The Morning Call-I'm lightening up

The Market
Technical

I was little surprised by the down draft in the indices (DJIA 12734, S&P 1318) yesterday. Nonetheless, they still closed near the upper boundaries of their intermediate term trading ranges (10725-12919, 1101-1372) and well above the lower boundaries of their short term up trends (12181, 1260). Furthermore the S&P’s 50 day moving average (1253) continues to move up toward its 200 day moving average (1256). A ‘cross’ would be a significant positive.

Volume declined, as did breadth. The VIX rose but remains in a marked down trend.

GLD (167) rose again. The next resistance level is circa 175. Any weakness from current levels will prompt the purchase of additional shares.


Bottom line: yesterday’s disappointing pin action, especially in light of Wednesday’s easing of monetary policy, suggests that equity prices are close enough to the recent highs that investors who bought at that old high and/or those that bought near the recent lows may be starting to cash in.

That is not to imply that a more direct assault on 12919, 1372 won’t occur or even be unsuccessful. As you know, I believe that the Averages will reach that level; and as I said yesterday, an easier Fed generally means higher prices. So the odds have increased that those highs will be breached.

That said, with no improvement in the fundamentals, those odds still aren’t high enough to convince me that any challenge will be successful.

Bullish sentiment remains high (short):
http://pragcap.com/bullish-sentiment-remains-elevated-2

The January effect (short):
http://blog.stocktradersalmanac.com/post/As-January-Goes-so-Goes-the-Year

Focusing on a pair of flags (short):
http://advisorperspectives.com/dshort/guest/Chris-Kimble-120126-A-Pair-of-Flags.php

Bearish sentiment near lows (short):
http://www.bespokeinvest.com/thinkbig/2012/1/26/bearish-sentiment-drops-below-20.html


Fundamental

Headlines

The economic news was mixed yesterday: weekly jobless claims were higher than expected, but given the recent strength in the employment numbers, some consolidation at a higher level is not surprising; December durable goods orders were better than anticipated; while December new home sales and the leading economic indicators were disappointing.

However, most of the news commentary and analysis remained on the change in Fed policy; and given the axiom of ‘not fighting the Fed’, that was what was so surprising about the Market sell off. Clearly, I expected a much stronger boost to upward momentum. That it didn’t occur may be, as I suggested above, that investors anticipated that follow through and decided that it was time to take some money off the table.

Bottom line: the economic numbers, the political environment in the US and events in Europe are all developing more or less in line with the assumptions in both our Economic and Valuation Models. At current prices (as defined by the S&P) valuations (as defined by our Valuation Model) are within 1% of Fair Value. That doesn’t create any urgent need to be chasing stock prices higher; indeed, if anything, it suggests that our attention is better focused overvaluation than undervaluation.

To be sure, this Market may prove me wrong and bust through 12919, 1372; but the operating record of our Sell Half Discipline is strong enough that even if I am wrong on the Market, the sales that have been and will be made will in retrospect have proven to be the right.

The problem with QE’s and zero interest rate policies (medium and today’s must read):
http://www.nakedcapitalism.com/2012/01/philip-pilkington-is-qezirp-killing-demand.html

Republicans move to prevent the US from making IMF contribution to bail out Europe (medium):
http://www.zerohedge.com/news/republicans-demand-block-us-imf-funding-bail-out-europe

The latest from Doug Kass (long(:
http://www.thestreet.com/story/11382331/1/kass-pressing-pause.html

Subscriber Alert

The stock price of Illinois Tool Works (ITW $53) has traded back into its Sell Half Range. Accordingly, the Dividend Growth Portfolio is being reduced it to a 75% holding. Further Sales can be expected as the Market works its way higher.

The stock prices of Nucor (NUE-$44) and Linear Technology (LLTC-$33) are bumping up against multi year technical highs. While they are not in the Sell Half Range, the Dividend Growth Portfolio is making a trading sale, reducing these positions to 75% of normal.

A recent review of the fundamental of Eli Lilly resulted in it no longer qualifying for the High Yield Universe. The High Yield Portfolio will use the latest price strength to begin moving out of LLY.

Like NUE and LLTC, the stock prices of Alliance Resource Group (ARLP-$78) an Kinder Morgan Energy Ptrs (KMP-$88) have reached technically vulnerable areas. The High Yield Portfolio is cutting these positions to 75% of normal.

Similarly, Reliance Steel (RS-$55) is at a multi year technical high. The Aggressive Growth Portfolio is reducing this position to 75% of normal.

A recent review of Amphenol (APH-$55) concluded that it no longer qualified for the Aggressive Growth Universe. The Aggressive Growth Portfolio is using the current Market strength to move out of this holding.

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.