Tuesday, June 19, 2012

The Morning Call-The can gets kicked down the road one more time

The Market


Yesterday’s pin action was mixed, with the DJIA down (12741) and the S&P up (1344). That leaves the Averages in conflict---the Dow traded back below the ‘neckline’ (12744) of the reverse head and shoulders while the S&P remained above its comparable level (1338) for the second day. As I noted yesterday, a break of the ‘neckline’ sets stocks up to trade higher; however, with the indices now out of sync, I am holding off on that call---at least for one more day. Whether or not the ‘necklines’ are broken, both the DJIA and S&P are trading within their short term trading ranges (12022-13302, 1266-1422) and both of the Averages finished well within their intermediate term up trends (11811-16811, 1242-1809).

Volume was down; breadth fell. The VIX plunged, closing below the lower boundary of its short term uptrend. Our time and distance discipline is now operative; however, if this break is confirmed, it would be a positive for stocks. Also a plus, yesterday’s move also took the VIX below the ‘neckline’ of its head and shoulders pattern. Nonetheless, the VIX remains above the lower boundary of its intermediate term trading range.

GLD rose fractionally, leaving it above the lower boundary of its intermediate term (and short term) trading range.

Bottom line: given recent volatile, schizophrenic trading, it is not surprising that the Averages would at some point get out of sync. Now at issue is whether they will break up through the ‘neckline’ of their reverse head and shoulders. If that ultimately proves to be the case, then the upside defined by this formation is roughly 13400/1440. If the break proves unsuccessful, then the ‘shoulder line’ of the reverse head and shoulders pattern (12344, 1292) becomes my focus.

However, for the moment the Averages’ nonconfirmation argues for doing nothing

Two key commodity charts (short):



No economic data yesterday. Once again, it probably didn’t matter. Firstly, because as you know, all eyes had been on the weekend’s elections, particularly those in Greece; so some investor effort Monday was trying to discern any meaning in the results. In sum:

(1) in Greece, a government must still be formed, policies developed and implemented and a resumption of negotiations with the EU over terms of the bail out. In other words, we don’t know much more today than we did last Friday and a solution for the EU credit crisis is no closer,

(2) the French gave Hollande’s socialist a sweeping victory, the retirement age is probably going to 35 and Germany gets lonelier and lonelier as a force for fiscal responsibility,

(3) the military continues to hold the reins of power in Egypt.

The implications of last weekend’s elections (medium):

Charles Biderman on what Germany should do about Greece (4 minute video):

A thorough but long analysis of Spain’s economic predicament:

Will Italy be far behind (medium):

Second, there is an FOMC meeting tomorrow and everyone is getting jiggy about an extension of Operation Twist or another QE. Hope springs eternal. Unfortunately, this time it will likely be granted its wish.

Bottom line: investor anticipation regarding the weekend’s elections notwithstanding, the visibility of a solution to the EU sovereign debt crisis is no clearer today than last Friday. The net effect of the Greek elections was another teeny, weenie baby step that might ultimately lead to something positive but in essence kicked the can down the road yet one more time buying God knows how much time before investors once again realize that nothing has happened, that the eurocrats are still jerking themselves off and that the day when events will spin out of their control is one day closer.

With stocks basically at Fair Value, the risk of ‘events will spin out of control’ is not reflected. Hence, despite the potential for a positive technical move if the break of the ‘neckline’ of the reverse head and shoulders is confirmed, our Portfolios will likely stay on the sidelines.

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.