Wednesday, May 09, 2012

The Morning Call-The sidelines are the place to be


The Market
Technical


Despite a very volatile day, little changed technically. The Dow (12932) remains within its short term trading range (12919-13302), though it challenged 12919 intraday and bounced---a modestly positive sign. It also continued to trade well within its intermediate term uptrend (11593-16593).

The S&P (1363) finished below the lower boundary of its short term trading range (1372-1422) for the third day. If it remains below it by the close today, the break of 1372 will be confirmed. However, the DJIA is still above its comparable level (12919); so assuming an S&P close below 1372 today, they will be out of sync. That keeps the short term technical picture somewhat muddied. On the other hand, the S&P is trading within its intermediate term uptrend (1216-1783).

Both index remained below their respective 50 day moving averages (13065, 1386). Volume rose; breadth fell with the flow of funds looking particularly ugly. The VIX was up fractionally, surprisingly small for such volatile and negative day. It closed well above the lower boundary its short/intermediate term trading ranges.

GLD fell sharply breaking below the lower boundary of its short term trading range and threatening the developing reverse head and shoulders formation. Our time and distance discipline is now operative, though with a shorter time frame given that there is a trading component in this holding. GLD remains above the lower boundary of its intermediate term trading range.
http://pragcap.com/gold-versus-berkshire-what-have-you-done-for-me-lately

Bottom line: the S&P continues to challenge the lower boundary of its short term trading range. The lack of confirmation by the DJIA plus yesterday’s unsuccessful intraday challenge raise some doubts about further downside in prices. As long as the indices are diverging technically, the short term trend is in question and that keeps me on the sideline.

A look at the charts of secular bear markets (medium):
http://www.ritholtz.com/blog/2012/05/long-term-secular-cycles-on-sp/#more-78810

Is the Russell 2000 sending a warning signal (short):
http://advisorperspectives.com/dshort/guest/Dominic-Cimino-120509-Russell-Warning.php

Wednesday morning humor (3 minute video):
http://www.zerohedge.com/news/btfd

From Trader Mike (short):
http://www.stocktradingtogo.com/2012/05/08/europe-stocks-disney-dis-breakout/

A really interesting approach to investment strategy using volatility (short and today’s must read):
http://advisorperspectives.com/dshort/guest/BP-120508-Volatility-Management.php

Fundamental

Yesterday was slow on news. We did get some minor economic datapoints: the small business optimism index rose while weekly retail sales were mixed. While I don’t think investors paid much attention, I am pleased that nothing in these stats run contrary to our forecast.

The European elections and the uncertainty over their implications were front and center. The ambiguity of these events will likely be with us for a while and I can’t help thinking that it will prove a damper on sentiment. The problem, in my opinion, is that potentially future events could end up being worse than anything about which investors are now worried; and that heightens my own uncertainty. In addition,, it is also likely to lead to increased volatility as witnessed by yesterday’s pin action---and that doesn’t help.

What happens next in France and Greece (medium):
http://www.macrobusiness.com.au/2012/05/france-simmers-greece-boils/

Greece moves closer to exiting the EU (medium):
http://www.zerohedge.com/news/german-lawmakers-prep-greek-eurozone-exit-handelsblatt

***Overnight Spanish bond yields move higher and CDS’s blow out (medium):
http://www.zerohedge.com/news/overnight-sentiment-europe-done-broke-again

The European Union is destroying European unity (short):
http://www.zerohedge.com/news/guest-post-european-union-destroying-european-unity

Bottom line: the US economy is looking fine. Oil prices are continuing to decline and that is a huge positive. We are getting no help from the clowns in Washington; but then that was expected.

The big kahuna remains Europe and it got worse over the weekend if for no other reason that there are new known unknowns mudding the picture. This will likely increase volatility---which could potentially be good if a sell off is overdone. But short term it keeps discretion as an important element to strategy.

Stocks as measured by the S&P are Fairly Valued at the moment. So I have no strong directional convictions. That means that I watch our Price Disciplines very closely, though I defer temporarily to the technicals, awaiting for the indices to re-set or confirm the lower boundary of their short term trading ranges and get back in sync.



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.