Friday, August 31, 2012

The Morning Call--Bernanke's big day

The Market


The indices (DJIA 13000, S&P 1399) had a hiccup yesterday, closing down more than just fractionally. Nevertheless, they remain well within their primary trends (1) short term trading ranges [12022-13302, 1266-1422] and (2) intermediate term uptrends [12276-17176, 1292-1872].

The real question, of course, is, will there be follow through to the downside that would extend to the lower boundaries of one or the other of aforementioned primary trends? Lacking omniscience, I have no idea; but were it to occur, our Portfolios would be Buyers.

Volume was flattish; breadth declined with the on balance volume indicator just getting worse. The VIX spiked for the fourth day in a row and is up seven out of the last eight sessions. It closed above the upper boundary of the very short term downtrend. Our time and distance discipline is operative now; but this move is not a positive signal for stocks.

GLD ended down fractionally, leaving it below the upper boundary of its short term downtrend (negative) but still well above the lower boundaries of both its very short term uptrend and its intermediate term trading range (positive).

GLD options trading point to higher prices (medium):

Bottom line: yesterday, investors showed some nervousness for the first time in a couple of weeks. Not surprising with Bernanke speechifying today and the return of many eurocrats from vacation. Indeed, as I noted yesterday, the surprise is that they haven’t demonstrated any lack of ease before now, especially with the deterioration in the underlying technicals (which I have been documenting in this section over the last couple of weeks).

That doesn’t mean that another assault on 13302, 1422 isn’t in the offing; but in the absence of a confirmed break above those levels, I am staying with my assumption that equities have hit their near term highs

A chart study of the global economy and the Market (medium/long---a must read):

Sentiment trending toward neutral (short):

Defining Market tops using historical MACD patterns (medium):



Yesterday’s economic news was generally upbeat with both July personal income and personal spending up and weekly jobless claims flat. That continues this week’s flow of mixed to positive stats and sustains our forecast.

What got stocks moving to the downside was the re-start of the political wrangling among the eurocrats including (1) negative comments about Europe’s economic prospects out of the IMF, (2) the Slovak premier stating that the odds of a breakup of the euro were 50/50 and (3) Spain stating that it would not request a bailout in the absence of explicit terms from the ECB---needless to say, Spanish bonds took a licking following that gem.

Morgan Stanley sets the odds for the German High Court approval of the ESM (medium):

***overnight, poor economic news out of Europe on unemployment (11.3%), inflation (2.6%) and retail sales.

Of course, the other factor making investors antsy was the proximity of Bernanke’s speech. Some of the negative sentiment in the Market yesterday seemed to be related to the lightening of positions ahead of his comments. As you know, I think there will be QEIII if not today then later; but no one will care.

Some data for Bernanke to cogitate on before making his speech (medium):

Bottom line: well, there appears to be a light at the end of the current tunnel investor indifference. Our ol’ buddy Ben talks today and, as witnessed by yesterday’s euro news flow, the eurocrats are back doing what they do best---bickering then doing nothing and obfuscating it. In any case, we are likely to get a big dose of clarity over the next two to three weeks with respect to what will or (more likely) won’t happen and that should liven things up (note to self---be careful what you wish for).

In the meantime, our forecast remains---a sluggishly growing economy with no help from our ruling class including the Fed and a ‘muddle through’ scenario in Europe (Greek exits, everyone else hangs on by their fingernails). That puts the Market (as defined by the S&P) a tad overvalued (as defined by our Model). Ordinarily that would suggest to me a low expectation for a lot of volatility. However, the tail risk in Europe associated with (1) whether or not the eurocrats can craft a plan to hold the EU together and (2) the extent of the damage if they don’t is so substantial that it would be foolhardy to be complacent.

So until there is clarity, an outsized cash position and a meaningful holding in gold seems appropriate.

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.