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Steve Cook on Disciplined Investing

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I am taking one more short break before the really important part of the year begins (football season).  After this is published, we are heading for the lake house of a good friend for a long weekend.  I will have my computer with me so if any action is needed I will be in touch via Subscriber Alert.  Have a great weekend.


The Market
    
    Technical

    Amazing how the negative predispositions can be reversed in a nanosecond.  The Averages (DJIA 10269, S&P 1080) were strong yesterday.  The key to the pin action was that the S&P blasted through the short term down trend off the August high which intersected at 1060 at the close yesterday.  As always our time and distance discipline applies although an almost 2% rise close above that 1060 level pretty much satisfies the ‘distance’ requirement.  In addition, having bounced three times off  1042, I am moving the lower boundary of the S&P trading range from 1009 to 1042.  That puts the boundaries of the current trading ranges at 9645-10725, 1042-1149.

    Volume was actually lower than Tuesday’s; however, breadth was much improved; the VIX traded back below the down trend off the May high (i.e. the upper boundary of the pennant formation)--which puts it once again in no man’s land and leaving it directionless.

    Bottom line: as impressive as yesterday’s pin action was, the low volume was bothersome, especially when a good deal of that was from short covering.  The negative seasonal impact of September also concerns me.  On the other hand, the fundamentals to which stock prices responded (see below) perhaps created one of those ‘emperor’s new clothes’ moments in which investors suddenly realize that they are being (in this case) way too pessimistic. (to be clear, I don’t think that investors suddenly believe that the economy is improving--it’s not, nor that it is not slowing--it is; it is simply that the likelihood of a ‘double dip’ is less than they thought Tuesday morning).  The probability seems high that 1042 has been established as the lower boundary of the current S&P trading range and that the short term down trend off the August high has been broken.

    The seasonality of September but by the day of the month; interesting (chart):
    http://www.businessinsider.com/chart-of-the-day-seasonality-map-for-september-2010-9?utm_source=Triggermail&utm_medium=email&utm_term=Clusterstock+Chart+Of+The+Day&utm_campaign=Clusterstock_COTD_090110

    The latest from Fusion IQ (short):
    http://www.investmentpostcards.com/2010/09/02/technical-talk-contrarian-buy-signal/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+wordpress%2FVYxj+%28Investment+Postcards+from+Cape+Town%29&utm_content=Yahoo!+Mail

    Stocks still need to rise above their moving averages before the trend is clearly up:
    http://www.bespokeinvest.com/thinkbig/2010/9/1/still-work-to-do.html

   Fundamental

    Headlines

    The strong performance in the Chinese and Australian manufacturing (see yesterday’s Morning Call) followed by a surprise in our own ISM manufacturing index (see below) pumped up investor enthusiasm which reigned all day.  As I noted above, (1) volume was a bit disappointing but that may be more a function of the vacation schedule than any lack of optimism and (2) the surprising improvement in global manufacturing clearly forced investors to reassess the likelihood of a ‘double dip’.  To be sure, we still have employment numbers both today (weekly jobless claims--they were OK [see below]) and tomorrow (nonfarm payrolls); and if they are terrible, then all bets are off.  But barring that then given the gradual recovery in the economic data flow of the last two weeks capped by yesterday’s stats, we may be returning to a more balanced picture of the economy after a pretty dismal August.

    We also are still facing the negative of the Market’s historical performance in September.  However, in the enlightening link to Bespoke yesterday, they pointed out that following a rough August, there were only even odds of a down September.  The other factor to consider is that the political season starts in earnest next week.  I can only imagine the pressure on Obama to do something to improve voter sentiment (think extending the Bush tax cuts).  Further, the Republican post 2010 agenda is due out shortly.  If it contains a program anything like the one outlined in a recent speech by house minority leader Boehner, that too will likely jack up voter/investor confidence.

    Bottom line: yesterday had many of the marks of a turnaround in investors’ perception of the economy; plus as I noted above, technically the short term down trend appears to have been broken.   That means that it is time to commit some cash (see Subscriber Alert below).  Unfortunately, yesterday’s move was of such a magnitude as to push prices out of the lower quadrant of the current trading range (1042-1069) which I consider the ideal price level.  As usual, our strategy will follow a compromise: our Portfolio will commit some funds but not as much as they would have if prices had closed in the 1042-1069 area.  In any subsequent correction, additional cash will be committed.
     
    This is an in the weeds discussion on current problems with asset allocation (medium):
    http://www.zerohedge.com/article/why-record-correlations-are-adverse-selection-feedback-loop-future-market-participation

    Another in the weeds discussion; this one about how US investment banks are end running the Dodd Frank bill (financial regulation) (long):
    http://www.zerohedge.com/article/guest-post-flight-mystery

    Thought for the day from Doug Kass (short):
    http://www.ritholtz.com/blog/2010/09/re-risk-prudently/

Economics

   This Week’s Data

    The August Institute for Supply Management’s manufacturing index was reported at 56.3 versus expectations of 53.0 and July’s reading of 55.5.
    http://scottgrannis.blogspot.com/2010/09/manufacturing-activity-continues-strong.html

    July constructions spending fell 1.0% versus estimates of -0.5%; worse June’s number was revised down to -0.8% from +0.1%.
    http://scottgrannis.blogspot.com/2010/09/construction-spending-remains-weak.html

    Weekly jobless claims fell 6,000 versus forecasts of a rise of 2,000.
    http://www.calculatedriskblog.com/2010/09/weekly-initial-unemployment-claims.html

    August auto sales declined versus expectations of slight increase.
    http://www.calculatedriskblog.com/2010/09/us-light-vehicle-sales-115-million-saar.html

    Second quarter productivity fell 1.8% versus estimates of a decrease of 1.9%; unit labor costs rose 1.1% versus forecasts of +1.3%.

   Other

    Are we following in Japan’s footsteps (medium)?
    http://pragcap.com/those-who-ignore-history

    Evidence of growth in state tax revenues (short):
    http://mjperry.blogspot.com/2010/09/state-tax-revnues-booming-what-double.html

    Help wanted ads surge (short):
    http://scottgrannis.blogspot.com/2010/09/help-wanted-ads-surge-22.html

    Eurozone second quarter GDP revised higher.
    http://econompicdata.blogspot.com/2010/09/euro-area-gdp-revised-higher.html

Politics

  Domestic

    One doctor’s view of Obamacare (5 minute video):
    http://mjperry.blogspot.com/2010/09/docs4patientcare.html











Posted 09-02-2010 8:22 AM by Steve Cook