Thursday, April 19, 2012

The Morning Call - 12919/1372 looking like the number


The Market
Technical


Yesterday, the Averages (DJIA 13032. S&P 1385) sold off modestly, leaving them (1) above the 12919, 1372 support level [third day for the Dow, second day for the S&P] which continues its status as the leading candidate for the lower boundary of a new short term trading range [12919/12744-13302, 1372/1332-1422], (2) above their respective 50 day moving average and (3) well within their intermediate term uptrends [11489-16489, 1203-1770].

Volume was flat (and low); breadth fell. The VIX rose, remaining with its short term trading range.

GLD slipped fractionally again but keeps going down at a slower pace than the upper boundary of its very short term down trend. Not encouraging although it is still above the lower boundary of its short term trading range. As long as it holds above that level, the inverse head and shoulders pattern (a positive formation) will continue to develop.

Bottom line: the indices are still in the processing of setting a lower boundary to their new trading range. 12919, 1372 looks like the number, though that appears a little high if the fundamentals are factored in. That said, we live with the Market we got. Nevertheless, it will introduce a conservative bias to any stocks we purchase in the lower region of the trading range and a more aggressive bias to any sales made at the upper end of the range.

Overall, the Averages have multiple support levels below 12919, 1372 not the least of which is the lower boundaries of their intermediate term uptrend. So any break below 12919, 1372 would likely only mean more stocks on our Buy Lists and better (lower) Buy prices.

Signs of a top? (short):
http://www.marketwatch.com/story/leading-indicators-of-a-market-top-2012-04-18?link=home_carousel

What about ‘sell in May and go away’ only in election years (short):
http://blog.stocktradersalmanac.com/post/Election-Year-DJIA-Stats-for-Sell-In-May--Big-Jan-Feb-Gains

Fundamental

Headlines


The only economic news yesterday was mortgage and purchase applications which was not a happy number as purchase applications dropped 11.2%. That got the Market off to skittish start and nothing much else happened as investors rolled Spain and Italy’s financial condition over in their minds. Earnings reports continued to pour in but without Tuesday’s enthusiastic reception.

Overnight the Spanish 10 year auction went so/so-the yield coming in higher than the last auction but with the bid to cover also rising.

The Spanish banks are in a very precarious position (medium):
http://www.zerohedge.com/news/quick-reminder-ahead-tomorrows-spain-debt-auction

Italian banks’ balance sheets are also deteriorating (medium):
http://www.zerohedge.com/news/italian-bad-loans-surge-highest-2000-foreign-deposits-plunge

A look at France four days before their elections (medium):
http://www.zerohedge.com/news/complete-and-annotated-hollande-victory-matrix

On a brighter note, two bills were introduced in the house, one that would authorize the building of the Keystone pipeline (simultaneously, Transcanada filed an application for a new route through Nebraska) and the second that would give tax cuts to small businesses. I have no illusions about the likelihood of either it passing or getting Obama’s signature; but at least the right noises are being made.

Bottom line: stocks are overvalued based on our assumptions on the economy (which appears on track), on fiscal and monetary policy (which regrettably is also on track) and on the eurocrats doing just enough to not implode the continent (getting more questionable by the day). As much as I sound exactly like I did when I thought that 12919, 1372 resistance would hold (and I was wrong), given the fundamentals, I can say nothing else. I may once again be proven wrong; but until I am or something occurs to change the math, this is my story and I am sticking with it.

Latest from Nomura’s strategist (5 minute video):
http://www.zerohedge.com/news/bob-janjuah-dismisses-central-bank-independence-amid-monetary-anarchy

The latest from Jeremy Grantham (medium):
http://www.zerohedge.com/news/jeremy-grantham-explains-how-survive-betting-against-bull-market-irrationality


Subscriber Alert

The stock price of Cato Corp (CATO-$29) has traded above the upper boundary of its Buy Value Range. Accordingly, it is being Removed from the High Yield Buy List. The High Yield Portfolio will continue to Hold CATO.


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.