Tuesday, June 05, 2012

The Morning Call + Subscriber Alert + No dead cat bounce?

The Market


The Averages (DJIA 12101, S&P 1278) had a flattish day (Dow down, S&P up); hence, no follow through from Friday’s shellacking. They remain in search of a lower boundary to their short term trading ranges; and along those lines, both index closed below their respective 200 day moving averages (12254, 1285) for the second day. In addition, the DJIA has traded below the support offered by the neckline of the former reverse head and shoulders (12287) for the second day

If the 200 day moving average can’t be regained, there remain three additional potential support levels: (1) the neckline of the reverse head and shoulders pattern [1266---clearly the Averages are out of sync on this support level], (2) the lower boundary of its intermediate term up trend [11732, 1233] (3) the old resistance/support level [11741, 1230].

Volume fell. Breadth improved but the flow of funds indicator continues to decline rapidly. The VIX was off fractionally but remains well above the lower boundaries of its short term up trend and intermediate term trading range.

GLD declined slightly but closed above both the upper boundary of a short term downtrend and the lower boundary of its intermediate term trading range.

Bottom line: the good news is that stocks didn’t experience any follow through to Friday’s significant decline; the bad news is that there was virtually no rebound from a technically oversold condition and the indices couldn’t recover above their 200 day moving average. The latter suggests more downside; so caution is paramount.

DJIA performance after a down Friday/down Monday (short):



We got a single economic datapoint yesterday: April factory orders dropped 0.6% versus expectations that they would unchanged---continuing last week’s string of lousy reports. I have always maintained that one day’s or one week’s worth of consistently good/bad data were insufficient to even consider altering our forecast. Nevertheless, ever trend has a beginning, so the longer the data flow remains predominantly negative, the more likely that change will become necessary.

However, the main narrative among the chattering class yesterday was that

(1) global growth is slowing. The data are pretty clear that Europe is entering a recession; Japan hasn’t grown in a decade; it is tough to tell about China because it lies a lot, but consensus seems to be that it is slowing drifting toward an ever lower growth rate; and as noted above, it is too early to make a call on the US---though certainly if the rest of the globe’s economies roll over, it would seem improbable that we could escape the same fate. So this all appears to justify investor worries.

(2) although hope is growing that the central banks of the world [US, ECB, BOJ, BOC] would ease monetary policy to address the decelerating world economy. The question is, even if that occurs will it make a difference? Every step the Fed has taken [QEI, QEII, Operation Twist] has met with marginal returns in terms of economic growth; the EU’s measures have an even more abysmal record; and Japan doesn’t qualify for mention.

Of course, the reactions from the securities’ markets have been more ebullient than those of the economies, though each step was met progressively with a less enthusiastic response. That has led some commentators to suggest that if we get another round of easing, it may be received neutrally or even negatively. I have to admit that I have sympathy with this thesis; although, there is no way I would bet money on it.

Of course, the solvency crisis in Europe still lurks:

Europe on the brink (medium):

And specifically the Spanish problem (medium):

And the soon to be Italian problem (short):

As it mulls over its Master Plan (medium):

Why it has failed (medium):

Today’s main event is taking place in Wisconsin where the Scott Walker recall vote is being conducted. At the risk of sounding overly dramatic, I do believe that the outcome will presage the November elections. Let’s hope the unions go down.

Bottom line: the recent trend in US economic data is not comforting though it will take a good deal more and consistently poor numbers to cause me to alter our forecast. Europe is a time bomb; and if the eurocrats don’t get off their collective asses and do something constructive, no one is going to like the consequences.

On the other hand, stocks (as defined by the S&P) are now 6% undervalued, so some of the aforementioned concerns are being priced in. That means that at any sign that equities have found support, our Portfolios will start nibbling again.

The latest from Mohamed El Erian (medium):

Subscriber Alert

The stock prices of Cummins Inc (CMI-$92) and Sun Hydraulics (SNHY-$22) have traded below the upper boundaries of their respective Buy Value Ranges. Accordingly, they are being Added to the Aggressive Growth Buy List. The Aggressive Growth Portfolio owns a one half position in SNHY (having Sold stock at $25-26). It does not own Cummins Inc. No shares of either stock will be Bought at this time.

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.