The Morning Call-Follow through is important

The Market
Technical

The indices (DJIA 12805, S&P 1368) bounced yesterday. However, the S&P joined the Dow in confirming the break of its short term up trend. Both are now in

(1) a short term trading range. We know the upper boundary, i.e. the recent highs [13302, 1422]; but must await the setting of the lower boundary. It is possible that equity prices could rally further, close above the 12919, 1372 resistance turned support level. However, both of the Averages have now completed a second day below those levels under our time and distance discipline. So that outcome is a bit iffy; and I would add that given the time it took to violate this level on the way up, I would have expected much more support on the way down than has been exhibited thus far. That is not a good sign if your are a bull.

In addition, the S&P attempted to trade back above its 50 day moving average but was unsuccessful. If this moving average remains a barrier, that is also not good for stocks.
http://advisorperspectives.com/dshort/updates/Current-Market-Snapshot.php

The next set of support candidates are the very short term support levels that I mentioned in yesterday’s Morning Call [12730, 1340]. The DJIA actually touched 12730 yesterday and bounced.

If these levels can’t hold, then the next stop is either the lower boundaries of the intermediate term uptrends [11429, 1199] or the 200 day moving averages [12118, 1270].

For the moment, we wait to see where investors set the lower boundaries [support].

(2) an intermediate term up trend (11429-16429, 1199-1766).

How low can we go? (short):
http://www.marketwatch.com/story/only-modest-correction-ahead-2012-04-11?link=home_carousel

Volume fell though breadth improved. The VIX was off slightly but closed for the third day above the upper boundary of its short term downtrend.

GLD (161.06) was off fractionally, finishing above the lower boundary of its short term trading range but remaining right on the descending upper boundary of a very short term downtrend.

Bottom line: the short term uptrend has been negated. Stocks are now probing for a new support level for a re-set to a short term trading range. There are several close in candidates; but if they don’t hold, it is not tough to visualize an additional 10-15% to the downside. To be clear, even if that occurs, equities would remain within their intermediate term uptrend.

In the meantime, I am focusing on stocks that are threatening to violate major support and hoping that more names can be Added to our Portfolios’ Buy List.

GLD seems to be building a base. A break above the very short term downtrend would likely result in additions to this holding.

Fundamental

Headlines

Yesterday, pre-market futures trading was buoyed by Tuesday evening’s positive Alcoa earnings surprise as well as an encouraging Italian bond offering. The day’s early economic data was not all that up beat: mortgage and purchase applications fell while the US March budget deficit rose. However, stocks were so oversold that it would likely have taken much worse data to offset the initial positive mood.

Later in the day, the Fed released its periodic Beige Book survey which I think could characterized as modestly upbeat. That along with a statement from an ECB official that it was prepared to buy Spanish debt if Spain otherwise had problems selling it. Frankly, I am not sure what to make of this. It sounds like more bulls**t from a eurocrat. Nonetheless, it pleased investors.

On the other hand, maybe it is no bulls**t (medium and today’s must read):
http://www.zerohedge.com/news/anatomy-usd-funding-crisis-and-feds-global-swap-line-bailout

And this:
http://www.zerohedge.com/news/how-much-ltro-dry-powder-there-and-why-spain-again-wildcard

Finally, last night Janet Yellen, number two at the Fed, made a strong case for continued Fed easing. QEIII, here we come.

Bottom line: I continue to see nothing in the US news that would cause me change our economic outlook. Yesterday’s data supports that view. With the exception of a blow up in the Middle East, I am becoming more sanguine about the impact high energy prices will have on our economy. This view is driven primarily by the growing abundance and low price of natural gas. True oil could keep gasoline prices high in the short term; however, longer term the conversion of industry and transportation to a lower cost energy feedstock I think quite positive.

Europe, on the other hand, has me worried. Our forecast was a default in Greece and the rest of Europe ‘muddles through’. That has worked for a couple of months; but in that time my assumption was that there would be a more concerted effort toward fiscal solvency. To the extent that it may be happening, I am concerned it is not enough. I am not pricing it into our Model yet; but it is the major risk to our forecast.

Our Valuation Model roughly has all of the above discounted at current prices. So with no overall overvaluation/undervaluation of equities driving direction, individual stock valuations become more important. That is my focus.

A preview of earnings season (short):
http://www.thereformedbroker.com/2012/04/11/jeffrey-kleintop-on-the-profit-growth-deceleration/

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.