Wednesday, July 18, 2012

The Morning Call-The S&P is at an important juncture


The Market

Technical


The indices (DJIA 12805, S&P 1364) rallied yesterday, remaining within both their (1) short term trading ranges [12022-13302, 1266-1422] and (2) intermediate term uptrend [11987-16987, 1261-1841].

Within the short term trading ranges, additional support exists at 12345/1292 and resistance at 12903/1364. Note that the S&P closed right on the resistance level. Further, the 1364 also is the intersect of the upper boundary of the pennant formation discussed previously (the lower boundary intersect is 1345).

Volume was up; breadth improved. The VIX fell but is still over the lower boundary of its intermediate term trading range and continues to develop its head and shoulders formation.

GLD was off a bit but remains above the lower boundary of its intermediate term trading range.


Bottom line: watch the S&P today following yesterday’s close on two resistance levels. A follow through to the upside suggests that an extended rally could occur. If the S&P backs off, it means more directionless back and forth. There are no plans for any purchases until stocks reach the S&P 1250-1300 level.

Fundamental

Headlines


Yesterday’s economic weighed to the plus side primarily based on the increase in June industrial production. This indicator is one of the most important inputs to many economic models, including ours. Hence it is good news for those who believe that a recession will be avoided and was well received by investors as stocks opened up on the day. The positive case was aided by a flat CPI report. Everything wasn’t rosy as weekly retail sales were poor---but that is a secondary indicator, so it was overshadowed by the industrial production number.

The other significant news item of the day was Bernanke’s first day of Humphrey Hawkins testimony before the senate. The highlights were that (1) the Fed is lowering its expectation for economic growth and (2) it is concerned about the ‘fiscal cliff’ and the lack of progress in Europe. Investors didn’t seem to care for the Ber-nank’s remarks---probably because he did shout QEIII from highest mountain. Then a funny thing happened, stocks started rallying right after the conclusion of his testimony---for what reason I haven’t a clue,

The embarrassment of the ‘fiscal cliff’ (short):
http://www.zerohedge.com/news/chuck-schumer-ctrl-p-get-work-mr-chairman-benefit-my-donors

The continuing lack of progress in Europe:

Conditions continue to degenerate in Italy (medium):
http://www.zerohedge.com/news/sicily-san-bernardino-first-italian-region-verge-default-montius-pilate-washes-his-hands

The French continue to work their wonder (medium):
http://www.zerohedge.com/news/peugeot-its-record-high-default-probability-and-brief-primer-corporate-viability-under-socialis

Where is all ends---the latest from John Mauldin; and as usual, it is quite long but still worth the read:
http://www.minyanville.com/business-news/the-economy/articles/euro-crisis-global-economy-bearish-analysis/7/16/2012/id/42441?page=1

What hath Bernanke wrought?
http://www.marketwatch.com/story/how-bernanke-will-cause-the-next-crash-before-2014-2012-07-17?link=home_carousel

Bottom line: the continued growth industrial production is a positive and supports our economic outlook.

senator Schumer, who is at the top of the democratic senate’s power structure, pretty much assured us yesterday that, at least in his opinion, nothing will be done about the ‘fiscal cliff’ until January 2013. That too is in our forecast.

It looks like Sicily is going toes up; and that can’t be good for Italy. Regrettably, the disintegration of the EU is not in our forecast. While that may not happen, the odds are sufficiently high enough, that I want some price cushion before committing any cash. 5% lower is, in my opinion, a reasonable level to start nibbling.

A study of debt versus GDP (short):
http://www.zerohedge.com/news/pick-your-debt-poison


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.