Friday, April 27, 2012

The Morning Call + Subscriber Alert + Houston, we have a trading range


The Market

Technical


The Averages (DJIA 13204, S&P 1399) had another good day, putting both (1) well above the 12919, 1372 level. In fact, the ‘distance’ element is now sufficiently pronounced that when coupled with a truncated ‘time’ element [which I mentioned in yesterday’s Morning Call] and the clear move above their respective 50 day moving averages [13017, 1379], it pushes me to confirm 12919, 1372 as the lower boundary of its new short term trading range and (2) well within their intermediate term up trends [11508-16508, 1209-1776].

Volume fell; breadth was mixed. The VIX declined but remains above the lower boundary of its short/intermediate term trading range(s).

GLD was up, closing above the lower boundary of its short term trading range and continues to develop a reverse head and shoulders formation.

The hidden role of gold at the IMF (medium):
http://www.usnews.com/opinion/blogs/economic-intelligence/2012/04/23/the-hidden-role-of-gold-at-the-imf


Bottom line: we now have some clarity on the dimensions of the indices new short term trading ranges. With that, the DJIA is now in the upper region of its trading range while the S&P is around its midpoint. From a technical standpoint that is not exactly a great place to be spending cash even if one thought that the valuations were attractive--which as you know, I basically don’t.

So for the time being, I intend to watch (1) how well the upper boundaries (13302, 1422) of this new trading range hold up and (2), then for a subsequent test of 12919, 1372. If they provide the necessary support, our Portfolios may nibble some.

Of course, there is clearly a possibility that prices could blow right through the 13302, 1422 resistance level. Our Valuation Model says no. Nonetheless, I continue to review the inputs to our Model and admit to the confusion over the dichotomy between the macro numbers and this earnings season’s results to date. At the moment, I can’t explain it and until I can or their divergence ends, I am reticent to increase our Portfolios’ risk exposure.

That said, everyday I get a little more impressed with GLD’s performance. Like stocks, it seems to have found a lower boundary to a short term trading range; but unlike stocks it is well below its recent highs. At the opening today, our Portfolios will increase their GLD holdings by 1-2%.

Topping or consolidation (short):
http://www.ritholtz.com/blog/2012/04/topping-or-consolidation/

The S&P advance/decline line (short):
http://www.bespokeinvest.com/thinkbig/2012/4/26/sp-500-cumulative-ad-line-attempting-to-take-short-term-high.html

Bullish sentiment is very low. This is generally viewed as a contrary indicator:
http://www.bespokeinvest.com/thinkbig/2012/4/26/bullish-sentiment-drops-to-lowest-level-since-september.html

Fundamental

Headlines


The early morning economic data was nothing to get jiggy over: weekly jobless claims were up slightly, in line with expectations and the April Chicago Fed activity report was a bomb.

However, investors were still hyped over Apple’s numbers and the Ber-nank not taking QEIII off the table. So stocks were off to a good start. Then later in the day, March pending home sales were reported well above estimates; and that kept the party going.

Bottom line: the earnings season continues to be pleasant surprise and that could ultimately result in upward revision to our Models. However, like the run of positive macroeconomic numbers a month ago, this profit story could end as abruptly as it started. I am not making a judgment either way because it is too soon to know. Nevertheless, it certainly supports the notion of an improving economy and that is captured in our Models.

Meanwhile, our political class (this time the senate), never dismissing the right time to do the wrong thing, in gross violation of previously agreed upon budget limits, just bailed out the post office--again, to the tune of $11 billion of your and my money.
http://www.zerohedge.com/news/bailout-postal-service-begins-cost-taxpayers-110000-vote-saved-or-gained

Back at the ranch, the eurocrats can’t figure out whether to s**t or go blind. They just keep fiddling while the entire continent burns.

**Overnight S&P downgraded Spain to B++, Spain’s unemployment rate hit 24%+ and it was Italy’s turn for a disappointing bond auction.

The mess that is Europe (medium):
http://www.ritholtz.com/blog/2012/04/political-science/

And this (medium):
http://www.zerohedge.com/news/translating-growth-european

I understand cautious optimism in this environment; but I don’t get why anyone would want to pay top dollar for stocks. Particularly when our Buy List is almost nonexistent and numerous stocks have traded into their Sell Half Range. Even if our Model is off by some percentage that would not alter the total Market valuation sufficiently for investors to be rushing to Buy stocks at historically high prices.

I am clearly always subject to being wrong, but this pin action is a mystery to me.

The growing disconnect between the S&P and macroeconomic data (medium):
http://www.zerohedge.com/news/guest-post-peak-dow-peak-gdp-and-peak-oil

The latest from Bill Gross (9 minute video):
http://www.zerohedge.com/news/bill-gross-europes-dysfunction-and-us-double-dips



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.