Wednesday, May 23, 2012

The Morning Call + Subscriber Alert + A pretty pathetic rally

The Market


After spending most of the day in plus territory, the indices (DJIA 12502, S&P 1316) finished flat on the day. They both (1) remain well within their intermediate term uptrends (11664-16664, 1225-1792) and (2) continue to probe for a lower boundary to their short term trading ranges (?-13302, ?-1422).

In addition, they both challenged the very short term downtrend (12513, 1320) and failed to hold above those resistance points.

Volume weakened, as did breadth. The VIX rose above the upper boundary of its short term trading range. As you know in yesterday’s Morning Call, I reversed/delayed a call regarding the confirmation of the violation of that boundary. Yesterday’s pin action seemed to re-confirm that break---not good for stocks.

GLD got whacked but remained above the lower boundary of its intermediate term trading range. However, yesterday’s very weak trading may indicate that we are in for another challenge to that lower boundary (148.20).

Bottom line: yesterday’s unsuccessful challenge by the Averages of the very short term downtrend suggests that Monday may have been little more than a relief rally and that the pressure remains to the downside. While stocks may once again challenge near in resistance, the pin action prompts me to chip away at technically broken stocks.

Leading indicators of a Market top. The longer term trend is positive; but that doesn’t mean, stocks won’t test 11651, 1224. (medium)

Are the bond markets sending us a warning (short):

The panic/euphoria model (short):



Yesterday’s economic news was neutral: existing home sales-positive; weekly retail sales-mixed; the Richmond Fed manufacturing index-negative. However, neutral was good enough to get stock prices moving up in the absence of news out of Europe. Then the inevitable occurred---news out of Europe; the former Greek Prime Minister was quoted as saying that the probability of Greece leaving the euro was high (well, duh), casting doubts that anything can be accomplished in the big EU pow wow today; and that little bit of patently obvious news was enough for stocks to quickly give up all the gains earned earlier.

Greek bonds crashing (even further) (medium):

The latest from David Rosenberg (medium):

The suicide watch in Europe is not over (medium):

And speaking of suicide, which I wish that I wasn’t (4 minute video):

Bottom line: with our economy continuing to stumble forward, Europe poses the major problem to our economic outlook and stock valuations. There, of course, is some probability that the worse case is largely reflected in current prices, especially since they have traded down of late. However, in my opinion, it is less than many hope.

At the moment, lines are being drawn in the sand: Germany has said no more money; and since they are the only Europeans that have any, that is significant; Greece has said no more austerity. This is like the gunfight at OK corral. Everyone is going to lose something; the only question is, how much. And yet nobody is doing anything to attempt to find the least painful alternative (Greece leaves the euro and Germany/ECB helps ease it through the transition). It may happen at the last minute, but (1) there is no sign of it, (2) the more time that lapses, the greater the chances that events could spin out of control and render it impossible to implement and (3) there are so many alternative scenarios to this ‘least painful’ course that potentially hold much greater negative consequences, that I just don’t believe are being discounted. Cash is a comfort.

The cure for JP Morgan and our banking system (medium):

Subscriber Alert

Given the failure of yesterday’s rally, I am assuming that we are in for more downside. Today at the open, the following actions will be taken on stocks that have experienced a technical breakdown.

In the Dividend Growth Portfolio, a small portion of Qualcomm will be Sold.

In the High Yield Portfotio, a small portion of Sanofi Aventis will be Sold.

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.