The Morning Call-No QEIII is not a tragedy

The Market

Technical

The indices (DJIA 12604, S&P 1341) had volatile but mixed day, with the Dow closing down, the S&P basically flat. Both remained well within their (1) short term trading ranges [12022-13302, 1266-1422] and (2) intermediate term uptrends [11959-16959, 1257-1837]. So no major trend is even close to being challenged.

However, on a much shorter term basis (1) within the short term trading ranges, additional support exists at 12344/1292 and resistance 12903/1384, (2) the DJIA fell below its 50 day moving average [12655] while the S&P is slightly above its 50 day moving average [1336] and finally (3) a very short term uptrend off the June lows has been developing. Yesterday the DJIA broke that trend line [12649] while the S&P remains slightly above it [1334].

Volume rose; breadth improved though the flow of funds indicator continues to degenerate. The VIX fell, finishing above the lower boundary of its intermediate term trading range and continuing to develop the head and shoulders pattern.


GLD lifted a tad and remains above the lower boundary of its intermediate term trading range.

Bottom line: longer term, stock prices are gyrating within their broad primary trends, but are nowhere near the boundaries of those trends; and hence, technically speaking, there is little reason for action. Shorter term both indices are at or near both their 50 moving averages and very short term uptrends. How they trade around these support levels could provide some insight on near term Market direction; however, neither breaking through support nor holding would be reason for activity. I await the S&P 1250-1300 level to start nibbling.

Update on the ‘three peaks and a domed house’ formation (short):
http://blog.stocktradersalmanac.com/post/Same-Time-Next-Year-DJIA-SPX-3-Peaks-Domed-House-Still-In-Play

Fundamental

Headlines

Yesterday’s economic numbers were mixed: weekly mortgage applications were down but purchase applications were up; May wholesale inventories were up but sales were down; the May trade deficit was down, in line with expectations. Nothing here about which to get excited.

The FOMC released the minutes from its last meeting in which the discussion on the economy and its policy alternatives were pretty much as portrayed in the statement following the meeting. However, investors were apparently hoping for a discussion more sympathetic to QEIII; they didn’t get it; and that accounted for the afternoon sell off. As you know, I believe that the Fed has already overstepped its mandate---not that they weren’t trying to help in the absence of any corrective fiscal effort by the nitwits in congress. Nonetheless, more money pumping is not going to cure our ills and could potentially make them worse. In other words, I am not concerned about not getting QEIII.

As I reported in yesterday’s Morning Call, the German high court said that it could take them up to three months to review the constitutionality of the recent Spanish bank bail out. That was the primary cause of the morning swoon.

The Spanish public: f**ked but no pussy (medium):
http://www.nakedcapitalism.com/2012/07/eurozone-screws-spains-citizens.html
http://www.zerohedge.com/news/syntagma-riotcam-resumes-broadcasting-madrid-where-cops-use-rubber-bullets-protesters


Bottom line: the economy continues to limp along; and while we all would like to see better results, I don’t believe that there is sufficient evidence to project a double dip. Our political class remains focused on insuring its re-election rather than doing what is right for the country---yesterday, for example, the house voted to repeal Obamacare for the 31st time which has as much likelihood of becoming law as Obama’s recent proposal to extend the Bush tax cuts for taxpayers making less than $250,000. Meanwhile, no one is doing anything about the arrogance, hubris and thievery of the financial system which is repeatedly proving itself a liability to our economy. Europe is a train wreck waiting to happen and China could be---they just lie about their data so much, I don’t think anybody really knows.

All that said, stocks (as defined by the S&P) are slightly undervalued (as defined by our Model---which incorporates much of the above); however, the risks to our Model posed by a potential crisis in Europe (and perhaps China) warrant unusual caution. Hence, our Portfolios are waiting for lower prices before committing any cash reserves.

More on the vulnerability of our financial system and how to correct it (medium):
http://www.cumber.com/commentary.aspx?file=070912.asp

Jonah Goldberg looks at the problem (medium):
http://www.nationalreview.com/author/56454/latest

A tough start to earnings season (short):
http://www.bespokeinvest.com/thinkbig/2012/7/11/a-tough-start-to-earnings-season.html

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.