Friday, November 11, 2011

The Morning Call The world didn't end

The Market Technical

The indices (DJIA 11893, S&P 1239) recovered modestly yesterday, leaving them within both their intermediate term trading ranges (10725-12919, 1101-1372) and their short term up trends (11522-12472, 1221-1334). Importantly, both are safely above the 11719, 1230 resistance turned support level.

Volume declined; breadth improved with the flow of funds demonstrating real strength of late. The VIX fell but remains well within the upper zone of its current trading range (negative for stocks).

GLD was off again; but only a bit and it remains within its intermediate term up trend.

Bottom line: the Averages bounced off the 11719, 1230 support level which was a plus for the bulls; so we can start thinking about the upside again, at least for a day. That said, the indices still have to overcome their 200 day moving average; plus there is now a minor resistance level at the recent trading tops (1275-1290 on the S&P). Those become the initial levels to watch on the upside.



We got some good economic news yesterday, specifically weekly jobless claims were lower than anticipated. As a bonus, the August trade deficit was below forecasts. These numbers added to the more positive atmosphere initially created by the news out of Europe; and prices remained on the plus side all day.

The headlines from Europe included:

(1) a new government in Greece. Many investors (read: bond vigilantes) had been skeptical the Papandreou would really resign and, hence, doubted that Greece would get its bail out funds. That scenario seems to be diminishing in likelihood.

(2) a vote on an austerity program is scheduled in the two houses of the Italian parliament today and tomorrow. Following that vote, Berlusconi is scheduled to resign and further aid should be forthcoming.

In addition, overnight Italy was able to sell 5 billion euros in one year notes at 6%. This was a much better auction than had been expected.

So despite more ‘end of the world (EU)’ speculation (see below), the news flow managed to push the Cassandra’s off the first page. Given the volatility of this Market, who knows what will happen today. But at least we got a day that allowed the negative fog to lift enough to allow visibility to the positive steps being taken to address the EU sovereign debt crisis.

Some perspective on Italy (today’s must read):

Will Germany enact an exit clause from the EU (medium):

The latest language of the German proposal (medium):

Europe’s worse case scenario (medium):

EFSF mismanagement (short):

Current CDS spreads (medium and a must read):

P.S. overnight the Italian senate passed the austerity bill.

Bottom line: our forecast is for:

(1) a sluggish recovery--there is presently nothing in the data to cause me to waver from the position,

(2) an ineffective, inept political class more concerned with their own re-election than the solving the enormous fiscal problems that face this country thereby offering little hope of any improvement in (1) above--to date, they are following the script perfectly. The only potential positive on the horizon is the rumor that I reported last night which suggested that the ‘super committee’ could recommend meaningful tax reform as part of the mandatory $1.2 trillion budget reduction program due 11/23. I also noted that I wouldn’t bet a nickel on such an outcome. But if it happens, I may have to tweak our long term secular growth rate assumption,

(3) Greece to default and the rest of Europe to muddle through. This, of course, is the key to whether our forecast is baloney or it gets close. Yesterday, it looked like the endgame would match up roughly to our outlook; Wednesday, not so much. And that is how it is likely to go, at least for a while, insuring that there can be almost no certainty to anyone’s assumptions about European economic growth. So we just have to live with it.

Of course, that just reinforces our investment strategy which has called for an above average cash position and a meaningful gold holding since our own financial crisis began several years ago.

The latest from Jim Grant (medium):

A different kind of sentiment indicator from Gallup (medium):