Thursday, June 21, 2012

The Morning Call + Subscriber Alert + Who really believes that the Fed won't stay easy?

The Market


Despite another day of volatile, schizophrenic behavior, the indices (12824, 1355) closed basically flat. That leaves them within both their short term trading ranges (12022-13302, 1266-1422) and their intermediate term uptrends (11835-16835, 1243-1810). At the moment, I am watching the upside target of the break out from the reverse head and shoulders (13400, 1440) on the upside and the lower boundary of a developing very short term up trend (12762, 1341) on the downside.

Volume fell; breadth deteriorated. The VIX declined and finished below the lower boundary of a short term uptrend for the third day; barring a recovery, the break of that uptrend will be confirmed at the close today (a positive for stocks). It remains well within an intermediate term trading range.

GLD was off, closing below the lower boundary of its short term uptrend. While our time and distance discipline is now operative, this is not a plus for GLD. It is still within its intermediate term trading range.

Bottom line: the negative reading of our internal indicator (which is detailed in yesterday’s Morning Call) keeps me from embracing the notion that stocks will complete the upside objective (13400, 1440) set by the reverse head and shoulders. The Averages could reach in the upper boundaries of their trading ranges (13302, 1422); but based on the fundamentals, I think that is about as good as it is going to get.



There was only one reported economic indicator yesterday: mortgage/purchase applications which were not good. That said, they are secondary indicators and Tuesday’s upbeat housing starts and building permits numbers more than offset these negatives.

The big US economic news of the day was the wrap up of the FOMC meeting, with the accompanying release of the latest Fed policy statement and the Ber-nank’s press conference. Highlights:

(1) the economic outlook was downgraded. Specifically, the Fed now expects that growth in GDP will slow while the description of household spending and employment went from ‘improved’ to ‘slowing’; consequently,

(2) interest rates were left unchanged,

(3) Operation Twist was extended through year end,

(4) the Fed declared that is it prepared to take additional steps if economic circumstances dictate.

Prices really yo yo-ed following the press release as investors were at first disappointed that there was no QEIII then recovered as they realized that the Fed would remain accommodative and could get aggressively so if the economy were to run into trouble.

Flawed Fed thinking (short):

Europe made its own small contribution to the intraday volatility as comments from Merkel and Van Rumpoy got investors jiggy about an improved EU outlook (even though they only stated the obvious---which is that any new EU bail out funds would buy bonds. ‘New’ being the operative word since there is no such fund.). However, stocks dropped back quickly as investors realized that this was just more of same monotonous, meaningless drivel the eurocrats produce on a daily basis.

**over night, Spain sells bonds at unsustainably high interest rates, Germany reports both manufacturing and service PMI below estimates and Greece asked for a two year delay in meeting the fiscal terms of its bailout.

The problem with the EU’s half baked rescue plans (medium):

My second favorite libertarian on the mess that is the EU (6 minute video):

The eurozone is failing at an accelerating rate (medium/long):

The optimist’s view (short):

Bottom line: nothing has or is occurring in European or US fiscal or monetary policy that would cause me to re-think our forecast. Indeed, if anything, the Fed’s less constructive view of the US economy adds to my concern regarding a potential recession. With stocks at or near Fair Value (as calculated by our Model) and an upside technical target of about 5%, I don’t want to chase prices up.

Anticipating the second quarter earnings season (short):

Subscriber Alert

The stock price of Sigma Aldrich (SIAL-$73) has traded above the upper boundary of its Buy Value Range. Accordingly, it is being Removed from the Dividend Growth and Aggressive Growth Buy Lists. Both Portfolios own a full position in SIAL.

The stock price of Balchem (BCPC-$32) has traded above the upper boundary of its Buy Value Range. Therefore, it is being Removed from the Aggressive Growth Buy List. The Aggressive Growth Portfolio owns a full position in BCPC.

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.