Tuesday, May 15, 2012

The Morning Call-Will 12744/1338 hold?

The Market


After a rough day, the indices (DJIA 12695, S&P 1338) are challenging the secondary support level and my initial candidate for a new lower boundary to their short term trading ranges (12744-13302, 1338-1422). Our time and distance discipline is now operative on the DJIA. As dismal as this sounds, both of the Averages are well within their intermediate term up trends (11604-16604, 1219-1786).

Right now I think the crucial levels to watch are S&P 1338 for support and S&P 1359 for resistance---which is the upper boundary of its very short term down trend.

Volume fell; breadth deteriorated. The VIX was up and remained within its short and intermediate term trading ranges. However, last night’s close was very near the upper boundary of its short term trading range.

GLD got whacked---again. For the second day, it was below the lower boundary of its secondary support level of its short term trading range. Yesterday our Portfolios reduced their positions to 4-5%. The lower boundary of its intermediate term trading range is at 148.10. A break of that level will prompt additional sales.

Bottom line: the technical picture keeps getting uglier. In that atmosphere, our Sell and trading disciplines increase in importance.



No economic data released yesterday. Again, even if there were, it is unlikely investors would have noticed. Front and center were:

(1) the unfolding fiasco at JP Morgan. Heads are rolling and the size of the losses keep inching up---although to be fair, the total estimated loss at present is well within Morgan’s capability to absorb. The problem is that [a] no one knows what evil lurks on the balance sheets of other US financial institutions, [b] there is an uneasy feeling that the US big banks are simply too big to manage and too big to regulate and no one seems to want to think about how to correct it, and [c] forget that no one knows how many landmines there are on US bank balance sheets, the potential for a couple of nuclear bombs on the euro banking systems books is almost heart stopping.

Why the big banks need to be broken apart (medium):

(2) Europe, Europe, Europe. [a] the Greeks can’t form a government. A new round of elections in June is likely and so the slow torture from this source continues, [b] Angela Merkel’s party lost elections in Germany largest state, creating additional uncertainty from Europe’s most stable and best economy and [c] Spain had another poorly received bond auction. More gruel for this witch’s brew. And yet, the political class is AWOL. If this is a sign that this crowd has resigned itself to letting events run their course, we are likely in for a very rough ride.

The latest from John Mauldin on Europe (medium/long):

Bottom line: stocks are getting cheaper as investors realize that the US economy is no where near a normal rebound and the financial system still has enough problems to prevent it from financing any higher rate of growth. At least in our forecast, that is not bad news. Indeed, equities at current prices reflect all that; so based on domestic events, there is no reason to anticipate a lower Market.

Europe may be another story. It is coming unraveled; and the eurocrats seem to be frozen in the headlights. They may come up with a solution that allows Europe to continue to ‘muddle through’; and they may not. However, until something happens all I can assume is that the risks to our Portfolios are rising; hence, their current high cash position helps me sleep at night. I am building a list of potential buy candidates while at the same time watching our trading stops very closely. I fear our Portfolios may have more selling to do before they get the opportunity to buy.

The latest from John Hussman (medium/long):

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.