Tuesday, June 12, 2012

The Morning Call-Another teenie, weenie step

The Market


Yesterday’s pin action (DJIA 12411, S&P 1308) was surprising to me. I had assumed that a bail out of the Spanish banks would prove to be a binary event; that is, if the bail out occurred, stocks would smoke and if it didn’t, they would get pounded. Well, Spain got the bail out, but stocks went down---as I said yesterday, it just goes to show what I know.

Intermediate term, the indices closed well within their uptrend (11773-16773, 1238-1805). Short term, they are still in the midst of a challenge to their downtrend (12319, 1299) and closed for the third day above that trend line. Depending on price volatility, the break will be confirmed at either today’s or tomorrow’s close. If confirmed, the short term trend will reset to a trading range with a lower boundary of 12026, 1266. Lending credence to this scenario is that the indices also remained above their 200 day moving averages (12319, 1292).

Volume was off, as was breadth. The VIX spiked up, remaining above the lower boundaries of both its short term uptrend and its intermediate term trading range (not good for stocks).

GLD rose and closed right on the upper boundary of its now contested short term downtrend, leaving open for at least another day the question of whether or not it has broken that downtrend to the upside. It remains above the lower boundary of its intermediate term trading range.

Bottom line: my focus at the moment is on those aforementioned short term downtrends and whether or not the Averages will confirm a break above the upper boundaries. If so, the short term trend will re-set from down to a trading range; it not, then the 12026, 1266 support level becomes very important.



No US economic data released yesterday. But once again, even if there had been, it likely wouldn’t have mattered.

All eyes had been on Europe over the weekend, anticipating some move by the EU to assist the Spanish banks---which, as fate would have it, was a major disappointment; and that in turn got reflected in stock prices. One can argue that the negative pin action was simply selling on the news; and maybe it was. But the consequences of the Spanish banks either receiving or not receiving a bail out were so radically different, I don’t see how one alternative (a bank bail out) could have been fully reflected on Friday’s close.

The other possible explanation is that while the eurocrats did something (and, to be sure, that is better than nothing), it was another one of those teeny, weenie baby steps that do just enough to keep a bomb from going off but not enough to really address the problems---which is typical of eurocratic historical behavior. In other words, so little has changed that the risk in this situation has also changed very little---the eurocrats dick around, events overtake their ability to respond and the grenade in our jockey shorts explodes.

Satyajit Das on the Spanish bank bail out (medium):

And Cullen Roche (medium):

And don’t forget about Italy (short):

The euro crisis for dummies (4 minute video):

The stock of a leading manufacturer of bank notes soars (short):

And EU finance officials consider capital controls (medium):

Bottom line: once again, the EU political class fades the tough decisions; and, hence, Europe remains the biggest risk to US economic growth and the health of our securities markets. As I noted last week, we have gotten some good news of late that could potentially at least partially mitigate a worse case scenario out of Europe: (1) monetary easing by the People’s Bank of China as well as some better economic reports and (2) an electorate that seems to have finally reached the point of intolerance of big government spending, taxes and regulations.

The question, as always, is how these factors are priced in. Our Valuation Model suggests that some of the EU bad news is reflected in stocks; but certainly not all. So how one assesses the magnitude and odds of a disaster scenario will determine how much more downside exists. That said, no one is going to know at what point the news is as bad as its going to get until we look back.

My solution to that has always been to (hopefully) be nibbling through the ‘V’ or ‘U’ of a Market bottom. So, as prices drop and our Buy Lists grow, our Portfolios will start that process. As you know, I usually let technical factors control those short term price decisions---and as I noted above, whether or not the short term downtrend is confirmed and 12026, 1266 can hold as support will determine the initial investment decisions.

The latest from David Rosenberg (medium):

The latest from John Hussman (medium):

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.