Wednesday, April 11, 2012

The Morning Call + subscriber Alert + Don't confuse an oversold bounce with a buying opportunity

The Market

Yesterday was another rough one for the indices (DJIA 12715, S&P 1358). The Dow confirmed its break of its short term uptrend; the S&P will follow suit at the close today barring a significant bounce.

In addition, both index busted through the former 12919, 1372 resistance turned support level, activating our time and distance discipline for the level.

There is a very weak support level at 12730, 1340; but clearly the DJIA has also penetrated this level. The two most visible support levels below 12919, 1372 are (1) the lower boundaries of the Averages intermediate term uptrends (11410, 1199) and (2) their 200 day moving averages (12111, 1132).

Volume rose (as is usual in a sell off); breadth was sickly. The VIX spiked, closing above the upper boundary of its short term downtrend for the second day.

Breadth weakens:

But a bounce from an oversold condition seems likely:

GLD (161.10) had another good day, leaving it above the lower boundary of its short term trading range and right on the upper boundary of a very short term downtrend. A move above the latter would clearly be a positive.

Bottom line: another day and the short term up trend will be history. Our task now is to pay close attention as stocks approach visible support levels. If they break, some Selling may be in order; if they hold, then our Portfolios will likely put some of our cash to work--assuming that some of our stocks trade into their Buy Value Ranges, which is starting to happen (see below).

On the other hand, stocks appear to have only begun to break uptrends. Given that they are still slightly overvalued, it is probably too soon to have our finger on the Buy trigger.

If GLD breaks above that upper boundary of the very short term downtrend, our Portfolios will likely Add to this position.

The Lead/Lag Report (medium):



Yesterday’s economic news was positive. Weekly retail sales were strong, as were February wholesale inventories and sales. However, investor sentiment was again buffeted by more bad news out of (1) Europe: Spanish and Italian bond spreads widened while those country’s bank stocks got hammered and (2) China which reported some disappointing trade numbers.

P.S. overnight Italy executed a successful bond offering and that along with last night’s positive earnings report from Alcoa has turned investors giddy.

In addition, Obama was back on the campaign trail with His populist tax the rich ‘Buffett Rule’ rhetoric. Frankly, I don’t argue with closing some tax loopholes used by high income Americans; but their impact on the deficit is a wart on goat’s ass. According to the CBO, Obama’s plan will raise $4 billion a year--that is equal to the deficit that the government runs in one day--let me repeat that, one day. To focus taxpayers/the electorate on a provision so minor and not attack the real issues that need to be addressed to return the US to fiscal solvency is misleading and a disservice to the budget debate. In addition, my guess is that making taxing the rich a class warfare issue versus one of simple math makes investors nervous. And that doesn’t help stock prices.

Bottom line: stocks are mildly overvalued; Europe appears headed for another financial crisis; the global economy appears to be slowing, doubts are rising that the US economy will not be as robust in 2012 as was thought a month ago, and the electoral silly season is upon us with every likelihood that it will prove sillier than normal.

All the above argues for some consolidation of the October 2011 to March 2012 stock price gains. I am not suggesting a bear market; I am suggesting that we may get a chance to Buy back stocks at lower prices.

Spanish and Italian yield spreads are widening and bank stocks are cratering.

Four signs to watch in this earnings season (medium):

Subscriber Alert

The stock price of WW Grainger (GWW) has traded well above the lower boundary of its Sell Half Range. The Dividend Growth Portfolio will Sell sufficient shares to reduce the position to 50% of normal.

The stock price of Target (TGT) and Occidental Petroleum (OXY) have traded below the upper boundary of their respective Buy Value Ranges. Accordingly, they are being Added to the Dividend Growth Buy List. The Dividend Growth Portfolio owns these stocks. No shares will be Bought at this time.

The stock price of CATO (CATO) has traded below the upper boundary of its Buy Value Range. Therefore, it is being Added to the High Yield Buy List. The High Yield Portfolio owns CATO. No shares will be Bought 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.