Wednesday, August 22, 2012

The Morning Call-Close but no cigar


The Market
Technical


The indices (DJIA 13203, S&P 1413) challenged the upper boundaries of their short term trading ranges (12022-13302, 1266-1422) and fell back; but they remained well within their intermediate term uptrends (12212-17212, 1285-1865).

Volume rose; breadth fell. The VIX was up another 7% yesterday but it continued to trade in its short term downtrend. On the other hand, it finished near the former lower boundary of an intermediate term trading range. As you know, I was hesitant to call a break down of this trading range because of the VIX’s squirrelly price performance around the lower boundary. No sooner had I made a belated call, the VIX immediately spiked. I am not saying that the last two days’ price move is a reversal; but if the VIX follows through to the upside, it may be that its performance was either one of those ‘fat tails’ to our time and distance discipline or the VIX simply shifted the lower boundary of the trading range to a slightly lower level. I am making no call at the moment (and I recognize that my fundamental view point is influencing my analysis).

GLD rose and closed above the level of the last lower high. Our time and distance discipline is now operative. If there is follow through, then the downtrend will have been broken, the lower boundary of the intermediate term trading range will be strengthened and our Portfolios will likely Add to this holding.
http://www.zerohedge.com/news/what-30-years-gold-confiscation-us-government-looks


Bottom line: yesterday, the Averages tried and failed to successfully challenge the upper boundaries of their short term trading ranges. That doesn’t mean that they won’t try again today, six weeks or six months from now and breakout to the upside. But for the moment, this pin action reinforces the thesis that 13302, 1422 will hold as resistance.

It also supports the notion that current territory is not a place to be Buying.

A great discussion of market cycles (5 minute video):
http://blog.stocktradersalmanac.com/post/DJIA-Going-For-Seven-Straight--A-Short-Video

The Shanghai Composite is really looking ugly (medium):
http://www.ritholtz.com/blog/2012/08/the-chart-that-keeps-us-up-at-night/

Fundamental

Headlines


Just one bit of economic news yesterday---weekly retail sales were mixed. While disappointing, after the blow out July retail sales number reported last week, I am not that concerned and certainly not considering altering our Model.

Stock prices rose in early trading on the news that Merkel was considering going along with Draghi’s bond rate cap plan. This positive was later supported by comments from the German representative to the ECB.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9488698/Germany-backs-Draghi-bond-plan-against-Bundesbank.html

To me, this is just more money printing and bond rate price setting, not unlike Fed policy. Not to be repetitive, but (1) the problem of too much debt is not solved by issuing more debt and (2) the Market is bigger than the Fed or the ECB. Investors may give the central bankers the benefit of the doubt for a while, as they have with both the Fed and the ECB. But when they lose confidence, all the price fixing and money printing in the world will not prevent higher interest rates/inflation or insolvency.

Is it the problem solver (medium):
http://pragcap.com/europe-a-policy-proposal-with-teeth

This author thinks not (medium/long):
http://www.zerohedge.com/news/guest-post-spain-%E2%80%93-ecb-vaudeville-show

European funds flowing into the US (medium):
http://www.zerohedge.com/news/flight-safety-foreign-banks-domiciled-us-see-cash-hoard-spike-back-record-highs

The history of prior collapses of currency unions (medium):
http://www.zerohedge.com/news/what-happened-after-europes-last-three-currency-unions-collapsed

Labor mobility: another reason the EU will have a tough time melding into a single entity (medium):
http://www.zerohedge.com/news/guest-post-greeks-want-stay-euro-why-don%E2%80%99t-they-move-germany

***overnight Spanish and Czech regions (our states and counties) are in revolt against austerity measures; and for umpteenth time, Greece said that it deficit will be larger than previously estimated.

Later in the day, the decibel level of Middle East saber rattling jumped a notch, oil prices rose and stocks weakened

Tensions continue to rise in the Middle East (medium):
http://www.zerohedge.com/news/israel-accuses-egypt-violating-peace-treary-sinai-incursion

***overnight Russia warned the West against any intervention.

Bottom line: stocks are slightly overvalued even on my assumption that Europe will ‘muddle through’. I appreciate that investors are feeling all warm and fuzzy about the likelihood of success of Draghi’s new plan; but that does nothing to make stocks more attractive from present levels. Furthermore, as I have noted previously, I buy into the thesis that some of the fallout from a disjointed EU is occurring as we speak and that introduces some limits to the downside in stocks in a bad news scenario. But again, that doesn’t help move valuations to the upside.

With bond investors seemingly getting a bit more concerned, with almost no knowledge about the exposure of our banks to some traumatic event in Europe, with Israel making threats against Iran and with our own political class more intent on re-election than of the ‘fiscal cliff’, I see little incentive to put more money at risk.


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.