On the edge of a change in trend
Steve Cook on Disciplined Investing

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Have You Seen This?


The Market
    
    Technical

    In the opening hours of trading yesterday, it looked like the Averages (DJIA 9774, S&P 1030) were going to get a reflective bounce; but that hope died by mid afternoon.  They both closed below the 9830, 1042 support level, the S&P for the second day.  Under our time and distance discipline I will give the Market another day or so to prove that the 9830, 1042 support level is broken; but in anticipation of that being the case, the 9446, 1009 November 2008 trading high will soon assume the charge of support.  If that doesn’t hold then 8880, 870 becomes the next line of defense.

    Volume declined a bit from Tuesday’s level; breadth was still poor, with the flow of funds stats looking absolutely horrible.  Adding insult to injury, the VIX was strong leaving it in a new up trend.  On the other hand, our internal indicator may be flashing a hopeful sign: in a Universe of 156 stocks, 93 are holding above their comparable 9830, 1042 support level, 52 have fallen below it and 11 are too close to call.  I am hesitant to assume that this is a sign that stocks may have hit bottom rather than that they are simply lagging the Averages.  However, it does  persuade me to stick with our time and distance discipline till either our indicator follows the indices or visa versa.

    Bottom line: yesterday’s pin action can’t be viewed anyway but negatively.  Clearly, stocks are on the edge of resetting from a trading range to a down trend.   While our internal indicator may be suggesting that stocks have bottomed, other indicators with good historical predictive records are pointing to another leg down.  We all need to be braced for that.
 
    The history of ‘dark crosses’ (charts):
    http://www.ritholtz.com/blog/2010/06/dark-cross-history/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+TheBigPicture+%28The+Big+Picture%29&utm_content=Yahoo!+Mail

    Bearish sentiment at the highest level since 2009 (chart):
    http://www.bespokeinvest.com/thinkbig/2010/6/30/bearish-sentiment-at-highest-levels-since-july-2009.html
   
   Fundamental
     
    Headlines

    The day started off well with a decent Chicago PMI report (see below).  Granted this is a secondary indicator, but it still reflects an improving manufacturing sector. 

Later, we got a spate of news out of the EU:

(1) Spain announced that it would inject money into its savings banks.  Presumably, this would decrease the likelihood of a savings bank failure,

(2) the EU said that it would increase the number of banks subject to the ‘stress test’.  That should mean that an even larger percentage of the EU financial institutions’ balance sheets will be reviewed and subject to the guidelines/corrective measures to insure a sound EU banking system,

(3) it was reported that EU banks will only need to continue to utilize $170 billion out of the $540 billion EU credit facility scheduled to mature today, suggesting that those banks balance sheets are stronger than many thought.

As you read the headlines, all the above sound positive and, of course, they address one of the major uncertainties plaguing the Market.  And if you listen the talking heads, they all pronounce these developments as positive.  However, if you have been reading the links in the Morning Calls analyzing the EU sovereign debt problems, you know that those authors have been very cynical about what is occurring beneath the surface to the EU banks.  As I stated in yesterday’s Morning Call, I am not an expert on this subject; but I will note that the technical expertise of the writers of the linked articles is much more impressive than that of the talking heads. For the moment, I cast my lot with the former which is to say that conditions in the European financial system may not be as good as the media would have us believe.
 
    Bottom line: I continue to believe that the facts on the ground are better than the headlines portray, at least in this country.  To be sure, those pesky headwinds are still there: China (its growth may be slowing but it is not rolling over), the Gulf disaster and the EU sovereign debt problem, though they are at least partially reflected in current stock prices.  Having said that, the rate of economic growth in the US will not likely improve and can surely become worse if our elected representatives don’t address the enormous problems our economy faces as a result of their complete lack of fiscal responsibility.  The good news is that the November elections are four months away, the electorate is up in arms and that can be sobering realization even to a bunch of drunken whores.  The bad news is that I am not sure that they would know what to do even if they found religion tomorrow.  The economy can continue to recover at a moderate pace and stock prices edge their way higher; but at some point the help of our elected representatives will be required--probably sooner rather than later. 

    The latest thought of Doug Kass (medium):
    http://www.thestreet.com/story/10795721/1/kass-panic-provides-attractive-entry-points.html

    Money continues to flow out of equity mutual funds (short):
    http://www.zerohedge.com/article/relentless-equity-fund-outflows-ici-reports-another-12-billion-redeemed-8th-straight-week-ou

    An interesting take on gold relative to stocks and bonds (short):
    http://paul.kedrosky.com/archives/2010/06/gold_is_way_und.html

Economics

   This Week’s Data

    The Chicago purchasing managers index came in at 59.1 versus expectations of 58.5 and May’s reading of 59.7.

    Weekly jobless claims rose 13,000 versus estimates of a 2,000 decline.
    http://www.calculatedriskblog.com/2010/07/weekly-initial-unemployment-claims.html

   Other

    The future of Federal debt as a percent of GDP according to the congressional budget office (chart):
    http://www.businessinsider.com/chart-of-the-day-federal-debt-held-by-the-public-2010-6?utm_source=Triggermail&utm_medium=email&utm_campaign=CS_COTD_063010

    Explaining derivatives (medium):
    http://www.zerohedge.com/article/explaining-derivatives-and-goldmans-dominance-thereof-four-simple-charts

    The latest data on money supply (medium):
    http://www.capitalspectator.com/archives/2010/06/is_it_time_to_c.html#more
   
    The latest from Bill Gross at PIMCO (medium and today’s must read):
    http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2010/Investment+Outlook+Gross+Alphabet+Soup+July.htm

    An 8 minute video with Nobel laureate Joseph Stiglitz (also a must read/see):
    http://www.investmentpostcards.com/2010/07/01/stiglitz-on-the-global-economy/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+wordpress%2FVYxj+%28Investment+Postcards+from+Cape+Town%29&utm_content=Yahoo!+Mail

    Restaurant performance softens in May (chart):
    http://mjperry.blogspot.com/2010/06/restaurant-activity-softens-in-may-but.html

    No signs of distress from the bond market (short):
    http://scottgrannis.blogspot.com/2010/06/no-signs-of-acute-distress-in-bond.html











Posted 07-01-2010 8:15 AM by Steve Cook