Friday, April 13, 2012

The Morning Call-China OOOOps; now can the bulls maintain the upper hand?


The Market
Technical


What a day. The indices (DJIA 12986, S&P 1387) rallied big. Not enough to get close to the lower boundaries of their former short term up trends; but sufficient to recover the 12919, 1372 resistance turned support level after two days below it.

That leaves the short term trading ranges in tact. 13302, 1422 remain the upper boundaries. On the strength of yesterday’ pin action 12919, 1372 is now the leading candidate for the lower boundaries. I am not willing to bet on that occurring; but it certainly has a much higher probability than this time yesterday.

Another near in contender for the lower boundary is the weak 12774, 1332 support level.

In another sign of strength, the S&P closed well above its 50 day moving average (1373) which should act as additional support.

Both of the Averages finished well within their intermediate term up trends (11429-16429, 1199-1766).

Volume was down; breadth improved. The VIX plunged. While it closed above the upper boundary of its short term downtrend for the fourth day, given the magnitude of the decline and the proximity of the closing price to that boundary, I am holding off confirming the VIX break above its short term downtrend for another day.

GLD (162.70) also rallied, finishing the day above the upper boundary of its short term downtrend. Any follow through this morning and our Portfolios will Add to their positions.

Bottom line: stocks are in an intermediate term uptrend and a short term trading range though the level of the lower boundary is uncertain. The power behind yesterday’s up move suggests that there is still plenty of bullish sentiment around and that, therefore, any additional downside may be limited. ‘Suggests’ is the operative word in the prior statement; so I am going to sit still until there is a clearer idea of where the lower boundary of the developing trading range is located.

GLD seems to have found its legs. As noted above, any follow through to the upside and additional shares will be Bought.

The latest from Charles Biderman (3 minute video):
http://www.zerohedge.com/news/biderman-short-euros-gold-terms

Bullish sentiment plunges (medium):
http://pragcap.com/bullish-sentiment-plunges-to-a-7-month-low

Fundamental

Headlines


Yesterday’s economic data (poor jobless claims, a better February trade deficit and a mixed PPI report) hardly ignited the Titan III pin action. What seems to have driven the Market was a rumor of a better than expected Chinese GDP report tonight. Given the return of unsettling news out of Europe, many see China as an important contributing component to US economic growth--and I wouldn’t disagree with that. The question as always is one of degree. Given that some of the economic news out of China of late hasn’t been all that great, I think some health skepticism here is warranted. Indeed, read the following (medium):
http://www.zerohedge.com/news/glimpse-what-really-happening-china

P.S. overnight China reported a GDP figure (8.1%) well below the aforementioned whisper number (9.0%+). Oooops.

And speaking of unsettling news out of Europe:

Overnight Spain reported a record increase in borrowings from the ECB with the result that its bond spreads are gapping wider.

A close look at Spain (medium):
http://www.nakedcapitalism.com/2012/04/spain-has-only-denial.html

And Italy (medium):
http://www.minyanville.com/business-news/the-economy/articles/euro-eu-fed-ecb-spain-spain/4/11/2012/id/40362

Bottom line: the current economic data fit our Model; the political class is doing nothing to improve the outlook--which also fits our Model. Yet stocks are slightly overvalued. That suggests a focus on individual stocks, both those that are breaking major support levels as well as those that trade into their Buy Value Ranges. The good news in this latest Market hiccup is that we are starting to get new candidates on our Buy Lists.

The outlier risk which makes me error on being overly defensive is the EU/global sovereign debt/banking debt problem described in sufficient detail below by Mohamed El Erian (no radical, right wing, fringe ideologue) to scare the living s**t out of anyone with skin in the game.

The latest from Mohamed El Erian (long and today’s must read):
http://www.zerohedge.com/news/el-erian-breaches-final-frontier-what-happens-if-central-banks-fail

The latest from Barton Biggs (medium, and better than his usual meanderings):
http://www.zerohedge.com/news/pick-your-poison-barton-biggs

Subscriber Alert

The stock price of Amerigas Partners LP (APU-$39) has traded into its Buy Value Range. Accordingly, it is being Added to the High Yield Buy List. No shares will be purchased at this time.

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.