Thursday, May 10, 2012

The Morning Call-Oversold bounce?

The Market


The DJIA (12835) broke the lower boundary of its short term trading range (12919-13302), starting our time and distance discipline; however, it does but potentially put the Dow back in sync with the S&P. The DJIA remains well within its intermediate term uptrend (11597-16597).

At the close yesterday, the S&P (1354) confirmed the break of the lower boundary of its short term trading range. By definition that means that the short term trend is down with an upper boundary of 1374. That said, as you know I think that this is not the start of a big down move but rather a probe for a lower boundary to a trading range. This index is also within its intermediate term uptrend (1218-1785).

Both the Averages are well below their 50 day moving averages (13055-1386). Volume rose; breadth was mixed. The VIX was up but remains within its short and intermediate term trading ranges. As long as it stays within its short term trading range, it is mildly positive for stocks.

GLD fell again and closed for the second day below the lower boundary of its short term trading range though it remains within its intermediate term trading and the developing reverse head and shoulders formation..

Bottom line: despite what has been the pattern of a big sell off early in the day and a rally later substantially reducing early losses, prices continue to decline with the S&P now having broken below the lower boundary of its short term trading range and the DJIA threatening to do the same.

Sooner or later, equities will at the very least stage an oversold rally. When that happens, the point at which it fizzles out should give us some information about the relative strength of the bulls versus the bears. However, with the exception of seeing an attack on 12744/1338 (a strong contender for the new lower boundary of the short term trading range) and a strong bounce, I don’t want to be trying to second guess the winner of the current bull/bear struggle.

Here is a bullish take on the Market (medium):

The latest from Trader Mike (short):



Yesterday was another meager economic stat day: weekly mortgage and purchase applications both turned positive for the first time in several weeks and March wholesale inventories came in lower than expected though sales grew more than inventories.

Again, I don’t think investors even noticed as the news out of Europe dominated headlines and psychology. Spanish bond yields moved higher when it became clear that the Spanish government was waffling on its proposal for shoring up bank balance sheets. In addition, EU officials issued a series of off, on again statements regarding whether or not the EU would fund the next bail out tranche to Greece due today. Again, the risk here is not that we don’t know what alternatives are available to each party in this charade. We know them all too well. The risk is that we have no idea what the weak, leaderless, cowardly group of morons making the decisions will do, when they will do it and what the counter party response will be.

More on the choices that both Greece and Germany face (medium):

I would title this Thursday Morning Humor if it weren’t so serious (3 minute video):

The Spanish bank bailout looks like a dud (medium):

How long will Germany continue to finance the EU (medium):

Bottom line: if we only had to deal with the current flow of US economic data and incompetencies of our own political class, then it would be easy to observe that stocks are now slightly below Fair Value, that our Portfolio Buy Lists are growing and that we need to be making our plans for putting money to work. Of course, it is never easy; although I am making a list---and checking it twice.

However, the European crisis is so fraught with known unknowns that we have to worry about a misguided group of eurocrats taking steps that lead to either a severe EU recession or a nonfunctioning financial system (think Neville Chamberlain). To be clear, I don’t think Greece departing the euro is among those unknowns; not because it isn’t an unknown, but because even if it occurs it will have the macroeconomic affect of a gnat on a goat’s ass. I worry that it happens and then southern Europe decides to follow it.

Not that the eurocrats won’t pull a goal out with two seconds left ala the NY Rangers. Indeed that still is perhaps foolishly our scenario. But Europe is clearly starting to rain on our parade and carries with it tail risk that we have to be hedged against.

That said, on the thesis that I can’t bet our entire Portfolio on a tail risk, I have my list and our Portfolios will likely start to nibble when the technical picture clears.

Another bull argument---7 in fact (medium):

A potential bear case (short):

Subscriber Alert

The stock price of Oracle ($28) has traded below the upper boundary of its Buy Value Range. Accordingly, it is being Added to the Aggressive Growth Buy List. The Aggressive Growth Portfolio owns a 75% position in ORCL. No additional shares will be purchased at this time.

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.