Tuesday, March 13, 2012

The Morning Call-It is still too close to call

The Market


The indices (DJIA 12959, S&P 1371) were quietly up yesterday. The Dow finished right on the lower boundary of its intermediate term up trend (12959-14669). This is the fifth day at or below that boundary. However, as I noted last weekend, (1) the Dow continues to rise just not as rapidly as the up trend’s lower boundary, (2) with the DJIA tracking the lower boundary of its uptrend but staying even or just slightly below it, I am hesitant to declare a break. As precise as analysis may appear [quoting trend lines to a point] at times, it isn’t. So I am putting off a call for at least another day.

The S&P continues to trade within its intermediate term trading range, though clearly it is in the process of a second challenge of the 1372 level. For the moment, this leaves the indices out of sync and us on the sidelines.

Volume remains quite low; breadth declined, though the flow of funds indicator continues to be positive. The VIX plunged 8% putting it within shouting distance of the lower boundary of its intermediate term trading range. A break of that boundary would be a positive for stocks.

GLD fell. Recall, it closed right on the initial support boundary last Friday which was the fifth day of our time and distance confirmation process. I held off calling a break because of that close. However, with yesterday’s clear close below that boundary, GLD has now re-set to a short term down trend.

Bottom line: stocks, GLD and VIX are all at important battle lines. My opinion is that stocks retreat, the VIX rebounds and GLD soon finds another support level; but what do I know. The great thing about out time and distance discipline is that I don’t have to guess. We almost always have fixed levels that ultimately determine a change in direction and we have a procedure for confirming that direction change. It doesn’t always work like it theoretically is supposed to; but it does with enough frequency that it keeps the uncertainty level low and the decision making simple.

Stock performance during the March ‘triple witching’ week and the week thereafter (short):

Wall Street strategists are bearish, which is a positive for stocks (short):



No economic data and very little of any other kind of news yesterday. Most of the day was spent anticipating up coming events, in particular the Fed rate meeting today and the announcement of the results of the Fed’s latest bank stress test on Thursday. The conditions of the test are severe depression, so I can’t imagine several banks not failing. That said, since 2007/2008 I have become very cynical about the value of any Fed/bank jointly released information; so I am not sure what Thursday is going to bring.

Bottom line: stocks remain mildly overvalued. Nothing in the domestic economic or political environment contradicts that. The risks to our forecast continue to be (1) high and rising oil prices, (2) potential conflict in the Middle East, and (3) the eurocrats stepping on their dick, transforming a ‘muddle through’ scenario into a much more economically damaging one.

The latest from John Mauldin (medium):

In the above article, John points out why investors may be hesitant to buy EU sovereign debt bonds because in the Greece bankruptcy, the law got changed after the fact; the same may be true of US mortgage backed securities (medium/long):

Could ‘buy and hold’ make a comeback (medium):

The latest from John Hussman (medium):

The Greek lawsuits begin (medium):

And now Portugal (short):

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.