Thursday, May 03, 2012

The Morning Call-The Market has happy feet; I just don't know why


The Market
Technical


The indices (DJIA 13268, S&P 1402) were off again yesterday; but not by much. They finished the day within their short term trading ranges (12919-13302, 1372-1422) and their intermediate term uptrends (11543-16543, 1213-1780). They also remain above their 50 day moving averages (13047, 1384).

Volume fell, as did breadth. The VIX traded up and continues above the lower boundary of its short/intermediate term trading ranges (neutral for stocks).

GLD was down slightly and remains above the lower boundaries of both its short and intermediate term trading ranges.

Bottom line: despite being down, the pin action was fairly positive given the lousy economic news out of both the US and Europe---so the bulls are still in there buying on any price weakness. Good for them. Our internal indicator points at a deterioration in breadth, which is not surprising if our Valuation Model is correct.

Clearly, I could be wrong (again); and while I am by no means calling for a major market decline, I just don’t believe the indices will break above the 13302, 1422 level.

More data on ‘sell in May and go away’ (short):
http://www.ritholtz.com/blog/2012/05/sell-in-may-and-go-awayexcept-in-election-years/

Fundamental

Headlines


If the bears were looking for a day that could push stock prices down big, they got it in spades yesterday. The day started with terrible news out of Europe---lousy employment and PMI reports. Then back at home, the April ADP private employment report was very weak and March factory orders were down. Weekly mortgage applications were OK; but this is secondary indicator. So it was hardly an offset to everything else.

Despite all the gloomy data, after a steep initial decline, stocks rallied back to close only slightly down. One can only conclude that the bulls are still in control; therefore, I can only assume that the upper boundaries of the current trading ranges will get another challenge. I continue to be baffled by investor optimism and struggle to find a reason for the current move into a higher level of overvaluation. So far, I have been unsuccessful.

After the early morning economic news, the media spent the rest of day obsessing over Aubrey McClendon’s gross violation of his fiduciary responsibility. While I hope the guy gets his just due, I wish the MSM would be equally obsessed with the (mis) management of our country’s financial institutions which brought our economy to the very edge of disaster. But it is so much easier to go after some hick from Oklahoma than all those Masters of the Universe with whom they drink whiskey, smoke cigars and play grab ass in lower Manhattan.

Bottom line: nothing in the yesterday’s news flow inspires confidence in either the economy or the Market. The economic numbers were nearly all bad, both here and in Europe. The good news, at least as related to the US, is this was only one day of data; and there have been plenty up beat stats previously reported to make me feel warm and fuzzy about our forecast.

Europe, of course, is a whole different matter. As you know, the threat of another country default, a freezing up in the EU financial system or something worse is the big daddy risk in our outlook. Unfortunately, unlike the US, there has not been a great deal of good news that would mitigate yesterday’s numbers. I fear that the risk meter for Europe may be entering its ‘red zone’; and if that happens, our ‘muddle through’ scenario goes out the window and with it, our generally positive forecast for US economic growth.

I’m still in the mind set that says that either I am nuts or a good chunk of Wall Streets have their collective heads in the sand. When that happens, I do nothing (except may be buy some more GLD).

The bull case for the market from Doug Kass (medium):
http://www.thestreet.com/story/11515295/1/the-approaching-reallocation-rally.html

The bear case from Charles Biderman (15 minute video---worth the watch):
http://www.zerohedge.com/news/biderman-makes-friends-bankers-are-dumb-politicians



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.