Wednesday, March 07, 2012

The Morning Call + Subscriber Alert + It's a Rip Van Winkle market

The Market

The indices (DJIA 12759, S&P 1343) suffered some severe whackage yesterday. The Dow closed below the lower boundary of its intermediate term up trend (12842-14560) as well as the 12919 former resistance (now support) level. Our time and distance discipline now kicks in. If this break is confirmed, the DJIA would re-set to a trading range and would be back in sync with the S&P. However, I don’t want to get ahead of myself; as you know, it will take another three to four days of closes below the lower boundary of its intermediate term up trend before change in direction is confirmed.

The S&P remained well within its intermediate term trading range (1101-1372), but did finish the day below its 50 day moving average (1345)--not a hopeful sign.

Volume rose; breadth cratered. The VIX spiked, closing above the upper boundary of its short term down trend. Again our time and distance discipline is now operative. If the VIX confirms the break of its short term down trend, it will re-set to an intermediate term trading range.

GLD (162.70) also got clobbered; clearly, lots of follow through to Monday’s break below initial support. There are several additional near in support levels (159.50, 154.16, 148.20); and hopefully, GLD will regain some traction at one of those levels. That said, our Portfolios Sold one half of their positions because (1) of yesterday’s follow through to the monstrous technical damage done last week when gold was down $90 in a day and (2) GLD is [was] our Portfolios’ largest position so principal protection takes on more importance.

Bottom line: the Averages remain in turmoil although the Dow’s potential break below the lower boundary of its intermediate term up trend could eliminate its current divergence with the S&P. That may not happen; but I continue to believe that the Market will remain in a trading range. As a result, as the stocks sell off our focus will move from our Sell Discipline to our Buy Discipline.

History of Market performance after 45 day win streak ends (short):

Are the charts telling us that it is time to get defensive? (medium):

Here is a more positive take on the Market (medium):



Not much news yesterday. On the economic front, we got weekly retail sales which were mildly positive. Encouraging but hardly Market moving.

That was about it for headlines. So why the water fall formation? I would characterize yesterday’s pin action as a Rip Van Winkle market. Investors suddenly woke up and realized that Greece was a short hair away from a bankruptcy that would trigger credit default swaps (and my nightmare scenario), that the global economy wasn’t quite as peppy as they thought (EU, China and the latest Brazil) and that there could be a war in the Middle East.

As you know, I have been perplexed by the Market’s seeming lack of focus on these problems. Well, it apparently is now (focused that is); and so the question is how much of the above was already subconsciously discounted. We will know soon enough.

Just to review what circumstances are/are not reflected in our Models: (1) sluggish global growth, is, (2) a Greek default, is, (3) higher oil prices for another month or so, is, (4) a chain reaction in the inability of multiple parties being unable to fund counterparty risk in their credit default swaps that leads to severe strains if not a collapse of multiple financial institutions, is not, (5) a shooting war in the Middle East that results in the a stoppage or near stoppage of the flow of oil from that area, is not.

Bottom line: stocks are heading back toward Fair Value which shouldn’t be surprising or concerning. To be sure there are risks that would force me to alter our forecast but they are not unknowns and our Portfolios are prepared for an imperfect environment. The near term question as I stated above, is the extent to which investors have chosen to previously ignore those risks and how much valuations will adjust if they have ignored them and will now factor them into their valuations.

No matter what other investors may do, if yesterday’s sell off is an indication of things to come, then as prices fall into our Buy Value Range or in the case of those trading Sales that have been made in the last couple of months, our Portfolios will be spending cash to Add to their equity positions.

Is the ECB starting to reject some of the collateral offered in its recent funding action? If so, it could be a problem. (short):

Several Greek pension funds refuse to accept haircut on the debt holdings (short):

A more positive view of the latest round of ECB money printing (short):

The recession in Europe has barely begun (medium):

Three ugly charts (short):

Subscriber Alert

The stock price of Cato (CATO-$26) has traded below the upper boundary of its Buy Value Range. Accordingly, it is being Added to the High Yield Buy List. The High Yield Portfolio owns a full position in CATO, so no additional purchases will be made.