The Morning Call--Use this rally to Sell broken stocks

The Market

Technical

The indices (DJIA 12504, S&P 1315) finally rallied, remaining within their intermediate term uptrend (11651-16651, 1224-1791). However, they are searching for a lower boundary to their short term trading range (?-13302, ?-1422).

Yesterday had all the feel of a relief rally/short covering; and we could very well witness some follow through before stocks again resume their search for a short term lower boundary. The key levels to watch as price rise are 12548, 1329---which are the upper boundaries of their very short term downtrends.

At the moment, I don’t believe that Friday’s low will prove to be the new lower boundary (12344, 1292). That said, there were a number of our stocks that bounced off easily defined support levels---hinting that there is some outside chance that equities have found a bottom; hence I am not totally ruling them out as new lower boundaries

As a reminder, the other support levels that I am watching (1) their 200 day moving averages [12198, 1277], (2) the neckline of the reverse head and shoulders pattern [12287, 1266] and (3) the old resistance/support level [11741, 1230].

Volume was down; breadth snap back solidly. The VIX plunged and closed right on the upper boundary of its short term trading range. You will remember that in Saturday’s Closing Bell, I moved forward the call for a break above this boundary based primarily on the distance element of our time and distance discipline. Yesterday, the VIX recouped the entire distance; so I am going to hedge a bit and re-open the confirmation period for at least another day.

GLD moved up slightly, remaining above the lower boundary of its intermediate term trading range.

Bottom line: at the moment, I am operating on the thesis that the current decline isn’t over; that the either the aforementioned upper boundaries of the very short term downtrends or the former 12744, 1338 resistance levels will hold; and when that occurs, our Portfolios will lighten up on some technically broken stocks.

If I am wrong and 12344, 1292 prove the bottom, then there are plenty of stocks on our Buy Lists to Add to.

Corrections take time (short):
http://www.chrisperruna.com/2012/05/20/corrections-take-time-be-patient/

Trader Mike on yesterday’s pin action (short):
http://www.stocktradingtogo.com/2012/05/21/market-recap-rebound-begins-education-tips-apple-and-facebook-updates/

Fundamental

Headlines

No economic news yesterday. In addition, there was little out of Europe over the weekend. The focus of investor/media attention was the disappointing trading in Facebook after its equally disappointing Friday offering. That it didn’t have any impact on the rest of the Market was somewhat surprising. But I think that only reaffirms that all eyes are on Europe and with no new bad news, there was a sigh of relief.

***over night, Germany said ‘no way, Jose’ to ECB issued bonds and the OECD
said Europe is now in recession.

A vision of the Greek endgame (medium and today’s must read):
http://www.zerohedge.com/news/forget-bazookas-here-come-tomahawks-and-howitzers-r-rated-walk-thru-greek-endgame

Will a eurozone crisis lead to another Lehman moment (medium):
http://www.nakedcapitalism.com/2012/05/could-the-eurozone-crisis-cause-another-lehman-moment.html

And:
http://www.minyanville.com/special-features/random-thoughts/articles/todd-harrison-todd-harrison-minyanville-todd/5/21/2012/id/41085

More on potential bank runs (medium):
http://www.zerohedge.com/news/elephant-room-european-capital-outflows-and-another-%E2%82%AC215-billion-spanish-deposit-flight

Bottom line: if investors were buying stocks just because there was no bad news out of Europe, I believe that they will be very unhappy with their purchases. Now perhaps the buying was because all the bad news from Europe was reflected at 12344, 1292. I doubt it; but it can’t be ruled out.

This is one of those times where the technicals guide my action. 12344, 1292 are either the bottom or they are not; we just have to wait for the Market to reveal its wisdom.

The latest from John Hussman (medium):
http://www.hussman.net/wmc/wmc120521.htm

Tuesday morning humor (3 minute video):
http://www.zerohedge.com/news/blast-past-snl-explains-wall-street

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.