Tuesday, May 01, 2012

The Morning Call-Don't chase stock prices at these levels

The Market

The indices (DJIA 13213, S&P 1397) traded off yesterday but remained within their short term trading ranges (12919-13302, 1372-1422) and their intermediate term uptrends (11535-16535, 1210-1777). They also closed above their 50 day moving averages (13032, 1384).

Volume rose; breadth was weak. The VIX was up and continues above the lower boundaries of its short/intermediated term trading ranges.

GLD inched up again and remains above the lower boundaries of both its short term and intermediate term trading ranges.

Bottom line: given the news flow, prices could have been down more than they were yesterday and I wouldn’t have been surprised. As you know, my bias is towards lower prices based on the results from both our Valuation Model and internal indicator. Further, even if I was more optimistic on the long term value of stocks, technically they are at the upper end of their current short term trading range which is not where I like to Buy stocks. That leaves me sitting on my hands.

Stocks performance on the first trading day in May (short):



The US economic news was mixed at best. The good news was that March personal income was up a bit more than expected while the increase in spending was somewhat less--indicating that consumers were being conservative in their personal finances. A good thing.

On the other hand, here is a look at real disposable income:

However, both the Chicago PMI as well as the Dallas Fed manufacturing survey were disappointing (see below).

Taken together, they fit our slow, erratic growth forecast and support the valuations from our Model.

The retail sales data out of Europe was also not inspiring.

This is just another piece of evidence that the eurozone continues to weaken; and with its political economy in complete disarray, I continue to believe that the greatest risk to our outlook is that the EU won’t luck out and ‘muddle through’.

The latest from Satyajit Das on the EU crisis (medium):

Bottom line: stocks (as defined by the S&P) are modestly overvalued (as defined by our Model). In and of itself, that is not sufficient to prompt any selling. As you know, what drives our Selling is our Sell Half and Stop Loss Disciplines, augmented by Trading Stops where appropriate--and, in this case, our Sell Half Discipline has already made it clear that some stocks are very overvalued. Taken together, they clearly caution against chasing prices at these levels. Even though there are a couple of stocks on our Buy Lists, I am not eager to commit cash to equities until, at the very least, they are at the lower end of their short term trading range.

Thoughts on being wrong (short):

The latest from John Hussman (medium):

The latest from Bill Gross (medium and today’s must read):

The latest from Charles Biderman (4 minute video):

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.