Tuesday, March 06, 2012

The Morning Call - Thursday could be a big day

The Market

Yesterday started off rough and moderated through the trading session, though the indices (DJIA 12962, S&P 1364) still closed down for the day. The Dow remains in its intermediate term up trend (12835-14500), but is still struggling to surmount the 13000 level.

The S&P finished the day within its intermediate term trading range (1101-1372). That leaves the Averages out of sync and, hence, in a sort of no man’s land in which I think no action is the best action.

Volume remains quite low; breadth was mixed. The VIX rose 4% but continues within its short term down trend and above the lower boundary of its intermediate term trading range.

GLD closed below the 166.25 support level. If it experiences follow through to the downside today, our Portfolios will start to chip away at this holding.

Bottom line: under our time and distance discipline, as long as the indices are divergent, the Market is defined as directionless. Accordingly, it is a time to sit on the sidelines. Any new additions to our Buy Lists are put on hold; but our Portfolios continue to react to our Sell Discipline though with a more incremental approach.

Up date on sentiment indicators:

Back to back down Friday/down Monday (short):

A look at S&P and sector breadth (charts):



Yesterday’s US economic numbers were mixed: February factory orders were disappointing while the ISM nonmanufacturing index came in above expectations. So the data flow continues to be somewhat erratic; the good news being that it fits perfectly with our forecast.

It was the international economic stats that brought the sellers out: the EU PMI services index was below estimates, Moody’s released a statement that it believed that Ireland would need a second bail out and most important, China lowered is 2012 growth outlook. None of this was exactly new news; so it may have just been a convenient excuse to sell off.

Also of note, we have another round of Greek bail out news scheduled later this week which has the potential for creating some extreme heartburn. The deadline for the ‘voluntary’ exchange offer on Greek bonds held by the private sector expires on Thursday. This debt ‘restructuring’ is mandatory for Greece to receive the funds from the second bail out. At the moment, the outcome is anything but clear; so it could be a weight on the Markets till there is clarity of resolution.

And (medium):

And will US banks manage this problem (medium):

Bottom line: stocks are slightly overvalued (as measured by our Model); and nothing is occurring to alter that judgment: the economy is fine if uninspiring; our political class is equally uninspiring; the eurocrats fiddle while Greece burns.

The risks remain largely to the downside: a spike in oil prices brought on by God knows what bit of violence or other moronic behavior and/or a disorderly Greek default which could start as soon as Thursday.

How GLD can go down in this environment is beyond me; but then omniscience is not my long suit. If it breaks technically, my job is to protect principal.

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.