Friday, March 02, 2012

The Morning Call - Our GLD position is still iffy

The Market


The indices (DJIA 12980, S&P 1374) recovered nicely yesterday. While the Dow couldn’t regain the 13,000, it remains well within its intermediate term up trend (12732-14500).

On the other hand, the S&P penetrated the 1372 upper boundary of its intermediate term trading range. That starts the clock on our time and distance discipline. If the S&P stays above 1372 for the next three to four days, the break will be confirmed. In the meantime, the Averages remain out of sync; though clearly the odds of stock prices re-setting to an up trend (and me being wrong) are growing.

Volume dropped while breadth rebounded. The VIX fell, finishing within its short term down trend but remaining above the lower boundary of its intermediate term trading range.

GLD also recoup some of Wednesday’s losses though its performance was not nearly as impressive as equities. Nevertheless, in the first hour of trading, it regained its initial support level below the lower boundary of its short term up trend. That is a start; but I am not going to get too hopeful. The technical damage done on Wednesday was simply too severe. So as much as I can’t get my arms around any fundamental reason for why GLD sold off so dramatically, I still have my finger on the trigger to blow out at least one half of our holdings.

Bottom line: the S&P took its first serious step toward breaking above the upper boundary of its intermediate term trading range and re-establishing harmony with the DJIA. I am sticking with our discipline; but clearly my call that stocks would remain in a trading range is a short hair away from being wrong.

GLD is also at a potential tipping point. Technical damage, perhaps, irreparable, has been done. As long as it can hold the 166.25 support level, I am willing to maintain our Portfolios’ position. Otherwise, discretion is the better part of valor.

A great look at Market performance in years with gains in both January and February (medium and a must read):



The economic data was mostly negative: January personal income and spending came in light as did the February ISM manufacturing index and January construction spending; weekly jobless claims were very slightly better than anticipated; but February auto and retail sales were pleasant surprises. So the trend of an uneven flow of stats remains in tact; as long as that occurs, our forecast stays unchanged.

In Bernanke’s testimony to the senate yesterday, he made little attempt to correct Wednesday’s market interpretation of his lack of comment on QEIII. I am going to assume, therefore, that he believes that investors’ conclusion that QEIII may not be coming is a correct one.

Not to be repetitious but as I said yesterday from an economic standpoint, I applaud this (lack of) action. Hopefully, it suggests that not only is the Fed convinced that the economy is improving but also that at least it is thinking about tightening monetary policy. ‘Hopefully’ being the operative word because Bernanke also said that the Fed will continue to work to keep interest rates low for the foreseeable future--which, of course, is a clear sign of easy money.

On the other hand, it may mean nothing more than that the Fed thinks Operation Twist is working just fine keeping the financial system flush with liquidity, so nothing more is needed. Investors appear to have concluded the same and returned to tip toeing through the tulips in spite of some less than positive economic datapoints.

If that is the case, then I remain confused about the pin action in GLD. True, it recovered a bit yesterday but it was as much of a muted response relative to the Market as Wednesday’s sell off was an over reaction to the downside relative to the Market. I have no great insight into why this is happening nor can I find anyone else who does. As always my reaction is to be sure that I keep my losses small when I am on the wrong side of the trade.

Overnight EU leaders signed a deficit control treaty; it now goes to the individual country parliaments. Meanwhile, investors are getting vocal about the European Investment Bank’s exemption from Greek bond haircuts. And surprise, surprise, most of the cash the ECB put up in its latest round of funding came right back to it as deposits. In other words, the banks are not using the money to fund sovereign debt as hoped.

Bottom line: all day yesterday, the MSM talking heads were wee weeing in the pants over the positive auto and retail numbers like those were the only stats we got. The fact of the matter, we also received some equally disappointing data. I am not saying that to argue for a recession but rather to suggest that when all the information is on the table, the conclusion that I draw is that the economy is making progress but at an erratic pace. I am happy about that but I’m not getting jiggy.

Further, I think that the concern about QEIII was much ado to about nothing. Bernanke is clearly satisfied with the impact of Operation Twist and does not think more in the way of easing is needed now. Unfortunately that doesn’t have nearly as positive an implication for (a more restrictive) long term monetary policy as I had hoped on Wednesday night. On the other hand, that means that I don’t have to change our forecast.

There is no need to reiterate my confusion about the price action in GLD or our Portfolios’ intended action. I don’t understand what is transpiring in that market; but the great thing about our Sell Discipline is that I don’t have to understand in the heat of battle. It has all been thought out before we get into the heat of battle, so all I have to do is to execute the Discipline. It is not always right; but it always keeps our principal in tact and it is never an irrevocable decision.

Draghi’s trillion dollar bet (medium):

More on the potential disaster being created by the central banks (medium):

Update on the Q ratio valuation model (medium):

Update on Crestmont valuation model (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.