Wednesday, March 14, 2012

The Morning Call-Blow off top or new trend?

The Market

The indices (DJIA 13177, S&P 1395) exploded upward yesterday. The Dow closed well above the lower boundary of its intermediate term up trend (12985-14705). As you know last Tuesday, this Average broke below the lower boundary of this trend and remained below it for the requisite time requirement of our time and distance discipline. However, save last Tuesday’s performance, the Dow was up in all subsequent sessions, tracking very closely to the rising lower boundary, just not quite managing to get above it. When the time came for confirmation of the break, I thought it a bit iffy to do so because of the DJIA’s pin action; and I got a bit lucky with my noncall.

The S&P soared above the upper boundary of its intermediate term trading range (1101-1372). Our time and distance discipline now kicks in, although yesterday’s move was big enough that the distance element of our discipline may soon overwhelm the time element if this rocket shot continues. If that occurs then (1) the S&P will re-set to an intermediate term up trend and (2) the Averages will be back in sync. For the moment, though, we wait for confirmation.

Volume rose; breadth was strong. The VIX broke though the lower boundary of its intermediate term trading range. Here also our time and distance discipline is operative. If this break is confirmed, it would be a positive for stocks.

GLD (162.30) got whacked hard yesterday, finishing the day within its newly re-set short term down trend. I am watching a support at 159.75; and if GLD trades below this level, our Portfolios will Sell additional shares of GLD.

Bottom line: blow top or the start of a new up trend? That is the question. Our time and distance discipline will hopefully provide the correct answer. Until then, we wait; and just to be clear, I would rather pay up when the trend reversal is clear, than panic into a head fake.

A look at breadth (charts):

The ‘hope springs eternal’ trade (short):



As the Market pin action suggested, the news flow yesterday was reasonably up beat:

(1) weekly retail sales were good. While February retail sales were up, they were a little less than expected; plus gasoline sales accounted to a decent percentage of the increase. Nonetheless, the recent improvement in retail sales as well as employment has many investors dancing a jig. I am not pooh-poohing these numbers; however, they are going to have to get a lot better before they will be indicative of economic strength beyond our forecast.

An in depth look at February retail sales (medium):

The pulse of commerce index (short):

Small business sentiment (short):

(2) the FOMC left interest rates unchanged. The tone of the statement accompanying this announcement was ever so slightly more positive on the economy than that from the last meeting. No mention of QEIII or the likelihood of an extension of Operation Twist.

Fed policy and the Taylor Rule (medium):

A look at global liquidity (medium):

(3) due to a misunderstanding between the Fed and Chase, the results of the bank stress test were made public yesterday afternoon versus the originally scheduled Thursday release. Bottom line most banks passed; but more importantly, many of them simultaneously announced dividend hikes and/or stock by back programs. The net effect was one of those aha moments where investors suddenly perceived that the banks are no longer crippled [‘perceived’ being the operative word; it doesn’t mean that they still don’t have billions and billions of toxic mortgages resting on their balance sheets]. The Market led by financials made a late day sprint to the finish line.

Bottom line: the recent retail sales and employment data could be suggesting that the economy is on a faster track than in our Models. If so, (1) we need a longer train of stats in these datapoints to be sure that the mild winter just didn’t pull economic activity forward and we see an unexpected weakening in the numbers in the late spring/early summer as seasonal factors create a reverse effect, and (2) they need to be confirmed by more significant improvement in other sectors of the economy. We can all only hope that the recovery will increase its rate growth; and if it does, no one will be happier than me.

However, with stocks already above Fair Value, some of the promise of better than expected times is already in prices. Nevertheless, if the magnitude and force of yesterday’s technical break out continue and are confirmed, they clearly can’t be ignored or attributed to ‘uninformed buying’. So far, I have been unable to resolve my differences with Market perceptions. That said, if I have to change strategy and figure out after the fact where I was wrong, so be it.

Greece to soon be back in the headlines (short):

Pimco’s cyclical outlook (medium):

What happens to stocks if the dollar strengthens (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.