Thursday, January 05, 2012

The Morning Call, More stocks are hitting their highs

The Market

The Market (DJIA 12418, S&P 1277) was quiet yesterday with the indices remaining above the neckline of the reverse head and shoulders (12287, 1266) for the second day. Should our time and distance discipline confirm this break, it likely opens the door for an assault on the upper boundaries of their current trading ranges (10725-12919, 1101-1372).

Volume was off; breadth also deteriorated. The VIX fell leaving it in a down trend--a positive for stocks.

GLD (157) was up but still hasn’t busted through the 200 day moving average (158). As you know, our Portfolios re-established a one third position yesterday; if and when, GLD confirms a break above the 158 level, they will add more shares.

Bottom line: stock prices remain in a very short term up trend off the October lows and have successfully challenged (1) the old resistance, turned support, turned resistance, turned support, turned resistance and now support 1230 level, (2) their 200 day moving average and (3) the short term down trend off the late October high. These successes should help price buoyancy if stocks confirm the penetration of the last barrier, the neckline of the reverse head and shoulders.

The Santa Claus rally while seemingly anemic this time around was still a positive according to the Stock Traders almanac (short):



A flat Market implies little in the way of news; and I think that was true of yesterday. The economic news was pretty neutral: slightly better December auto sales, mixed weekly retail sales, negative (though seasonally impacted) weekly mortgage applications and less than anticipated November factory orders (although they were still positive).

The only other thing worth mentioning is the latest example of US political decay. Yesterday Obama chose to make several ‘recess-appointments’, namely new members to the National Labor Relations Board and a new Dodd Frank ‘czar’. He chose to do ‘recess-appointments’ because the Senate has been unable to confirm those ‘nominees’.

Of course, under the Constitution, the President has every right to exercise that power; the problem is that the Senate, by its own definition and by tradition, is not in recess. So Obama has apparently decided that the executive branch gets to decide when the Senate is in recess and when it is not (do bathroom breaks count?). I am not sure procedurally how this action gets remedied; but it is at a minimum an attempt at another step toward a centrally controlled, government knows best nanny state, embolden by a Herculean hubris that in the end squashes rights and liberties that it finds inconvenient. It makes me want to puke and sell everything.

Bottom line: While I believe that our forecast of a sluggish recovery is spot on, there are still some serious risks mostly centered on the potential fallout from the coming defaults/restructurings in EU sovereign debt. That should keep a cap on stock prices at least until we get clarity on just how rough the solutions to this problem will be on US corporate profits and the viability of the US banking system.

So while (1) equities [as defined by the S&P] are undervalued [as defined by our Model], it is only approximately 5% and (2) the technical picture is improving, I think only the nimblest of traders should be chasing prices at this time--and nimble I am not. In addition, in my first review of our Universe since mid December, a number of stocks entered their Sell Half Range (see below). That in itself is not particularly disturbing; but it follows a number of Sell Half transactions that have already been made in the last year (HRL, CL, PX, GIS, KO, MCD, UGI, ADP, ITW, ARLP, BCPC).

Historically, this suggests that a top is somewhere in our future. I recognize that this is a maddenly vague time reference; but unfortunately, this indicator can be months too soon. That said, when the above number of stocks reaching all time relative and absolute highs grows to this magnitude, it is time to be cautious. Hence, it lessens my enthusiasm for equity ownership and reinforces my belief that the 12919, 1372 level is as good as it is going to get for the next six months or so--and that may be wishful thinking. See below for actions that our Portfolios are taking today.

Total return roller coaster (short):

Earnings season is about to start and fourth quarter estimates continue to drop (short):

Compare the above with what appears to an overly optimistic economics community (short):

The latest from Bill Gross (medium):

Subscriber Alert

The stock price of Teva Pharmaceuticals (TEVA-$44) has risen above the upper boundary of its Buy Value Range. Therefore, it is being Removed from the Aggressive Growth Buy List. The Aggressive Growth Portfolio will continue to Hold this stock.

Several stocks have traded into their Sell Half Range. Accordingly, the following positions will be reduced by one half at the Market open:

In the High Yield Portfolio: NuSkin Enterprises (NUS-$48) and VF Corp (VFC-$135).

In the Dividend Growth Portfolio: VF Corp (VFC-$135) and Brown Forman (BFB-$79).

In addition, Lowe’s (LOW-$26) has experienced a dramatic rise in a very short period of time. While it is still below its Sell Half Range, both the Dividend Growth Portfolio and Aggressive Growth Portfolio are reducing their positions on a trading basis to 75% of normal size.

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.