Thursday, August 09, 2012

The Morning Call--Enjoy the calm

The Market


The indices (DJIA 13174, S&P 1402) continued their winning streak, finishing even closer to the upper boundaries of their short term trading ranges (12022-13302, 1266-1422). They also well within their intermediate term uptrends (12134-17134, 1277-1857).

Volume remains anemic; breadth was weak. The VIX broke slightly below the lower boundary of its intermediate term trading range (and the neckline of the developing head and shoulders pattern). Our time and distance discipline is now operative; however, if this break is confirmed, it will be a big plus for stocks.

GLD rose fractionally, leaving it above the lower boundary of its intermediate term trading range. Nevertheless at current levels, it poses no challenge to the long series of lower highs.

Bottom line: at the moment, I am closely watching the Averages as they approach the upper boundaries of their short term trading ranges as well as the VIX which is now challenging the lower boundary of its intermediate term trading range. These indices are closely related in that stocks breaking above 13302, 1422 resistance would likely be accompanied by the VIX penetration of the lower boundary of its trading range.

If stocks were undervalued and if the aforementioned breaks were to occur, it would be a signal to get busy putting cash to work. Since equities are overvalued (as calculated by our Model), it more likely to prompt a reduction in our Portfolios’ stock position.

Odds of a correction (short):

Dow Theory says sell (short):

Richard Russell thinks that the boundaries of the short term trading ranges represent a critical juncture (short):

Charting the CRB (short):



Yesterday’s weekly mortgage and purchase applications report was a bit disappointing as was second quarter unit labor costs. However, second quarter productivity was better than expected. So once again mixed results---keeping our economic forecast on track.

While the political discourse in the US is on a steep slide, with congress at home running for re-election, it looks like nothing good or bad is going to occur on fiscal policy until September.

Similarly, Europe is on vacation until the end of August. I am assuming that means that in the interim, news on the bank/sovereign debt crisis will slow to a trickle; so absent investors suddenly exchanging their pixie dust for a stiff shot of reality, the crisis is not likely to cause much heartburn for the next couple of weeks.

On the other hand, Monti appears to be upping the ante (medium):

Bottom line: with all the critical players on break, the next couple of weeks will likely be boring. So we all should sit back and enjoy the Olympics, the PGA championship and the new Bourne movie. Maybe go to the beach or mountains.

Certainly from a portfolio strategy point of view, with stocks above Fair Value, there is little to do except to monitor our holdings should any of them penetrate their Sell Half Range.

This is a bit long but it is a very thorough look at current equity valuation (today’s must read):

The latest from David Rosenberg (medium):

Another case of short term thinking about long term problems (short):

The disconnect between stocks and bonds (short):

And the new connection between stocks and inflation---higher inflation = lower bond prices---see above (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.