Thursday, June 07, 2012

The Morning Call--Be sure there is follow through before getting too jiggy

The Market


The indices (DJIA 12414, S&P 1315) staged a moon shot yesterday. Both of the Averages (1) pushed back up through their 200 day moving average [12269, 1285], (2) stayed within their intermediate term uptrends [11760-16760, 1234-1801] and (3) closed near or right on the downtrend off their May highs [12426, 1314].

First, blowing back through the 200 day moving average gives some strength to this support level. For the S&P that suggests a potential lower boundary of a short term trading range in the 1266-1285; for the Dow, the corresponding area would be 12037-12269. Time will tell whether these zones can provide the necessary support.

Second, to the upside, the question is now, can the Averages lift through the very short term downtrend (12426, 1314)? If these boundaries can be taken out to the upside, that would also contribute to the strength to support zones mentioned above. If they hold, that probably means that stocks are headed lower and those support zones won’t hold. Again, we must be patient until Mr. Market gives us the answer.

Volume rose though not as much as I would have expected; breadth was strong. The VIX fell but remains well above the lower boundaries of both its short term uptrend and its intermediate term trading range.

GLD was up slightly continuing to trade above the upper boundary of the short term downtrend and the lower boundary of its intermediate term trading range.

Bottom line: yesterday’s pin action may have contributed to setting a lower boundary to the short term trading range if the indices can (1) hold above their 200 day moving averages and (2) take out the downtrends off the May highs. On both counts, our time and distance discipline is now operative. All that said, bear in mind that there was a lot of short covering as no one wanted to be short ahead of the Ber-nank’s congressional testimony today.

While the temptation is always there to chase prices up especially after a negative run in the Market, I am going to let our time and distance discipline do its work before taking any actions.

The history of 10% corrections (short):



Yesterday’s economic news was mixed (remember we like ‘mixed’ after run of lousy numbers): mortgage applications were up but purchase applications were down; first quarter productivity fell more that expected but unit labor costs rose less than anticipated. However, the important event was the latest Fed Beige Book report in which the economy and most of its components were characterized as growing modestly and inflation was depicted as moderate.

So (1) this week’s economic numbers are slowly but surely diluting the potential impact of last week’s dismal data. That is a positive for our forecast, if you haven’t already guessed it and (2) the Beige Book report doesn’t suggest the need for any kind of additional Fed easing---which also is good news but not of the variety for which traders have been hoping [i.e. QEIII]. On the other hand, the Fed’s resident dove was out yesterday trumpeting the flexibility the Fed has to ease more.

Plus China is easing:

In addition, while Germany was making some noises about supporting some sort of bail out of the Spanish banks

(1) we have heard that tune before and been disappointed,

Germany’s supposedly proposed plan to bail them out AND not force the Spanish government into any further ‘austerity’ measures (medium):

(2) following an ECB meeting, Mario Draghi gave no hint of further EU monetary

A summary of Draghi’s press conference (short):

(3) demonstrating their historical grasp of critical issues, the French legislature lowered [you heard me right] the retirement age,

(4) rumors swirled that the losses at the Spanish banks could be double their original estimate.

Here is Charles Biderman discussing on the Spanish banks (3 minute video):

And lastly, take a look at how well the Greek’s are doing in working out their difficulties (short):

All in all, not the grist for a 2.5% explosion to the upside. So what was the accelerant in yesterday’s Titan III shot?

(1) as I suggested above in the Technical section, stocks were oversold, many investors did not want to go into Bernanke’s testimony today short,

(2) some talking heads were pointing at the seeming softening in the German position on bailing out the Spanish banks. But the eurocrats have been tap dancing through the plunge in EU sovereign and bank insolvency for over a year, making one phony, baloney promise after another and then reneging. What could possibly be different this time around? A big chunk of the continent is in deep ka ka, so addressing Spanish bank problems in the absence of a much larger solution is just rearranging the deck chairs on the Titanic. Europe is a big problem; it has the potential to severely disrupt global economic activity; and until the morons running the place do something meaningful, throwing bones at individual crisis won’t alleviate the systematic risk to the world economy.

The EU bad news scenario (medium/long):

(3) the Wisconsin revolution. At the risk of over hyping the Scott Walker victory, it seems to me that this was a sign of the revolution we need so desperately; that is, it is the people saying enough is enough and then doing something about it. Not the president not the speaker of the house; because there is no leadership from the top. The whole lot of them are more concerned about protecting their entrenched perks than what is good for the nation. Even more significant, this bottom up movement came not from Texas or some other red state but from one with a consistently liberal electorate.

Returning to earth, hopefully, this is a wake up call for the political class and a sign of the voting pattern in the November election. If it proves to be the case, it potentially removes a negative to our long term outlook (i.e. a political environment that encourages more regulation, higher spending, higher taxes and less free trade). So if the electorate follows through on Wisconsin’s message, it would be a big step in removing the depressants on long term secular economic growth and lifting our projections for future economic activity.

To be clear, this is just a gleam in my eye right now. Indeed, as investors we still have to survive the havoc that the European political class seems intent on inflicting on the global. But that will pass, however, painful it may be. But coming out the other side, the investment outlook may be better than it otherwise would have been.

Bottom line: it is too soon to get jiggy about our own political/economic outlook. We still have to endure the consequences of the resolution of the EU sovereign debt/bank debt crisis---and it may not be pleasant. However, wherever the bottom may be, it may be higher than it would have been on Monday as a result of Tuesday night. That increases my confidence that the lower boundary of the Averages intermediate term up trend could be our worse case. Be patient; let’s be sure Tuesday was as important as I think it could have been. But smile, things could be getting better in this country.

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.