Thursday, May 24, 2012

The Morning Call + Subscriber Alert + OK, I am confused


The Market
Technical


The indices (DJIA 12496, S&P 1318) pin action the last two days has been about as confusing (to me) as it could be. Before going into that, it is important to note that they remain well within their intermediate term uptrends (11668-16668, 1226-1793).

As for the short term, recall that Tuesday, the Averages traded above the descending very short term downtrend, then failed to hold. I concluded that pin action pointed to more downside. And yesterday the trading for the first 75% of the day confirmed that with the indices falling big time, trading down to the lows of last Friday (12344, 1292). Then late in the day, they bounced hard and finished the day over that very short term downtrend (12489, 1315).

So it would seem that (1) the 12344, 1292 level gained some strength as a new support level for the short term trading range while (2) the very short term downtrend lost strength. However, the dramatic intraday reversals of the last couple of days gives those conclusions an ‘iffy’ feel. Nevertheless, in a broader sense, the current level has apparently become the battleground for the bulls and bears.


Volume rose; breadth recovered somewhat though to add to the current lack of technical clarity, the flow of funds indicator continues to get whacked. Likewise, the VIX closed down on the day but remains above the lower boundary of its intermediate term trading range.

GLD experienced a big intraday flush but rallied and closed down just slightly, remaining well above the lower boundary of its intermediate term trading range (148.20).

Bottom line: at the close Tuesday, I thought that I had the technical picture all worked out. With the surprising pin action yesterday, I am humble. As the old saw goes---the Market always acts to make the greatest number of investors wrong. With that in mind, I am going to back off for the moment and wait for more technical clarity.

The latest from Trader Mike:
http://www.stocktradingtogo.com/2012/05/23/market-recap-2011-all-over-again-gold-update/

And from Stock Traders Almanac:
http://blog.stocktradersalmanac.com/post/DJIA-Still-Technically-Broken

The chart on copper (short):
http://www.thereformedbroker.com/2012/05/23/what-is-this-copper-breakdown-telling-us/

Fundamental

Headlines


Yesterday’s economic news was mixed (as usual): mortgage applications were up but the more important purchase applications were down; April new home starts came in ahead of expectations. Not much Market moving in this data.

There was one other tidbit. The congressional budget office issued its long awaited assessment of the impact of expiration of the Bush tax cuts and the spending sequestration on 1/1/13---and it wasn’t pretty. Although any sixth grader that can add and subtract already knew that. So it is not news. However, it does force the issue onto the headlines and into the electorate/investor awareness.
http://www.cbo.gov/publication/43262

I have opined that nothing will likely get done to address the potential negative economic consequences of these events until after 1/1/13--which means that as 1/1/13 approaches the heat level will almost surely increase. The good news is that the elections will hopefully clarify the higher taxes versus lower spending issue which is at the heart of the inability of our political class to reach a compromise. Irrespective of which side wins those elections, a resolution will likely be forthcoming when the newly elected officials take their seats and fix it to their satisfaction. You or I might not like the results; but the point is that this fiscal cliff will dealt with before the negative consequences described above occur.

In the meantime, this is probably going to have a big impact on psychology, meaning with the uncertainty posed by this potential problem, consumers and businesses alike will be circumspect about their spending and that in turn keeps our economy in a slow, sluggish rate of growth---sort of like our forecast.

As usual, Europe ruled the day. Early on, investors were nervous about Greece going under and problems in the EU banking system, resulting in some severe whackage. Later on, these investors decided that the eurocrats would once again snatch victory from the jaws of defeat and come up with a plan to ease Greece out of the euro, bestow bond issuing (money creating) capacity on the ECB, institute a deposit insurance program and implement a program for growth. Notice (1) they managed to bet money on two contradictory scenarios on the same day but just sequentially rather than simultaneously and (2) ‘come up with’ implies a bit of wishful thinking---since nothing was announced.

That said, bear in mind that unless something gets done very quickly and the Greeks (Spanish, Portuguese, Italians) continue to pull money out of their banks, none of the above matters because the banks will collapse. Then the fat lady will have sung and the bad news scenario will be upon us.

***over night EU PMI’s were reported down, below 50.0, meaning economic contraction; a German newspaper announces that the Greek exit is a ‘done deal’; and Spain ‘discovered’ that its debt to GDP was much higher than had been originally estimated (oooopps).

Bottom line: so yesterday’s confusing technical performance was simply reflective of severe schizophrenia among investors. I appreciate that because the economic implications of a Greece defaults/Europe ‘muddles through’ scenario versus one in which the PIIGS default resulting in social strife and extreme financial uncertainty are radically different, wild swings in investor sentiment is to be expected as one alternative or the other gains favor. . However, appreciating investors’ dilemma provides no insight as to what will actually occur. And to be sure, we are getting nothing concrete from the eurocrats. Common sense says the eurocrats will surely do the right thing. But unfortunately the history books tell us that the euros are not good at making inclusionary decisions that while clearly in the best interest of all in the long term involved too much pain short term. So until we see the whites of their eyes being on the sidelines is the safer strategy. Nevertheless. we must in the meantime have a list of both Buy and Sell candidates, so that when clarity arrives we can act immediately.

A review of Europe’s choices (medium):
http://www.forbes.com/sites/briandomitrovic/2012/05/22/its-time-for-europe-to-learn-from-its-past/

An interesting article on the Greek dilemma and game theory (medium):
http://www.zerohedge.com/news/beware-proud-greeks-and-ultimatums

JP Morgan’s addiction to gambling (long but a must read):
http://www.ritholtz.com/blog/2012/05/jpmorgans-addiction-to-gambling-on-derivatives/

And speaking of Wall Street greed, here is a PBS video (20 minutes) on the rise and fall of MF Global:
http://www.zerohedge.com/news/frontline-mf-globals-six-billion-dollar-bet

Subscriber Alert

The stock price of Western Gas Partners (WES-$44) has traded below the upper boundary of its Buy Value Range./ Accordingly, it is being Added to the High Yield Buy List. No shares will be bought 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.