Wednesday, February 01, 2012

The Morning Call--Bad news = Good Market; Go figure


The Market

Technical


The indices (DJIA 12632, S&P 1312) had another day with lots of intraday volatility but little change between the open and close. That leaves the Averages within their intermediate term trading ranges (10725-12919, 1101-1372) and above the lower boundary of their short term up trend (12256, 1267).

Volume rose though it remains anemic; breadth was mixed. The VIX was up fractionally but it still well within its down trend. The 200 day and 50 day moving averages for the S&P executed the ‘golden cross’ at closing prices; historically, this has been a positive for stocks.

GLD rose and continues to build a short term up trend.
http://www.zerohedge.com/news/112-eurusd-coming

Bottom line: virtually all the fundamental news yesterday was negative/disappointing, but stocks again absorbed it all and managed to finish basically even for the day. Furthermore, they marked two historically positive indicators: (1) the aforementioned ‘golden cross’ and (2) the ‘January effect’ which holds that as January goes (i.e. whether stocks are up or down) so goes the rest of the year.
http://blog.stocktradersalmanac.com/post/Positive-January-Barometer-Supports-2012-Gains--February-Opens-Strong

So the prior upward momentum is being augmented by investors accepting bad news and not selling stocks and the two new technical indicators pointing to further gains. That reinforces my conviction that the 12919, 1372 level will be challenged and increases my apprehension that it could be successful. If you are skillful enough to trade for 4% Market move, the outlook for such seems to be improving.

The argument for why the Market hasn’t topped out yet (medium):
http://www.ritholtz.com/blog/2012/01/the-u-s-and-global-stock-markets-have-not-yet-topped-out/

And:
http://advisorperspectives.com/dshort/guest/AI-120131-Last-Share-Out-Standing.php


Fundamental

Headlines


Yesterday’s economic reports were universally negative: November home prices continued to decline, Chicago PMI came in well below estimates as did January consumer confidence.

In addition, the news out of Europe was not improved. The Greek financial disaster is not getting any closer to resolution. Despite conflicting almost comically disjointed versions of the negotiations from the Greeks and the eurocrats, investors seem to be looking through a bankruptcy and are focusing on Portugal as the next likely candidate for financial demise.

Yet, as has been the case recently, US equity investors apparently don’t care. Either that or they continue to focus on December’s economic stats assuming a stronger economy than is now apparent, negating the ‘temporary’ bad news out of both the US and Europe.

Bottom line: at the risk of sounding like a broken record, nothing fundamentally has changed that would alter either our economic forecast or our Valuation Model. Of course, I may have my head in the sand or some equally dark place. But until I can discern a reason for assuming an improving economy or a lower discount factor (higher PE) on equities, I am sticking with the current strategy of chipping away at fundamentally or technically overextended stocks.




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.