Don't get jiggy just yet
Steve Cook on Disciplined Investing

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Have You Seen This?


The Market
    
    Technical

    Yesterday was a stellar one for stocks.  The Averages (DJIA 10018, S&P 1060) traded well above the 9830, 1042 resistance level but remain within the recently reset down trend (9218-10418, 984-1106).  Assuming there is no immediate reversal, the next resistance level to watch is 10210, 1084.

    The advance was on light volume; breadth was OK but the flow of funds remains negative.  On the other hand, the VIX fell again and seems to be suggesting that the worst of the recent decline is over.

    Further, our internal indicator remains more positive than the indices.  Out of a Universe of 157 stocks, 73 either never traded below their 9830, 1042 comparable level and/or have broken the May to present down trend to the upside, 70 have not and 14 are too close to call.  Granted that is not overwhelming evidence that the rally will continue; but with the S&P still 4.3% from even challenging its down trend off the May highs, having a 46% plurality of stocks already above it certainly points to a Market that is struggling for a bottom.  That said, as you know, I have placed less emphasis on this indicator since it gave us a false signal earlier this year.  I am not going to suddenly put my former level of confidence back on this indicator; however, it may be time to consider that prior reading as an outlier.

    Bottom line: for me, the key to yesterday’s pin action was the lack of volume.  That likely means that the surge was not driven by any mass popular consensus that stocks are undervalued but rather by a small number of the high frequency traders who have the attention span of a fly and a time horizon measured in minutes if not seconds.  That is a weak reason to assume that the July 1 intraday low was the bottom of this decline; hence, it is a bit too soon to be getting jiggy about yesterday’s performance.  On the other hand, the VIX and our internal indicator are suggesting that the worse may be over for this decline or at the very least that we should consider using any cash from the sale of stocks that are technically weak to buy stocks that have clearly bottomed out. 

    The latest from Fusion IQ (short):
    http://www.ritholtz.com/blog/2010/07/fusioniq-equity-market-review-july-7-2010/

   Fundamental
     
    Headlines
  
    There were a couple of news items yesterday that while not as ‘game changing’ as the Market performance might suggest still provided some additional clarity to those ‘head wind’ issues that have been plaguing investors off and on for the last month:

(1)    the European Central Bank revealed more details of the EU bank ‘stress test’.  Supposedly this test will be more extensive than originally thought.  I have admitted to a lack of expertise in this area; so once again I provide links to guys/gals more knowledgeable that I.
                http://www.zerohedge.com/article/cebs-releases-details-stress-tests-91-banks-adverse-scenario-assumes-3-cut-vs-gdp-forecast-c

(2)    BP announced that its relief well was within 15 feet of the blown out well.  To be sure this is progress; however, now the tricky/difficult part begins.  No one, including BP has claimed that the subsequent actions will be successful in stopping the flow of oil.  Further, it will still apparently take till mid August to complete the exercise.

(3)    Obama gave a pro free trade speech, claiming that the administration will encourage congress to pass a number of bilateral agreements.  Three words: unions, November elections.

Finally, the chattering class continued to dwell on the positive news that will likely come from the upcoming earnings season.  As you know, I have mentioned this factor several times as an argument against a ‘double dip’ and the Market tanking.  That said, it was very disconcerting yesterday when Family Dollar Stores announced positive earnings for the latest quarter, but guided profit expectations for the next quarter down.  Its stock got whacked big time.  I am not suggesting this will be a pattern (good earnings, poor guidance, stock trashed); but I am cautioning that it could be.  

Bottom line: nothing really changed yesterday; there was no new exogenous piece of news that forced investors to re-think their forecasts or valuation assumptions: the EU is making an effort to deal with its sovereign debt problem, though it is not clear that they are being entirely forthright in the process; BP has been drilling that relief well for months and everyone knew that the critical part of the operation would be the subsequent capping effort; everyone knows that second quarter earnings will be a step up from first quarter results; and everyone knows that Obama is a cynical political animal who will (and has) say anything to further His agenda which includes the dems not taking a shellacking in the November elections.  On the other hand, on the assumption that there will be no double dip (which is my operating assumption), stocks are modestly undervalued and there is no reason that they should keep going down.  In the end though, this is a technical call; so I will wait for the Market to tell me that it is no longer declining (by either making a higher low or busting through the upper boundary of the current down trend).

Economics

   This Week’s Data

    Weekly jobless claims fell 21,000 versus estimates of a 12,000 decline.
    http://www.calculatedriskblog.com/2010/07/weekly-initial-unemployment-claims_08.html

    More employment data (short):
    http://mjperry.blogspot.com/2010/07/asa-staffing-index-level-26-above-last.html

   Other

    For the economic optimist (medium):
    http://www.forbes.com/2010/07/06/jobs-depression-economy-opinions-columnists-brian-wesbury-robert-stein.html?boxes=Homepagelighttop

    What the yield curve is telling us (medium):
    http://pragcap.com/yield-curve-says-slow-growth-but-no-recession

    The Baltic Dry Index continues to fall (short):
    http://www.zerohedge.com/article/baltic-dry-index-slides-5-14-month-low-30th-consecutive-day-declines

    China and gold (long):
    http://www.zerohedge.com/article/china-promises-not-use-nuclear-option-buy-gold-dump-us-assets

    More criticism of austerity (medium):
    http://www.nakedcapitalism.com/2010/07/martin-wolf-continues-attack-on-fiscal-austerity.html

    Ireland’s experience with austerity (short):
    http://cafehayek.com/2010/07/all-the-news-thats-fit-to-print-plus-some-more.html

    Harvard professor Greg Mankiw addresses the argument of more stimulus spending and why it is not a good thing (short):
    http://gregmankiw.blogspot.com/2010/07/are-stimulus-skeptics-logically.html

Politics

  Domestic

Thoughts on the recent comments of NASA chief Charles Bolden (medium):
http://townhall.com/columnists/JonahGoldberg/2010/07/07/one_giant_leap_backward

    Anecdotal evidence of the effects of Obamacare and why corporations aren’t hiring or investing (short):
    http://mjperry.blogspot.com/2010/07/obamacares-devastaint-impact-on-white.html










Posted 07-08-2010 8:20 AM by Steve Cook