Tuesday, December 06, 2011

The Morning Call They are Trying, sort of

The Market

The indices (DJIA 12097, S&P 1257) had a good day (1) closing noticeably above the very short term down trend off their October highs [12036, 1239] and (2) within their intermediate term trading ranges [10725-12919, 1101-1372]. For this up move to continue, the S&P must successfully challenge its 200 day moving average (circa 1264).

Volume was unchanged; breadth improved. The VIX was up fractionally but finished its fourth day below the upper zone of its trading range--a positive for stocks.

GLD price fell but remains within its intermediate term up trend.

Bottom line: the bias continues to the upside though clearly the enthusiasm is guarded. Both of the Averages have busted through the short term down trend off the October highs, though our time and distance discipline is operative for another day or so. Big obstacle near term is the S&P 200 day moving average; however, the DJIA has already successfully negotiated its 200 day moving average. I still believe that the upper boundary of the current trading ranges (12919, 1372) will be as good as it can get. But that means Santa Claus could still move equities another 10% to the upside.

Six reasons why there will be a Santa Claus rally (short):

Recent breadth data support the positive bias of our internal indicator (charts):



For the first time in a couple of months, the economic news was mostly bad: both October factory orders and the November ISM nonmanufacturing index were disappointing. These two poor data points come on the heels of a couple lousy numbers last week. However, the statistical flow has been so good of late, I was beginning to worry that our ‘slow, sluggish’ recovery forecast may be too conservative. So I am not surprised by less than stellar economic reports. On the other hand, I am not going to ignore them, especially with the ECRI weekly leading index promising recession.

That said, Europe continues to control the headlines. We started the day with good news: (1) the Italian government announced a $30 billion austerity program; and the yield on its bonds declined, (2) Greece received another payment from the IMF and (3) in a joint statement, Merkel and Sarkozy said that the EU needed a new treaty that included stricter fiscal provisions. This all gave a positive tone to the Market.

Then in the afternoon, the S&P said that it was putting most of the eurozone on credit watch (in danger of a rating down grade). Markets reacted immediately and negatively, though clearly this was not enough to push stocks into the negative. Since the S&P has been basically irrelevant since it completely missed the US credit implosion, I can’t get too worried about it stating the obvious. On the other hand, if it serves in the slightest way to push the eurocrats toward a workable solution to their debt crisis, then it will have been a positive.

Measures that would cause a long term recession in Europe (short):

A simple solution (short):

Meanwhile, back in the US, municipalities have their own set pf problems (short):

Bottom line: stocks remain somewhat undervalued assuming the euros can bandage the EU sufficiently to prevent multiple country/bank defaults. To be sure, it won’t happen overnight just like our own political class isn’t going to solve our problems in the short run. It is like pulling teeth; but the eurocrats seem to be working their way to a solution that at least in the intermediate run will avoid disaster. That is the way our money is bet. If I am wrong, our GLD position should help, but our Sell Discipline will become critical.

Mohamed El Erian on changes taking place in the global financial system (he is more optimistic than most):

The Fed and the ECB as lenders of last resort (medium):

The latest from Jeremy Grantham (medium):

Final Standing in CNBC $1 million Portfolio Challenge

Quality Growth 96.94%
High Yield 94.70
Aggressive Growth 97.09
International 94.55
All In 98.92

Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973. His 40 years of investment experience includes institutional portfolio management at Scudder, Stevens and Clark and Bear Stearns. Steve's goal at Strategic Stock Investments is to help other investors build wealth and benefit from the investing lessons he learned the hard way.