Our internal indicator points to higher ground
Steve Cook on Disciplined Investing

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News

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Have You Seen This?

The Market
    
    Technical

    The Averages (DJIA 10340, S&P 1091) were off yesterday but closed within their current trading ranges (9645-10725, 1042-1149).  Surprisingly, volume was lower than any day last week; breadth was terrible; and the VIX rallied hard closing back within the boundaries of the prevailing pennant pattern.

    At the moment, I am watching the lower quadrant of the current trading range (1042-1068 on the S&P) on the downside for a potential buying opportunity.  On the upside, current resistance levels to watch are 1109 (the down trend off the April 2010 high), 1132 and 1149. 

    I visited our internal indicator at the close last night.  In a Universe of 159 stocks: 106 have busted through their equivalent of the S&P down trend off its April high (1109), 33 have not and 20 are too close to call.  All in all, a very positive reading.

    Bottom line: yesterday’s retrenchment following last week’s remarkable performance was not a shock; but as I noted above, the lack of volume was unexpected.  Of course, the Jewish Holidays start this week; so maybe many just didn’t come back to work.  That said, our internal indicator is fairly definitive in pointing to more upside. If stocks get below the 1068 level, our Portfolios will likely be nibbling some more.  But nothing will be done as long as prices remain above that level.

    For the bulls amongst you (medium):
    http://www.minyanville.com/businessmarkets/articles/real-estate-cnbc-bull-market-bear/9/7/2010/id/29936?camp=featuredslide&medium=home&from=minyanville

   Fundamental
      
     Headlines

    No economic news yesterday; so most of the chatter focused on old news:  (1) the $50 billion additional stimulus spending proposed by Obama and the subsequent $150 billion tax cut [by the way the key component of this tax cut is the immediate expensing of capital investment; that is a good idea; the problem is that He only wants it to be in effect one year which is a meaningless gesture].  Of course, neither of these is apt to happen because November 2 is simply too close and most of congress is distracted by that fact.  But it makes for great press moments for Obama.  (2) the revelation that European banks were not quite as diligent in testing their finances against the terms of the stress test as originally portrayed.  That is not particularly surprising.  We knew the European banks were [and are] in worse shape than their US counterparts; and yet there has been little by way of restructuring as compared with our financial institutions.  To repeat a common refrain from these pages--this problem is not over yet.

    Crumbling infrastructure? (short):
    http://cafehayek.com/2010/09/crumbling-infrastructure.html

    Bottom line:  despite last week’s rally, stocks remain modestly undervalued.  Further, recent data seems to suggest that the worse economic case is lessening in probability.  That said, the long term outlook (below average secular growth; as Don Luskin said ‘a really crumby recovery’) has not changed; so I am not concerned with stock prices getting away from us on the upside.  Our present strategy is to Buy stocks (in the Buy Value Range or those that were Sold on a trade at higher prices) at the low end of the current trading range and Sell based on our Sell Discipline (violating their Stop Loss Price or trading into their Sell Half Range).

Economics

   This Week’s Data

    Weekly mortgage applications fell 1.5%; though purchase applications rose 6.3%, the highest since May.

   Other

    The argument for more stimulus (long):
    http://www.ritholtz.com/blog/2010/09/the-real-lesson-from-the-great-depression-fiscal-policy-works/#more-58608

    More states with increasing tax collections (short):
    http://mjperry.blogspot.com/2010/09/state-tax-revnues-booming-what-double.html











Posted 09-08-2010 8:16 AM by Steve Cook