Wednesday, March 28, 2012

The Morning Call -- The fundamentals continue to support our forecast; the technicals not so much

The Market

The indices (DJIA 13197, S&P 1412) took a break yesterday, but continued well within both their short term (13077-14410, 1381-1511) and intermediate term (11345-16345, 1188-1755) up trends.

Volume was flat, breadth declined. The VIX rose and once again finished the day over the lower boundary of the intermediate term trading range, thereby (once again) negating the recent break. Clearly, the VIX is waging a battle around the aforementioned lower boundary. Typically, when such a back and forth trading pattern occurs and direction is finally established, the security in question tends to experience strong follow through; in other words, if the VIX breaks down, it will likely go down a lot more (a positive for stocks); but if it holds, it will likely bounce hard (a negative for stocks).

Volume is actually constructive (short):

GLD fell but remains well above the lower boundary of its short term trading range.

Bottom line: the Averages remain in an up trend. There is a growing chorus of technicians yelping about nonconfirming indicators. I agree with them; but I have been agreeing with them since the S&P re-set to an up trend and that is not working out. That said, because I do have empathy with their position, our Portfolios have a very tight stop on the VIG holding.

Margin debt is rising (short):

The current rally in perspective (short):

A review of the historical performance of stocks in April (short):



The preponderance of yesterday’s news was economic and it was almost universally lousy: weekly retail sales were mixed, the Case Shiller home price index was down, the Richmond Fed’s manufacturing survey was weak and the Conference Board’s index for consumer sentiment was a disappointment. So it is not surprising that stocks drifted lower.

Bottom line: as long as the data flow remains erratic as typified by yesterday’s stats, I can’t come up with a reason to alter our forecast. And all other things being equal, if I have no cause to alter our Economics Model, I have to cause to alter on Valuation Model.

That leaves me fundamentally at odds with investor sentiment. As you know, I have elected to trade this spike in psychology as a hedge that our Models might eventually be proven wrong. But as I noted above, I am not giving the current up trend much leeway for indecisive price movement.

The latest from Bill Gross and today’s must read:

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.