Tuesday, April 10, 2012

The Morning Call -- The technical outlook darkens + Our Portfolios blew out VIG yesterday


The Market
Technical


Both indices (DJIA 12919, S&P 1382) closed below the lower boundary of their respective short term up trends (13248-14605, 1404-1512). Our time and distance discipline is operative now with the Dow ending its third day and the S&P its second day below those lower boundaries. If the DJIA closes below its boundary today it will confirm the break; the S&P will follow tomorrow.
http://macromon.wordpress.com/2012/04/08/ugly-chart-contest-trend-breakers/

Should that occur, I don’t see a reason for a lot of concern. For one, our Portfolios blew out the VIG trading holding yesterday, as I noted they would in yesterday’s Morning Call. That takes our Portfolios’ cash holding back in the 30-33% range. Coupled with their GLD position, that puts them in a well hedged position.

Second, as I have noted numerous times, there are plenty of near end support levels. The Averages are still in an intermediate term up trend (11384-16383, 1196-1763). Other support levels include: (1) the former resistance now support levels [12919, 1372--clearly, the indices are right on this level], (2) their 200 day moving averages [12118, 1269], (3) the neckline of the reverse head and shoulders pattern [12287, 1266] and (4) the old resistance/support level [11741, 1230].

Volume was quite low; breadth negative. The VIX rose, breaking above the upper boundary of its short term downtrend. A confirmed break of this trend line would be a negative for stocks.

GLD (159.39) was up, leaving it above the lower boundary of its short term trading range (157.84).

Bottom line: the indices are providing a stiff challenge to their short term uptrend. The break for the DJIA will be confirmed tonight, for the S&P tomorrow night. Assuming the break occurs, the next level to watch is the former resistance now support level of 12919, 1372--which is very close.

As I noted when the trading positions in VIG were initiated, they were not subject to our time and distance discipline. They were eliminated during the trading session yesterday.

That said, there is plenty of support to contain any decline to a manageable size. Although hopefully, a sell off will be of sufficient depth to create some Buying opportunities.

The liquidity ratio remains reasonable positive (medium):
http://www.investmentpostcards.com/2012/04/02/keep-a-close-eye-on-institutional-cash/

Update on the ‘three peaks and a domed house’ formation (short):
http://blog.stocktradersalmanac.com/post/DJIA-Topped-First-Trading-of-April

Are junk bonds in a topping pattern? If so, what does that mean for stocks? (short):
http://advisorperspectives.com/dshort/guest/Chris-Kimble-120409-High-Yield-HS.php

New lows exceed new highs (short):
http://www.bespokeinvest.com/thinkbig/2012/4/9/new-lows-exceed-new-highs-for-the-first-time-in-2012.html

Fundamental

Headlines


Yesterday investors’ principal focus was on last Friday’s poor nonfarm payroll report and its implications for 2012 economic growth. Clearly, they weren’t happy dudes and dudettes. In addition, there were undercurrents of concern about Europe (there was a negative 60 Minutes segment Sunday night) and first quarter earnings season which begins tonight.
http://www.capitalspectator.com/archives/2012/04/a_bit_of_humili.html#more

My outlook is unaltered since my last note. Indeed, the slowing growth in employment fits my forecast rather neatly. With our Models unchanged, that leaves stocks (as defined by the S&P) slightly overvalued.

Bottom line: the above suggests that the current weakness could experience some follow through, though I am by no means bearish. If a decline does occur and any of our holdings trade down into their Buy Value Range or our trading Sells reach significant support levels, then our Portfolios will put cash back to work.

Uncertainty about government policies is not the problem; the policies themselves are the problem (3 minute video):
http://www.investmentpostcards.com/2012/04/02/cliff-asness-uncertainty-is-not-the-problem-holding-back-the-economy/

Some not very positive thoughts from David Kotok (today’s must read):
http://www.ritholtz.com/blog/2012/04/kotok-i%E2%80%99m-worried/

The latest from David Rosenberg (medium):
http://www.zerohedge.com/news/rosenberg-ruminates-six-roadblocks-stocks



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.