Wednesday, June 20, 2012

The Morning Call--There is not enough upside to be chasing stocks

The Market


The indices (DJIA 12837, S&P 1357) had a smokin’ day, closing (1) within both their short term trading ranges (12022-13302, 1266-1422) and their intermediate term uptrends [11821-16821, 1243-1810] and (2) above the ‘neckline’ of their reverse head and shoulders formation [12744, 1338]. It also put the Averages back in sync and from a technical standpoint, increases the probability of follow through to the 13400, 1440 levels.

I checked our internal indicator after the close with these results: out of a Universe of 156 stocks, 59 were above their comparable ‘neckline’ levels, 80 were not and 17 were too close to call. That reading is clearly not supportive of a Market that is breaking to the upside.

Volume was up but not that much; breadth improved. Surprisingly, the VIX was up on the day, but still closed below the lower boundary of its short term uptrend for the second day (good for stocks). It remains above the lower boundary of its intermediate term trading range.

GLD was down slightly but closed above the lower boundaries of its short term uptrend and its intermediate term trading range.

Bottom line: on the surface, it looks like stock prices are headed higher. However, our internal indicator suggests otherwise. In addition, the VIX’s performance yesterday casts further doubt on that thesis. A decent means of hedging this little dilemma would be to nibble at some of the stocks on our Buy Lists which are well below the comparable S&P ‘neckline’; however, I am not there yet.



Yesterday’s economic news was generally upbeat: housing starts were down but that was off a dramatically upward revised prior month; plus building permits were up; weekly retail sales were mildly positive. These numbers got the Market off to a good start.


(1) rumors were flying out of the G20 meeting about what Germany/the IMF/etc might do to assist the Greeks/Spaniards/Italians. As usual, they were batted down almost as soon as they hit the tape. While all this back and forth contributed to the intraday volatility, by the close, unfortunately we didn’t know anything new with respect to how the EU sovereign debt crisis will be resolved,

Milton Friedman on the euro (medium):

(2) the emotional momentum built throughout the day on the expectation for a dovish statement from the FOMC today---either an extension of Operation Twist and/or some hint about QEIII. Whether or not it proves correct this time, I have maintained all along that this was coming; so once again, it is built into our Models and, therefore, provides little reason for bidding stock prices over currently calculated Fair Value.

Moreover, it is amazing to me that at a time when an already sluggish US economy could be stumbling, when the Europeans continue to refuse to take their medicine on fiscal responsibility, when the world is awash with liquidity from the global printing of money, the hint of even more monetary easing, which will likely has no utility value at the margin, drives investors to orgasmic heights. I know the axiom is not to fight the Fed; but at some point, it seems to me that too much of a good thing will prove a disaster.

Bottom line: the most recent spurt in equity prices have taken much of the Market back to approximately Fair Value (as computed by our Model). No amount of additional global central bank easing, Fed easing or ‘muddling through’ by the EU will lift those values. Hence, with a probable upside of no more than 5% (1430-1440), there is no compelling reason to be chasing stocks up. That said, names like Coach Inc whose stocks have been pounded of late and have not participated in the recent rally still offer value. I just hate buying stocks when the rest of the Market is tip toeing through the tulips. As I noted above, I may get there; but not yet.

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.