Thursday, March 15, 2012

The Morning Call + Subscriber Alert + Do we need to add interest rates to our list of worries?

The Market

The indices (DJIA 13194, S&P 1394) had a quiet, mixed day--the Dow up, the S&P down. The DJIA finished the day within its intermediate term up trend (13010-14730) and above the new 12919 support level.

The S&P closed above the upper boundary of its intermediate term trading range (1101-1372) for the second day. Two to three days to confirmation, depending on the strength of the follow through from Tuesday’s break out. If we get it, then the S&P re-sets to an up trend and is then back in sync with the Dow.

Volume was heavy for the second day in a row; breadth was down, though the flow of funds indicator continues to climb. The VIX rallied but finished below the lower boundary of its intermediate term trading range for the second day.

Fear has declined but confidence is still low (medium):

GLD (159.57) sold off again, remaining in a short term down trend and taking out secondary support at 159.75. Our Portfolios will sell sufficient shares at the open to bring their GLD position to 2.5%.

Bottom line: until our time and distance discipline confirms (or not) the S&P upside break, our Portfolios remain on the sidelines. I am, however, carefully reviewing the holdings in each of our Portfolios; my intent is to use current strength to Sell those companies that while they meet the quality hurdles for incorporation into our Universe are at the lower end of the acceptable quality scale. More to come.

An argument for higher stock prices (medium):

A technically compelling datapoint (short and a must read):

Update on the 'three peaks and a domed house’ pattern (short):

Another divergence (short):



Yesterday was quiet all around. There were two minor economic stats: weekly mortgage applications were down while purchase applications were up; and US’ February trade deficit continued the descent into ugliness. These hardy bear comment much less impact our forecast.

The only other thing that warrants comment is the decline in the bond market. It has investors’ attention because it could presage a rise in interest rates and a steepening in yield curve. As you know, I don’t operate a lot in bond land; but bond prices and interest rates are an integral piece of the investment mosaic for all asset classes.

For instance, one of the primary arguments of late for owning stocks is that bond yields are low (relative to their historical relationship) compared to stock yields. However, if the bond market is signaling that it is no longer going to give the Fed a pass on low interest rates and the massive expansion of money supply, then (1) clearly the Fed is now in the window that it must either start withdrawing excess liquidity from the system or it will once again be too late to prevent corrosively high inflation and (2) the low interest rate bogey that the bulls have been touting as a reason to buy stocks is about to go away.

Another example is the impact interest rates have on gold. Recall the study that I linked to several months ago that showed a very close inverse correlation between gold and interest rates. The main point of the study was that as the cost of carry (i.e. interest rates) rose, the less attractive a 0% return asset becomes. It would appear that gold investors are taking to heart the aforementioned signal from the bond market that rates are headed higher.

Are bonds breaking out (short):

And (short):

Bottom line: having said all that, the point is not to predict the direction of interest rates, stock prices or gold but to sound an alert that another factor may be starting to have an impact our Economic and Valuation Models. We need to watch the bond market more closely and remain aware that if there is a re-setting of the trend in interest rates, it will have consequences in the equity and gold markets. (In addition, I would be extremely nervous if I owned long bonds.)

The S&P versus the US Data Trend Index (short and must read):

Thursday morning humor (5 minute video):

Subscriber Alert

The stock price of Chas Schwab (SCHW-$14) traded above the upper boundary of its Buy Value Range. Accordingly, it is being Removed from the Dividend Growth and Aggressive Growth Buy Lists. Both Portfolios will continue to Hold SCHW.

The stock price of Cato Corp (CATO) traded above the upper boundary of its Buy Value Range. Therefore, it is being Removed from the High Yield Buy List. The High Yield Portfolio will continue to Hold this stock.

As mentioned above, at the Market open this morning, all Portfolios will reduce their GLD holding to a 2.5% position.

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.