Friday, April 20, 2012

The Morning Call-Tops are a process

The Market

The Averages (DJIA 12931, S&P 1376) closed above the 12919, 1372 support level, the Dow for the fourth day, the S&P the third. Depending on today’s pin action, this support level may be confirmed as the lower boundary of a newly re-set short trading range, Making that call would be easier if they could regain their 50 day moving average (12995, 1379) which they crashed though yesterday. Both index is solidly within their intermediate term uptrend (11489-16489, 1203-1770).

Volume was abysmal; breadth mixed. The VIX fell but remains within its short term trading range and above its very short term uptrend.

GLD was up a bit, continuing to trade above the declining upper boundary of a very short term down trend and the lower boundary of short term trading range.

Bottom line: both index tested its respective 12919, 1372 level intraday and bounced. That is positive. Both index fell through their 50 day moving average. That is negative. So there remains a question in my mind as to whether 12919, 1372 will prove to be the new lower boundary of a new trading range. Since I normally wouldn’t make the call till the close tonight under our time and distance discipline, I may delay that call a day or so, if there is market weakness today. At this moment, I don’t see the urgency to make a decision.

Market tops are a process (short):



Stocks actually performed better than I expected yesterday, given the news flow. Overnight, Spain had a so so ten year auction, which while was not as bad as many feared, certainly wasn’t as positive as Tuesday’s moon shot suggested it could be.

That was followed by a morning of pretty rough US economic numbers--weak jobless claims, existing home sales and the Philly Fed index--partially offset by an increase in the leading economic indicators.

Also getting attention was the ongoing, intense debate over the meaning of the recent widening of the yuan trading range by the Chinese. The issue being whether or not this action meant that the Chinese economy was entering a ‘soft landing’; and its importance being that the strength of the Chinese economy is still among the worries of many investors.

The cherry on top was that while the quarterly earnings of reporting companies were coming in better than expected (as of the close last night, 80% of reporting companies are beating estimates) many of the stocks of those companies were declining following their earnings report. That says to me that those better profits were already priced into stocks and that we could be witnessing a ‘sell on the news’ phenomena. We need more evidence before making that call; but it clearly could be telling us something about what was driving stock prices in the first quarter and what the upside in stocks are from here.

Bottom line: while our Valuation Model suggests that stocks (as defined by the S&P) are slightly overvalued, there is no reason to be negative on the Market--at least, at this moment. In this environment, the best strategy is to (1) adhere closely to our Price Discipline, being a slightly more aggressive Seller on strength than a Buyer on weakness and (2) keep a very watchful eye on the clusterf**k that is Europe.

Don’t buy the ‘stocks are cheap relative bonds’ argument (medium):

A great article on the role of dividends in total investment returns (medium):

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.