Wednesday, January 04, 2012

The Morning Call-I am nibbling at GLD again

The Market


The indices (DJIA 12397, S&P 1277) had a great first day of the year, closing within their intermediate term trading ranges (10725-12919, 1101-1372). Both of the Averages (1) broke the necklines of their reverse head and shoulders, as well as (2) their 200 day moving averages and (3) the down trends off the October 2011 highs. Of course, our time and distance discipline is now operative; however, the percentage change yesterday (distance) was of sufficient magnitude that any follow through will confirm the break outs quickly.

Volume rose; breadth improved. The VIX continued to fall suggesting more upside for stocks.

GLD (156) clearly bounced off its 300 day moving average (150), moved above the 153 initial support level and has yet to challenge its 200 day moving average (158). The inability to penetrate the 300 day moving average as well as the rebound above the 153 support level persuades me to re-establish a one third position in our Portfolios at the open this morning.

Bottom line: stocks appear poised to attempt a run at the 12919, 1372 highs. If the indices can confirm the break above the reverse head and shoulders neckline and their 200 day moving averages, then the probability of that occurring goes up. I am going to await that confirmation. However, even if stocks do move to the upside, I continue to believe that there are simply too many and too strong headwinds to push above the 12919, 1372 highs.

GLD seems to be building a base. Any significant move higher is likely a ways away; so there is no hurry to re-build a position. That said, I don’t believe it terribly risky to nibble a little at these levels.

Stock performance following a flat year--usually quite good:

The first day’s stock performance for the prior three years:



Stocks were strong before the open yesterday, despite poor early morning headlines:

(1) Morgan Stanley revised its 2012 S&P target down to 1167 [we are at circa 1400]. With volatility as extreme as it has been; and with geopolitical events likely to keep it so, it matters far less where one thinks that prices will ends up than how one thinks that they will get there.

(2) a Greek spokesman said that if his country doesn’t receive its second bailout, it will quit the EU. SO DO IT AND GET THIS CHARADE OVER WITH!!!. A-hum, that little out burst notwithstanding, this is already in our Models,

(3) over the weekend, Iran was engaged in some serious saber rattling. This is the only one I take with more than a grain of salt; not because I think that the Iranians are serious. I think that they are bluffing. But because I have no confidence that Obama will call their bluff.

On the other hand, this analyst paints a much more dire picture (medium):

The above notwithstanding, the US economic data released yesterday was very positive--great ISM manufacturing data, improving foreign PMI stats and a strong construction spending number. This kept the party going; and for me was certainly the most important headlines of the day. This keeps our own economic (no recession) and valuation (modestly improving) forecasts on track.

Bottom line: the data continues to favor our outlook. In addition, our political class has shown no inclination to act in any manner other than inept; that too is in our Models. The major risks to both our economic and valuation forecast remains some disruption in the derivatives market where counterparties can not meet their obligations in the case of default (of which there is a significant probability), it snowballs and results in another US financial crisis. For that reason, our Portfolios’ cash position will remain above average until we have clarity on the EU sovereign debt crisis.

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.