Tuesday, April 24, 2012

The Morning Call-News flash: Europe isn't getting any better


The Market
Technical


The Averages (DJIA 12927, S&P 1366) backed off yesterday. That negative pin action complicated process of defining the lower boundary of the new short term trading range. As you know, in last week’s Closing Bell, I put off calling 12919, 1372 as its lower boundary because the S&P was having trouble penetrating its 50 day moving average (1379). Then yesterday, the S&P finished below the 1372 level (the Dow managed to stay just above its comparable level). Since our time and distance discipline never confirmed 12919, 1372 as the lower boundary of the new short term trading range, there is no boundary to negate (though this price decline is clearly negative). Meaning that issue remains open. Complicating matters, the DJIA and S&P are now diverging at the 12919, 1372 levels (also not a positive). Candidates for the lower boundary of the new short term trading range continue to be 12929/12744 and 1372/1332. The upper boundaries are 13302/1422. One final negative development-both index traded below the lower boundary of its very short term uptrend.

However, there is no confusion about the Averages intermediate term uptrends (11489-16489, 1205-1772).


Volume decline; as did breadth. The VIX rose but not nearly as much as I would have expected. It remains above the lower boundaries of (1) its very short term uptrend and (2) its short term trading range.

GLD was off fractionally but continues to trade above the upper boundary of its very short term downtrend and the lower boundary of its short term trading range.

Bottom line: stocks are still struggling to set a lower boundary to their short term trading range. I opined in the last Closing Bell that I thought that 12919, 1372 seemed a bit rich for such a support level. One marked by 12744/1332 seems more reasonable; although I have listed a number of other lower potential candidates. Our task is to simply be patient and wait for stocks to clearly define that lower boundary.

GLD is also struggling, but in its case, it is to stay above the lower boundary of its short term trading range. So far, so good. But discretion is the better part of valor here; so again, I think it best to await a stronger trading pattern before adding to this holding.

Update from Trader Mike (short):
http://www.stocktradingtogo.com/2012/04/23/market-recap-support-falls-and-apple-preps-for-earnings/

Update on the ‘three peaks and a domed house’ pattern (short):
http://blog.stocktradersalmanac.com/post/DJIA-Three-Peaks-and-a-Domed-House-Update

Fundamental

Headlines


Not much US news; but I am not sure anyone would even have wanted it given the rough weekend news flow from overseas:

(1) in the French elections, Hollande, the socialist candidate and an antagonist to the recent EU austerity plan, did quite well. That puts him in a run off in early May with Sarkozy--the fear is that Hollande will win. Why investors would be upset by this is beyond me--everybody on the globe who listens to the news knew that this was going to happen,
http://www.marketwatch.com/story/black-weekend-for-europe-economic-monetary-union-2012-04-23?link=MW_popular

And:
http://www.nakedcapitalism.com/2012/04/europes-lunatics-rise.html

And fresh from the EU parliamentary debates (2 minute video):
http://www.zerohedge.com/news/nigel-farage-batters-barroso-noyer-self-deludes-european-crisis-ending

(2) the Dutch government fell because it couldn’t get agreement on its own austerity plan. This was a surprise; and remember, The Netherlands is among the most fiscally responsible of the EU governments. If they can’t get their budget house in order, the sovereign debt problem could get even worse,

(3) European production manager indices came in below expectations [EU in recession?],

(4) Meanwhile, in Greece, things are going from worse to even more worse:
http://www.zerohedge.com/news/it-took-bank-greece-only-three-weeks-revise-it-2012-gdp-forecast-even-lower

(5) Egypt cut off natural gas to Israel [40% of its needs],

(6) finally, two semi-bright spots, [a] the IMF raised 400 billion euro funding facility for Europe {although one half of that came from Europe, go figure} and [b] the Chinese production manager index came in slightly above estimates.

Here at home, our political class is arguing over the history changing issues of the century, i.e. who is to blame for a couple of Secret Service officers taking hookers back to their hotel rooms and who at WalMart paid some vig to a Mexican enabler--leaving the minor matters like... you know...unsustainable budget deficits, bankrupt entitlement programs and an economic tanking tax raise in January 2013 for later.

Bottom line: yesterday’s pin action notwithstanding, stocks (as defined by the S&P) remain modestly overvalued (as defined by our Model). Nothing in our economy or our political environment suggests otherwise. Europe, on the other hand, is concerning because, at present, our forecast only incorporates a ‘muddle through’ scenario. While ‘muddling through’ implies conditions somewhat worse than exist at present, it doesn’t include another country bankruptcy or severe contraction of the EU financial system. The unfolding EU circus keeps my bias on the conservative side.

More on the derivative market (short):
http://www.ritholtz.com/blog/2012/04/228-trillion-derivative-exposure/

The latest from John Hussman (medium):
http://advisorperspectives.com/commentaries/hussman_42312.php

An excellent discussion of all that worries me (medium):
http://www.zerohedge.com/news/keeping-faith-strategic-alpha

In addition to a better than expected earnings ‘beat’ rate, guidance is also strong (short):
http://www.bespokeinvest.com/thinkbig/2012/4/23/guidance-has-been-relatively-strong.html


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.