Friday, June 08, 2012

The Morning Call + Subscriber Alert + The 800 lb. gorilla---he's still there

The Market


After a strong start yesterday, the indices (DJIA 12460, S&P 1314) ended mixed (Dow up, S&P down). They remain within their intermediate term up trends (11760-16760, 1235-1802).

However, the short term picture remains cloudy. While the Averages closed above their 200 day moving averages (12276, 1287), they are testing the very short term down trend (12431, 1310) off the May high. Wednesday the Dow closed below this trend line, while the S&P closed right on it. Yesterday, both of the Averages finished above the trend for the first day but not by much. As I noted in yesterday’s Morning Call:

‘If these boundaries can be taken out to the upside, that would also contribute 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.’ I await the outcome.

Volume was down as was breadth. The VIX fell but remains above the lower boundaries of both the short term uptrend and the intermediate term trading range (not a positive for stocks).

GLD plunged, closing below the upper boundary of the short term downtrend on the fifth day. That makes a call on whether this downtrend was broken or confirmed something of a toss up. So I am going to put off that decision for a day. However, GLD is still above the lower boundary of its intermediate term trading range which it has tested three times---so this support level has some strength.

Bottom line: not much follow through from Wednesday’s moon shot, though there was enough to put both indices above their respective short term down trends off the May high. That said, stocks are in the time and distance discipline no man’s land; so for the moment, I await clarity.

If GLD stages a quick comeback above that short term down trend, our Portfolios will likely Add to their positions.

A technical look at options expiration week (next week):

AAII bullish sentiment declines (short):

Percentage of stocks above their 50 day moving averages (short):



We were light on economic news yesterday: weekly jobless claims declined approximately as anticipated and consumer credit rose though less than expected. Not much there; but it doesn’t matter because there were plenty of things on which to focus:

(1) the People’s Bank of China cut interest rates. That got stocks moving up as well it should. China is a major trading partner of both the US and Europe; so assuming China’s economy is not completely in the tank [and since they lie a lot, nobody really knows] if it is working to stimulate its economy that clearly could help mitigate the risk of recession in the US and lessen the severity of one in Europe,

(2) Fitch cut the credit rating of Spain---just to remind us that the 800 pound gorilla is alive and well and not going away,

(3) Janet Yellen gave a very dovish speech which also helped move equity prices higher; then Bernanke testified before congress and basically said that the Fed stands ready to provide liquidity if Europe goes down the chute BUT there was not a lot he could do to improve the US economy WITHOUT HELP ON THE FISCAL SIDE. That last little bit did not make investors happy and hence the late day sell off.

As an aside, the Ber-nank’s message was roughly the same as Mario Draghi’s, i.e. there is not much he [Draghi] can do [for Europe] without fiscal and structural reform in the EU---again, the gorilla.

Europe’s (and Germany’s) dilemma (medium):

From Goldman Sachs: expect to be disappointed (medium):

And speaking of disappointments, overnight Spain re-applied for a bank bail out and Germany reiterated that a response was conditioned on Spain accepting more austerity.

Finally, this must see 4 minute video that summarizes it all:

Bottom line: we have gotten two pieces of potentially good news in the last two days: (1) one of a longer term nature---the implications of an electorate sick and tired of the way this country is being managed and (2) shorter term, the initial step in easing monetary policy by the Chinese. If we get just a little bit lucky, both items will provide some cushion to the downside risk.

However, neither one impacts in any meaningful way the source of the greatest risk to our economy---the inability of Europe to take sufficient steps to put its fiscal house in order and avoid the potential of multiple bank and country bankruptcies.

So as good as recent events may make me feel, there is simply too much intervening risk to look across the valley and invest now. To be sure, there will be a point where the European risks will be reflected in stock prices; but not at current levels. Stay patient.

Update on Q ratio valuation model (short):

Subscriber Alert

The stock price of Coach (COH-$62) has traded below the upper boundary of its Buy Value Range. Accordingly, it is being Added to the Aggressive Growth Buy List. The Aggressive Growth Portfolio does not own shares in COH and none will be Added at this time.

Thoughts on Investing--New Rules of Money

#17 It’s Okay to Chase Performance, Sometimes

It is considered a cardinal sin to invest based o past performance. However, Dan Wiener, editor of the Independent Adviser for Vanguard Funds, tells his readers to do just that. He found that since 1981 if you had invested in the previous year’s top performing diversified equity fund you would have had a annualized return of 16.4% versus 11% for the market index. Using his ‘hot hands’ approach, Wiener recommended the purchase of Vanguard Capital Value after its 81.5% return in 2009. Lo and behold, it beat the market in 2010 with a 20% return.

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.