Thursday, February 16, 2012

The Morning Call-Orderly or disorderly default, that is the question


The Market
Technical


The indices (DJIA 12780, S&P 1343) had their worst day in some time yesterday, although they closed well within their intermediate term trading ranges (10725-12919, 1101-1372) and remain above the lower boundary of their short term up trends (12524, 1296).

Volume was up; breadth fell. The VIX spiked 8% but remains within its current down trend.
http://www.bespokeinvest.com/thinkbig/2012/2/15/breadth-weakens.html

In addition, stock trading was heavily influenced by an intraday reversal in Apple stock. I have noted previously that AAPL was getting technically overextended and that as its price kept rising, it was having an impact of the Averages. I have no idea if a rollover in this stock could be a leading indicator for the Market in general; but it bears watching.


GLD rose, finishing above support but below the lower boundary of its short term up trend. If it doesn’t rebound above that trend line today, the trend will re-set to a trading range.

Bottom line: yesterday’s pin action was the first sign that the Averages could give up some up side momentum. I am not saying that this is happening; it is far too early for such a prediction. That said, whether stock prices correct more or not, I remain convinced that the 12919, 1372 level will hold as resistance, at least in the short to intermediate term.

If stocks do sell off, then our shift will move from almost total concentration on our Sell Discipline to a more balanced view of both Buy and Sell Disciplines.

Updated chart on the Shanghai stock market:
http://www.thereformedbroker.com/2012/02/15/shanghai-surprise-2/

Fundamental
Headlines


The economic data continues to come in mixed: mortgage applications were down a bit but purchase applications were terrible. The NY Fed manufacturing index was strong, while January industrial production were flat, though this was impacted by lower utility output due to a warm winter. All in all, nothing unexpected or threatening to our forecast.

What got stocks headed down should be no surprise--Greece; or better said, the lack of progress on resolution of the Greek debt problem. What we got instead was another day sound and fury, signifying nothing--no pledge (to honor the terms of the Greek bail out) from Samarus yet; but still a lot of yakking particularly from the Greek president slamming the Germans...and the Dutch...and the Finns. In other words, it is the same old song, just a different tune.

Later in the day, the minutes from the Fed’s last meeting were released. There were not a lot new. But the slide in stock prices accelerated. For some reason investors elected to focus on a statement from Jeffrey Lacker that he anticipated preemptive tightening by the Fed prior to 2014 instead of the main message from a majority of the FOMC which was that the Fed would do what was necessary to keep the economy growing (think QE3).

Why investors chose to pay attention to a negative note in a sea of positive, I don’t know. I could speculate that, collectively, they are having second thoughts about their recent tip toeing through the tulips. But that would be talking my book. So I will write it off as noise but watch to see if there is any follow through.. Here is a summary of the FOMC’s release, as well as the full text:
http://www.zerohedge.com/news/fomc-minutes-more-bond-buying-may-be-necessary

Bottom line: our economy continues to struggle forward (as expected), our political class continues its corrupt, self serving, fiscally irresponsible ways (as expected) and the S&P is sitting right on Fair Value. That suggests no particular directional bias--which makes all the sense in the world to me. The only potential problem is Europe, specifically Greece. Our forecast assumes an orderly default which as I have opined several times is the best alternative course out of this mess for both Greece and the rest of the EU.

The risk is that the technocrats come up some Fantasy Land solution that has no chance of working in the real world and investors sooner or later torch it--the consequences of which would not only be a disorderly default by Greece but could conceivably drag other PIIGS as well as their financial institutions down the chute with it. That is not our forecast; but the longer these morons fiddle around playing grab ass instead of confronting the issue head on, the greater the likelihood of an unwelcome outcome.

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.