Wednesday, January 18, 2012

The Morning Call--Adding to GLD


The indices (DJIA 12482, S&P 1293) had a volatile day, though they closed within their intermediate term trading ranges (10725-12919, 1101-1372) and above the lower boundaries of their short term up trends (12052, 1240). Both also have other multiple support levels including the neckline of the recent reverse head and shoulders, the 200 day moving average and the old 11741, 1230 resistance/support level.

As an aside, if the 200 day moving doesn’t soon retreat dramatically, then we will get a ‘golden cross’ (when the 50 day moving average trades up through the 200 day moving average) in short order. Historically, this is a very strong positive for stock prices.

Volume was off though breadth improved. The VIX jumped over 6%, but remains in a short term down trend. However, it does appear to be in some sort of basing action--something to which we need to pay attention.

This analysis really gets into the weeds on the VIX--its bottom line, the VIX is near a low (medium):

GLD bounced off its 200 day moving average. At the open, this morning, our Portfolios will Add to their positions (now in the 4-5% range).

Bottom line: technically speaking, there is no reason to think that stocks won’t challenge their April 2011 highs. Those investors nimble enough to trade a 5% move may want to consider doing so. For my part, the combination of Fair Value (1336) and the number of our stocks at or near their Sell Half Range is too big a hurdle to overcome.

Advance/decline line closing on new highs (short):


The news was generally up beat all day, though most it of occurred before the Market opened. Overseas,

(1) China reported slowing but still robust growth (+9.8%) by almost any standard. This is particularly good news in the face of a lot of hand wringing over a potential recession there,

(2) Spain had a very well received bond auction. After all those down grades last week, this is at least a short term sign that the new EU credit facility continues to work,

(3) a German investor sentiment poll was up beat. Worries about a severe recession in Europe mostly hinge on a contraction in the northern [more fiscally responsible and economically healthy] countries of which Germany is the largest. If sentiment is better than many fear and that translates to stronger economic performance, this is clearly a positive.

Here at home, the New York Fed reported its Empire State Manufacturing Index came in better than anticipated.

Later in the day, all this good news was tempered somewhat by weak bank earnings. Nevertheless, I agree with the early investor optimism, that is, the news was positive because it does indorse our forecast of continuing progress in the US economy albeit at a historically below average secular pace. Factors that could make that outlook too optimistic include a severe recession in Europe brought on by a mishandling of its sovereign debt crisis and/or a significant slowdown in Chinese economic growth. So the above news is welcome.

Bottom line: while I am reassured by the above, I believe that most of it is already in the price of stocks ASSUMING our Valuation Model is correct (S&P Fair Value 1336). Since they are my assumptions in the Model, I feel no compelling to reason to believe that stocks are heading considerably higher.

On the other hand, as long as the Germans go along with the implicit expansion of EU money supply via this its new credit facility, that probably favors higher gold prices.

The latest from Satyajit Das on Europe (medium/long):

A trillion here, a trillion there and pretty soon we are talking real money (short):

How governments steal your money and what to do about it (medium):

You can’t fool Mother Nature (medium):

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.