Wednesday, July 25, 2012

The Morning Call-Will the Fed really ease and will anyone care?

The Market

The indices (DJIA 12617, S&P 1338) had another rough day but remain well within their primary trends: (1) the short term trading range [12022-13302, 1266-1422] and (2) the intermediate term uptrend [12036-17036, 1266-1846]. Within the short term trading range additional support exists at 12345/1292 and resistance at 12909/1364.

Volume declined; breadth was mixed. The VIX was up another 10%, but remains above the lower boundary of its intermediate term trading range and still within the developing head and shoulders pattern. However, if it continues to rise, this formation will be negated.

GLD was up slightly leaving it above the lower boundary of its intermediate term trading range.

Bottom line: the Averages are still far enough over the two primary support levels that I see little reason to be spending cash. If the current downward momentum takes prices to the 1250-1300, our Portfolios will start to nibble. In the meantime, patience.

The ‘wall of worry’ isn’t there (medium):

Thoughts on ‘buying the dip’ (medium):

A review of the ‘down Friday, down Monday’ technical warning (short):



Yesterday’s economic data was mixed: weekly retail sales were up while the Richmond Fed’s manufacturing index was terrible. That said, both these indicators are secondary so they don’t carry that much weight. Nonetheless, these stats got stocks off on the wrong foot and simply added to the downside momentum resulting from the mounting uncertainty out of Europe.

About thirty minutes before the Market closed, the WSJ reported that the Fed was prepared to stimulate if the economy didn’t improve. Investors, anticipating a vote to ease during next week’s Fed meeting, jumped all over that announcement cutting Market losses in half,. There are two issues here:

(1) will the Fed ease? I have always felt that we would get QEIII or some variant of it; so next week is as good a time as any to start. I will observe that in the absence of conclusive evidence that the economy is slipping into recession, the Fed does invite the criticism that the move would be more about politics than about economics and that in turn would threaten to tarnish its apolitical reputation. I have no doubt that Obama or one of His lackeys are on the phone ten times a day pushing Bernanke to crank up the printing presses. It will be instructive to see what the Fed does.

(2) the larger question is what will the Market do if the Fed does ease? On this issue I have opined that I thought that given the decreasing Market impact of QEI, QEII and Operation Twist, any further easing would have a deminimus affect on stock prices. Of course, yesterday’s final hour price spike suggests that I could be wrong---and that may be the case. However, I would like to see how stocks perform today after investors have had the evening to think it over before crying ‘uncle’.

Thoughts on Fed easing from Charles Biderman (4 minute video):

And from David Stockman (the video is great but long; so just read the excerpt):

The other news item that will likely influence today’s trading was the disappointing after hours earnings report from Apple. As you probably know, this stock is a major investor favorite and an unexpectedly poor profit report is just the kind of news that can tip a vacillating Market over the edge. That is not a prediction, it is an alert to be careful in today’s Market, at least in the first hour.

***overnight, Moody’s downgraded the outlook for the European stability fund and the UK reported a larger than expected decline in second quarter GDP.

Bottom line: today should be an interesting session as two significant conflicting events have to be digested by investors; this is particularly so with stock prices very near Fair Value. This is a situation where only the most sophisticated traders should be treading---and I am not among them.

The latest from David Einhorn (medium):

The latest from Charles Biderman (4 minute video):

Thoughts from Art Cashin (short):

What Moody’s placing Germany et al on negative watch could mean (medium):

Three reasons to worry (medium):

Market capitalization as a percent of GDP (short):

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.