Tuesday, November 22, 2011

Subscriber Alert It's the Germans, stupid


The indices were off big again yesterday. After one more day’s delay the S&P confirmed the break below the lower boundary of its short term up trend as well as the 1230 support level. In addition, the DJIA broke its short term up trend, putting the Averages back in sync--this time to the downside.

Two things are keeping me confused: (1) the VIX rose only fractionally on a major sell off, continuing its very atypical behavior. I have yet to hear an adequate explanation for this. (2) our internal indicator continues to look reasonably healthy, certainly much more so than would be normal in a 3.5% sell off/break in the S&P. Whatever the reasons, these indicators keep me comfortable that the lows of the current trading range (10725, 1101) will hold.

That said, a couple of our Portfolio holdings have broken support levels and need to be trimmed. They include the Wisdom Tree India ETF (EPI) in all our Portfolios and Avon Products (AVP) in the Dividend Growth and Aggressive Growth Portfolios. Both are being reduced to one quarter positions. In addition, I am selling the trading position in the Aggressive Growth Portfolio, the Vanguard Dividend Appreciation ETF (VIG). These transactions will be done at the Market open this morning.

GLD traded down yesterday and touched the lower boundary of its intermediate term up trend. If we see a bounce today, some of the funds generated by the above sales will be used to increase that position.

On the fundamental front:

(1) the super committee failed, as expected. I continue to believe that the only negatives are [a] psychological--disappointment in functioning of our political system, [b] the risk that these a**holes will figure a way to weasel on the mandatory spending cuts. In my opinion, the failure is not necessarily bad news and was not the cause of yesterday’s sell off,

(2) rather that honor goes to the Germans. The EU debt crisis continues to worsen and the Germans are holding tough regarding allowing the ECB to print money. If they don’t relent, the odds of multiple country/bank defaults rise. As you know, it has been my opinion that ultimately the Germans would ultimately come around; but it appears increasingly unlikely that they will. To be sure, in cases like this, the probability of the worst case occurring always appears the highest right before it doesn’t. Nonetheless, as long as the Germans play hard ball, this Market is likely to decline.