Wednesday, April 18, 2012

The Morning Call--I am clueless

The Market

The Averages (DJIA 13115, S&P 1390) smoked everything in sight yesterday. The key development was that the S&P moved above 1372, joining the Dow (its second day) above the 12919, 1372 resistance turned support level. Our time and distance discipline is operative; so it will take a couple of days before 12919, 1372 are confirmed as the lower boundaries of the indices short term trading ranges (12919/12744-13302, 1372/1338-1422). Both of the Averages are in an intermediate term uptrend (11489-16489, 1202-1769). Both of the Averages closed above their 50 day moving average.

Despite the Titan III shot, volume was down, though breadth improved. The VIX declined but remains in a short term trading range and above the lower boundary of a very short term uptrend.

GLD was off slightly but remains above the upper boundary of the very short term downtrend and within its short term trading range.

Bottom line: yesterday’s frenetic pin action notwithstanding, the Market’s technical status didn’t change: both index is in an intermediate term uptrend and is in the process of setting the boundaries of a short term trading range. I do not believe investors should use yesterday’s performance as a signal to buy, although clearly I could be wrong. My focus is assessing the new boundaries of the indices short term trading ranges.

Advances versus declines (short):



Warning!! I don’t have a clue why stocks were so strong yesterday.

(1) volume was very low; certainly not indicative of a rush to buy,

(2) the US economic news was mixed at best: weekly retail sales were uneven and both housing starts and industrial production were below expectations. While that fits into our forecast, it is hardly a prescription for a moon shot,

(3) Obama did an Act II of His ‘blame everybody but Himself’ campaign, demonizing oil ‘speculators’ for high oil and gasoline prices. He forgot to mention those evil speculators role in the current waterfall formation in natural gas prices. Nor did He review any of His own failed energy policies. Yeah, that is politics as usual, at least as practiced by the Master of Hope and Change; but again not exactly a spark to ignite investor enthusiasm,

(4) Argentina nationalized a Spanish oil company and offered nothing in compensation. Not really what the Spanish economy needs right now,

(5) sticking with the Spanish theme, one of the prime reasons attributed by the talking heads to the yesterday’s rally was a successful Spanish bond action. Here are the particulars of the auction. How any sane investor could interpret them as positive escapes me; but you decide for yourself: [a] demand was slightly higher than expected {that’s it, but there is more}, [b] the interest rate paid was considerably higher than the last auction, [c] the principal buyers were Spanish banks which had no choice but to buy, [d] finally and most importantly, the bonds were all very short maturities which means that they will be ‘rolled over’ within the term of existence of the new European funding facility. In other words, there is not a lot of risk of Spain defaulting on them.

The key challenge will come Thursday when Spain is selling 10 year bonds. If those auctions go well, there may be a reason to get jiggy. But to add 1.5% to stock prices over a two year bond sale of questionable success seems a bit over the top to me.

(6) not to be out done for ‘kicking the can down the road’, Italy announced that it will delay balancing its budget for at least another year,

(7) finally, there were some positive earnings reports [most notably some regional banks]; and if they presage a much better profit season than most expect, then I can at least understand part of the spike in investor sentiment. But stocks are overvalued. Presumably, some of that overvaluation is due to optimism about improving corporate profits. But that suggests some double counting in yesterday’s price action; and that brings me back to being mystified.

Anybody who can provide a 1.5% positive spin to these events, please send it to me. Then send your resume to Obama; you will fit well into His PR department.

Bottom line: stocks got a bit more overvalued yesterday for no easily discernable reason. Just as I was before the Averages broke above the 12919, 1372 resistance level the first time, I can’t make the math work justifying higher prices. I took solace when stocks simply couldn’t maintain that upward momentum; and it makes me even more skeptical at this point that equities can again re-set to an uptrend. So my attention remains on our Price Disciplines.

Ten more years of below average returns (medium):

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.