Wednesday, December 21, 2011

The Morning Call What happened yesterday

The Market

The indices (DJIA 12103, S&P 1241) did a Titan III maneuver yesterday, potentially negating a number of the negative technical factors weighing on the S&P.

Our time and distance discipline is now operative; so barring another spectacular move up fulfilling the distance element, I will wait for the time element to play itself out. Here is where the Averages would stand as I see it, assuming this move up is confirmed:

(1) they are still within their intermediate term up trends (10725-12919, 1101-1372),

(2) the S&P would regain the 1230 [which would now become support] level as well as pushing back up through its 50 day moving average,

(3) this would put the DJIA and S&P back in sync [recall the DJIA never penetrated its 50 day moving average or the 11741 {comparable to 1230} level],

(4) on the S&P, the right shoulder of the reverse head and shoulders was never damaged enough to negate the formation, so it remains in tact.

(5) the DJIA broke above its 200 day moving average; the S&P did not.

(6) both indices bounced off of a very short term up trend set by the October lows and the November lows

Levels to watch:

(1) on the downside, the 1230 support level and the 50 day moving average [circa 1229],

(2) on the upside, the 200 day moving average [circa 1241] and the ‘neckline’ of the inverse head and shoulders [1266].

Note: the 50 day moving average (the wiggly red line), the short term up trend (upward sloping black line) and the neck line to the reverse head and shoulder.

Gold bounce also but not with the conviction of the stock indices. It did hold the 153 support level and is now in a position to challenge the 200 day moving average. If that occurs, I will probably began re-building this position.


Several factors accounted for yesterday’s stunning pin action:

(1) better housing numbers,

(2) the end of EU sovereign bond auctions for the year,

(3) a short squeeze,

(4) most important was the expansion of a new ECB lending facility, which will allow the banks to borrow money very cheap. This was seen as addressing one of the two major financial issues facing the EU; either the bank liquidity/solvency problem or the sovereign liquidity/solvency problem.

To be sure, that is good news. But to be clear, it can’t do both--either the banks use the money to shore up their capital base or they use to buy sovereign debt. So this move is not a panacea for all that ails Europe; but it does certainly help.

The other thing to note is that while this lending facility was nominally increased from $300 billion to $500 billion, as always when dealing with government entities, there was some funny accounting involved. So it is not quite as positive as first perceived.

Here is a summary of comments by EU financial experts on this new lending facility:

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.