Wednesday, February 29, 2012

The Morning Call -- The 1372 challenge begins

The Market

The indices (DJIA 13005, S&P 1372) had a good day. The Dow was up, staying within its intermediate term up trend (12729-14328) and closing above the psychologically important 13000 number.

Obviously, the S&P finished right on the upper boundary of its intermediate term trading range (1101-1372), commencing the long await challenge of 1372. Under our time and distance discipline, it must penetrate the 1372 to qualify as a break and initiate the time element of this discipline. So as jiggy as many may be feeling, nothing has actually changed in terms of our discipline. In addition, that means that the Averages are still diverging. Now this may all start to change today, if the S&P closes above 1372. But our discipline is not anticipatory; so until the S&P moves up, the assumption is that this Market is directionless/in a trading range.

Volume was down (again); breadth was flat. The VIX fell fractionally, a bit unusual on a day in which psychological barriers are being breached. It remains within its short term down trend but also above the lower boundary of its intermediate term trading range.

GLD also had a good day and continues within its short term up trend.

Bottom line: today and any additional days that the S&P is kissing 1372 has the potential for anticipating a change in trend. Yes, our time and distance discipline forces some introspection that prevents calling a reversal if a boundary is breached on a close; but the process is nonetheless started. I am not altering my call; but clearly the odds of me being wrong are rising.

A key spread to watch (short):



Lots of economic data yesterday; mixed is the word: the headline number for January durable goods orders was disappointing but ex transportation (an historically volatile component) orders were fine; weekly retail sales were mixed; the January Case Shiller home price index showed another decline; the bright spot was the February Conference Board’s consumer confidence index which soared. I think that these figures adequately reflect an economy making slow sluggish progress.

Europe was quiet but today and tomorrow will witness plenty of action. This morning the ECB released the terms of its second round of bank funding. Think QEII eurostyle. The whisper number was $ 700 billion; and that is about where it came in though a lot more banks participated than expected.

Tomorrow, we will find out if the credit default swaps on Greek debt will get triggered.

Finally, oil had a miserable day. According to the traders that I talk to (1) the term structure of oil futures has changed dramatically to the negative over the last couple of days and (2) yesterday the price of oil declined while most commodities were increasing; that also is not a positive indicator for higher oil prices. This is all very good news if you are worried about high and rising energy prices slowing down our struggling economy. Clearly, it is too soon to dismiss this concern; but it is a hopeful sign that I will continue to monitor. Just as obvious, a meaningful drop in oil prices would certainly add fuel to current upbeat investor sentiment.

Greece and oil (medium):

Bottom line: the good news is that the concern about rapidly rising oil prices may have been overblown. We don’t know that; but there are a couple of hopeful signs. Certainly, any relieve on this front would likely give further lift to stock prices.

The uncertain news is the continuing saga of Greece and the EU working their way out of the corner in which they have placed themselves. Given investor reaction of late, no one seems worried about the terms or consequences of either the new funding arrangement or whether Greece will be held in default.

In the end, everything may be just fine; and if we are all going to Disneyland, then I will have been wrong. But the risks associated with the alternative scenario are so great that having some cash and gold gives me comfort.

The latest from Bill Gross (medium):

Main Street’s blunder (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.