Tuesday, January 24, 2012

The Morning Call-The narrative is too positive

The Market

The indices (DJIA 12708, S&P 1316) finished the day flattish and mixed (S&P up, DJIA down) though there was some volatility intraday. At the close, they were within their intermediate term trading ranges (10725-12919, 1101-1372) and well above the lower boundaries of their recent short term up trends (12099, 1251).

Volume fell; breadth was flat. The VIX rose but remains in solid down trend.

GLD (163) rose, breaking above its 50 day moving average. The last remaining resistance level is the down trend off the September high (circa 164). A move above this boundary will prompt additional buying.

Bottom line: there is still nothing in the technicals that suggests the current upward momentum won’t continue. I won’t argue with the Averages reaching Fair Value (S&P 1336) or the upper boundary of the current intermediate term trading ranges (12919, 1372); but since that is such a short distance away, I don’t see the point in Buying stocks for a couple of percentage points. Indeed, as I have made clear, the higher prices trade, the more stocks in Universe are moving into their Sell Half Range or bumping against significant resistance levels. That will lead to further Sales.

A look at resistance (short):

On the other hand, GLD appears close to surmounting key resistance levels formed during the down turn from last September. If that happens, our Portfolios will be Adding to their positions.



There is very new little to discuss. No US economic news. There was some lousy data out of Germany; but we already know, Europe is slowing down and may be in a recession.

The eurocrats still can’t decide on how to solve the Greek problem, though the endgame is visible and inevitable. They just don’t seem willing to accept it. In any case, that country’s bankruptcy is in our forecast.

Bottom line: I continue to believe that investor’s are far too complacent regarding the headwinds that face both the US and Europe. That is not to argue that stocks won’t trade at Fair Value because those headwinds are priced into our Model. And that may all that is happening--investors continuing to put their cash to work as long as stocks are even fractionally undervalued. That is not something I would do; but I can at least understand it.

The problem is the narrative that is accompanying this action particularly as it relates to Europe. It is, at least in my opinion, way too positive on potential outcomes to the EU credit crisis. If, as a result, stock prices continue advance beyond Fair Value, then the further they rise, the more aggressive our Selling will become--with the caveat that I would take a confirmed break of the 12919, 1372 level as a sign that I seriously rethink my assumptions in our Models.

This is an example of what the narrative is ignoring (medium):

Comparing past economic and stock market recoveries (medium and today’s must read):

The latest from John Hussman (medium):

John Mauldin on the EU dilemma. As usual, his articles are long but worth the read:

Confessions of a bear (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.