Despite yesterday's positive close, it should have been more positive
Steve Cook on Disciplined Investing

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Have You Seen This?

The Market
    
    Technical

    The indices (DJIA 10014, S&P 1049) had another schizophrenic day yesterday--  with big price swings in both directions.  Yet at the close they were up marginally and remain with their current trading ranges (9645-10725, 1009/1042 [?]-1149).  The down trend off the August high now intersects at 1066.

    Volume picked up dramatically; breadth improved; the VIX traded down but remained above the down trend off the May 2010 high.  This is the first time it has closed above that down trend line for two consecutive days.  That has negative bias to it; but as always our time and distance discipline demand that we hold off before declaring a trend line broken.

    Bottom line: based on the fundamentals, I expected that the pin action would have been better yesterday.  That along with the potential break out of the VIX to the upside are negatives. Furthermore, we are starting the historically worse performing month of the calendar year. That puts my caution level at flashing yellow.  That said, the key for me is whether stocks break either the developing head and shoulders neckline (1009-1042) or the down trend off the August high (1066).  It will be the signal that will prompt action.

    The latest from Trader Mike:
    http://tradermike.net/2010/08/august-31-2010-stock-market-recap/

    Market performance in September following a weak August (short):
    http://tickersense.typepad.com/ticker_sense/2010/08/september-following-a-weak-august.html
   
   Fundamental
      
     Headlines

    There were a number of economic indicators reported yesterday (see below), most of which I would characterize as neutral to positive; so investors had reason to get jiggy if they wanted.  And they did initially.  Then the minutes of the FOMC were released and everyone got beared up.  For what reason, I don’t know.  The chattering class attribute a change in sentiment to a discussion in the minutes that focused on the weakening economy--like that is news.

    More likely it simply reflects an underlying negative predisposition.  Until that changes, good news will likely be received with skepticism and restraint and bad news will be embraced.

    Under the category of extraneous observations, I would note that the Swiss franc has been smoking against the euro over the last week or so.  That suggests to me that there is more bad news coming on the European sovereign debt problem (I tol’ you).

    Bottom line: while economic growth in the second half will likely be less than I originally estimated, the data reported yesterday nonetheless supports the notion that there will be no double dip.  If that is the case, then at least by our Valuation Model’s calculation, stocks are modestly undervalued.  That said, I am not going to fight negative sentiment.  So I am a buyer when we know that the neck line of the aforementioned head and shoulders has held.

    The funds flow out of stock funds are bit deceptive (medium):
    http://www.marketwatch.com/story/death-of-equities-may-be-exaggerated-2010-08-31

    Gold and monetary policy (short):
    http://scottgrannis.blogspot.com/2010/08/gold-leads-commodity-prices-and-both.html

    The case for owning gold (medium):
    http://scottgrannis.blogspot.com/2010/08/gold-as-investment.html

    Forget whether bonds are in a ‘bubble’; how about asking, are they a good investment at current levels? (short)
    http://www.ritholtz.com/blog/2010/09/bond-bubble-a-sterile-debate-on-semantics/

    As an aside, since I am a stock jockey, I watch the bond market only for the informational value it may give me about the stock market--and the most important information that the bond market has been giving recently is that a flattening yield curve historically presages an economic slowdown.  That is not exactly news; but it is another piece of data that suggests rough going in the second half of 2010.

Economics

   This Week’s Data

    The June month over month Case Shiller home price index rose 0.3% versus expectations of an increase of 0.5%.
    http://mjperry.blogspot.com/2010/08/case-shiller-home-price-indexes-highest.html

    The International Council of Shopping Centers reported weekly sales of major retailers up 0.1% versus the prior week and up 2.8% versus the comparable period last year; Redbook Research reported month to date retail chain store sales up 1.0% versus the similar timeframe in July and up 3.0% on a year over year basis.

    The Conference Board’s August index of consumer confidence came in at 53.5 versus estimates of 51.0 and July’s reading of 50.4.
    http://econompicdata.blogspot.com/2010/08/consumer-confidence-jumps-slightly-flat.html

    The Chicago purchasing manager’s index was reported at 56.7 versus forecasts of 58.0 and 62.3 in July.

    China’s PMI rose to 51.7 from 51.2, exceeding expectations.
    http://econompicdata.blogspot.com/2010/09/chinaustralia-economy-jumps.html

    ADP Private Employment falls 10,000 in August:
    http://www.calculatedriskblog.com/2010/09/adp-private-employment-decreases-10000.html

    Weekly mortgage applications rose 2.7%.
    http://www.calculatedriskblog.com/2010/09/adp-private-employment-decreases-10000.html

   Other

    The number of ‘problem’ banks keeps growing (chart):
    http://www.businessinsider.com/chart-of-the-day-number-of-fdic-insured-problem-institutions-2010-8?utm_source=Triggermail&utm_medium=email&utm_term=Clusterstock+Chart+Of+The+Day&utm_campaign=Clusterstock_COTD_083110

    This a very long analysis, which the bears will love, on why there is a bubble in bonds and why inflation is inevitable:
    http://www.zerohedge.com/article/guest-post-termite-riddled-house-treasury-bonds

    Update on the ASA staffing index (chart):
    http://mjperry.blogspot.com/2010/09/asa-staffing-index-nra-restaurant-index.html

    Update on the HARPEX shipping index (chart):
    http://scottgrannis.blogspot.com/2010/08/harpex-update.html

Politics

  Domestic

This is a great analysis of the problems associated with the Dodd Frank Bill (financial regulation).  It is quite long but well worth the read.
http://www.aei.org/outlook/100983

    Stop tinkering with housing (short):
    http://mjperry.blogspot.com/2010/08/answer-to-housing-recovery-lower-prices.html











Posted 09-01-2010 8:23 AM by Steve Cook