The Morning Call A respite before more upside?

The Market
Technical

The indices (DJIA 12020, S&P 1244) finished the day basically flat after Wednesday’s moon shot and well within their intermediate term trading ranges (10725-12919, 1101-1372). Near term, on the upside, I am watching the intersects of their down trends off the late October highs (12054, 1244) and the S&P 200 day moving average (circa 1265); and to the downside the 11741, 1230 support levels.

Both volume and breadth declined--not surprising after a huge up day; the VIX fell slightly, making it the second day that it has closed below the upper zone of its current trading range.

GLD was off fractionally, leaving within its intermediate term up trend.


Bottom line: stocks are in an intermediate term trading range; and a majority of the stocks in our Universe have better charts than either of the Averages. I am assuming that means that equities will continue to work their way higher. That said and the global coordinated central bank easing notwithstanding, the lack of any progress in the EU to solving any of its real problems suggests to me that the upside is limited to the upper boundary of the current trading range (12919, 1372).

Fundamental

Headlines

We actually got a mixed day in the economic data yesterday: (1) weekly jobless claims were up for the second week in a row and (2) November retail same store year over year sales were slightly below estimates, while (3) the November ISM manufacturing index was better than anticipated, (4) construction spending was quite strong and (5) auto sales were slightly better than expected. Stir into that mix a disappointing Chinese PMI report. All in all, nothing about which to get worried.

As you might expect, much of the day was spent digesting Wednesday’s news events, in particular, the global central bank easing. I read/saw nothing to alter my opinion laid out in yesterday’s Morning Call; the conclusion of which is that the central bank aid is not a game changer, the heavy lifting is yet to be done, but it does buy some limited time for the eurocrats to do what is needed to prevent multiple country/bank defaults.

Here are a couple of articles that I thought would continue to illuminate the issue. I don’t necessarily agree with all that is said; but they do bring additional clarity.

Monetary easing and the stock market (medium):
http://www.marketwatch.com/story/monetary-easing-is-detrimental-to-the-markets-2011-12-01

More thoughts on the recent central bank easing and what the EU now has to do (medium):
http://www.nakedcapitalism.com/2011/12/does-anybody-who-gets-it-believe-central-banks-did-all-that-much-yesterday.html

And:
http://pragcap.com/swap-lines-not-a-panacea

And:
http://www.zerohedge.com/news/guest-post-fed%E2%80%99s-european-%E2%80%9Crescue%E2%80%9D-another-back-door-us-bank-goldman-bailout

A look at what happens if this all doesn’t work, i.e. the worse case scenario (medium):
http://www.zerohedge.com/news/ubs-how-bad-might-it-get-and-why-sooner-or-later-intense-instability-will-resume

And overnight:
http://www.zerohedge.com/news/so-much-bailout-european-funding-situation-worst-march-ecb-deposits-and-emergency-loans-soar

Meanwhile back at the ranch, the joke that is our political class is in the midst of another kabuki dance; this time over extending the payroll tax cut. It is not getting much press because (1) the European political class has done a much better job of crisis creation then even our own and (2) the whole debate resonates with campaign rhetoric, nothing meaningful will get done, so no one gives a s**t. The good news, these clowns are irrelevant to our forecast and will remain so unless they really do something stupid.
http://www.zerohedge.com/news/us-debtgdp-hits-post-ww2-high-995-following-55-billion-overnight-debt-increase-total-debt-now-o

Bottom line: stocks are undervalued as calculated by our Model. Coupled with the investor relief resulting from Wednesday’s central bank action and the normal upward bias of seasonal factors, there is a decent chance of a rally through January. Since our Portfolios have a full position in every stock on our Buy Lists, I tried to get cute and bought a very small trading position in VIG. That said, as I noted above, I don’t see an extended upward move even if the eurocrats came out tomorrow and executed a perfect recovery plan; so the operative words in the previous sentence are ‘very small trading position’. My main focus in this trading range Market is on our Price Disciplines.

Being wrong and staying wrong (medium):
http://abnormalreturns.com/being-wrong-and-staying-wrong/

The latest from Doug Kass (short):
http://www.thestreet.com/story/11328929/1/kass-encore-or-hangover.html

Update on Q Ratio valuation:
http://advisorperspectives.com/dshort/updates/Q-Ratio-and-Market-Valuation.php