Tuesday, July 24, 2012

The Morning Call-Spain joins the 'basket case' club

The Market


The indices (DJIA 12721, S&P 1350) had a rough day, but nonetheless finished well within their (1) short term trading ranges [12002-13302, 1266-1422] and (2) intermediate term uptrends [12019-17019, 1265-1845]. Within the short term trading ranges there is additional support at 12345, 1292 and resistance at 12903, 1364. With yesterday’s price drop, the S&P break above the upper boundary of a developing pennant formation has been negated. Indeed, the formation itself has been negated by the recent volatility.

Volume fell; breadth deteriorated. The VIX was up 14% and remains above the lower boundary of its intermediate term trading range. It also continues to develop a head and shoulders pattern.

GLD fell fractionally but closed above the lower boundary of its intermediate term trading range.

Bottom line: other than introducing confusion into the technical picture, last week’s up move changed nothing. The primary trends are in place; the interim resistance levels 12903/1364) held up under a challenge. Our Portfolios continue to await the S&P 1250-1300 to Add to their positions.

Yesterday was the eighth down Monday in a row. However, historically, that is not such a bad thing (short):



There were no releases of economic data yesterday though the Chicago Fed reported its National Activity Index which was neutral. Even if this indicator was more well followed and had been terrible/terrific, it likely wouldn’t have mattered as Europe again vaulted to center stage.

I outlined the weekend activity in yesterday’s Morning Call: approaching Greek default, a financial squeeze in Spanish and Italian provinces and the eurocrats’ ongoing game of Russian roulette. Overnight, we can add that Moody’s put Germany, The Netherlands and Luxembourg (all AAA rated) on negative watch. Between the links in yesterday’s comments and the below, you have a clear picture of the EU’s continuing slide toward a disaster scenario.

What is coming next in euroland (medium):

Bottom line: the data flow continues to portray an economy that is struggling but not slipping into recession. Our Valuation Model suggests that stocks are near Fair Value based on just that scenario. Unfortunately, the economy is facing both quantifiable risks (the corn crop and the ‘fiscal cliff’) and unquantifiable risks (a blow up in the Middle East and Europe running off the tracks).

I can deal with the former; and currently don’t believe that their associated risks are high enough (yet) for me to alter our Model. The latter, particularly Europe, are what give me heartburn. As a result, I want some (price) cushion before our Portfolios began putting their cash to work. And as you know, I have focused on an additional 5% price decline as a starting point for beginning this process.

The latest from John Hussman (medium):

The latest from David Rosenberg (medium):

The financial overlords have screwed all of us (medium):

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.