Thursday, March 08, 2012

The Morning Call - I was wrong; it is an ostrich market

The Market

The indices (DJIA 12837, S&P 1352) rebounded yesterday. However, the DJIA failed to regain either the lower boundary of its intermediate term up trend (12863-14581) or the former resistance turned support now resistance level of 12919. This keeps our time and distance discipline operative and moves the Dow a day closer to converging again with the S&P. The S&P remains within its intermediate term trading range.

Volume increased; breadth spiked. The VIX declined 8%, pushing it back below the upper boundary of its short term down trend. That negates Tuesday’s break and keeps the VIX in a down trend (good news). It remains above the lower boundary of its intermediate term trading range (potentially troubling).

GLD (163.63) traded up but failed to finish above its initial support level (166.27). Hence. our time and distance discipline is still operative for a potential break from a short term trading range to a short term down trend.

Bottom line: until we get confirmation/negation of the DJIA and GLD technical break downs, there is very little to do. The nonconfirmation of the VIX’s break to the upside could be viewed as a positive for stocks. That said, this is not a time to get cute.

What ETF performance is telling us (short):



Yesterday’s US economic news was mixed and, therefore, supportive of our forecast: fourth quarter productivity rose in line expectations while unit labor costs soared; the ADP private payroll report was better than estimates; consumer credit rocketed up due primarily increasing student loans.

What got investor attention was a Wall Street Journal article that suggested that further Fed easing was being considered; and stocks were off to the races, once again proving the adage to not fight the Fed. I am not as cynical as some Market observers (see below), so I won’t insinuate that the Ber-nank planted the story after Tuesday’s sell off. However, I will simply say that I believe that no amount of money will prevent a decline in asset prices if (1) Greece defaults and CDS counterparties can’t meet their obligations and/or (2) if Israel bombs Iran or oil remains at the current elevated levels.

And here is this latest rumored Fed action (short):

Bernanke and higher oil prices (medium):

China and higher oil prices short):

Bottom line: I jokingly referred to Tuesday’s pin action as a Rip Van Winkle market in which investors woke up and realized that there were actually some risks in the current environment. But I was wrong; it was actually as ostrich market. Investors pulled their heads out of the sand on Tuesday and were panicked by what they saw. Then yesterday, they stuck their heads back in the sand and went back to pretending.

Of course, if Greece doesn’t default, Israel and Iran don’t go to war and oil prices back off, then there was no reason for concern. However, all those conditions are present in our Model and stocks are still overvalued; so there is still no reason to be buying in general. On the other hand, we have Added a couple of stocks to our Buy List of late, which our Portfolios may Buy if the DJIA re-sets to a trading range and investors move prices back to Fair Value.

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.