The Morning Call--I can't figure out what is being discounted

The Market

Technical

While there was some intraday volatility (see VIX below), the indices (DJIA 12883, S&P 1349) finished slightly higher on the day, closing a bit closer to the upper boundaries of their intermediate term trading ranges (10725-12919, 1101-1372) and above the lower boundaries of their short term up trends (12413, 1283).

Volume rose modestly, though its remains low; breadth was mixed. The VIX rose despite prices being up.

GLD declined but remains above the lower boundary of its short term up trend.

Bottom line: prices continue their plodding assault on the 12919, 1372 resistance levels; although at the current rate, it may be another couple of weeks before the S&P actually challenges 1372. I continue to believe those barriers will hold. However, this lack of volatility is great for my short term tactics because (1) it allows our Portfolios more time and caution as they chip away at stocks that are either over extended or that no longer qualify for inclusion in our Universe and (2) provides more time for the fundamentals in the US economy and the EU debt crisis to unfold; and if they prove me wrong, keeps my opportunity cost to reinvest low.

For the bulls (short):
http://tickersense.typepad.com/ticker_sense/2012/02/the-sp-500-continues-its-rally.html

For the less positive (short):
http://blog.stocktradersalmanac.com/post/The-17-Correction-Or-New-Bull-Market-At-Resistance

Fundamental

Headlines

There was only a single (secondary) data point released yesterday: weekly mortgage/purchase applications and it was neutral at best.

That left Greece as the center of investor attention--where it will remain, because the kabuki dance continues. Late in the day, the eurocrats announced a ‘draft’ of an agreement which they are supposedly going to meet on today. To which the Greeks responded ‘no way, Melvin’. Once again, investors seemed impervious to it all--which I can only deduce means that they must completely agree with our analysis of the situation (Greece defaults but Europe ‘muddles through’) and have priced this scenario into stocks or they think Greece won’t default (in which case, they are smoking dope).

Bottom line: if I assume that investors have priced in our Greece/EU scenario, then in order to get stock prices much higher, the principal areas where they would have to disagree with my analysis is that either they are more positive on the economy than our forecast or their more willing to bet that there is going to be a significant alteration in the philosophical make up of our political class in November.

Clearly, I could be wrong about any of these critical assumptions (the EU, the US economy, an epiphany by our political class). I just don’t have enough evidence to make that conclusion. Certainly, it could be coming and I am not smart or perceptive enough to see it yet. Until I do, I will continue to believe that at current levels stocks are Fairly Valued and will act accordingly.

Summary of the terms that the Greeks supposedly agreed to (along with some humorous editorializing):
http://www.zerohedge.com/news/summary-greek-reform-pledges

Then there is Spain (medium):
http://www.nakedcapitalism.com/2012/02/marshall-auerback-the-elephant-in-the-room-is-spain-not-italy.html

Declining loan demand in Europe is not a good sign (short):
http://pragcap.com/why-i-dont-believe-the-eurozone-crisis-is-over\

A different take on Market valuation (short):
http://econompicdata.blogspot.com/2012/02/equity-valuation-based-on-gdp-growth-20.html

What the bond market is telling us (short):
http://advisorperspectives.com/commentaries/isharesblog_20712.php

The latest update on this quarter’s earnings ‘beat’ rate (short):
http://www.bespokeinvest.com/thinkbig/2012/2/8/consumer-discretionary-technology-and-industrials-lead-this.html

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.