Once again, the bears fizzle
Steve Cook on Disciplined Investing

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The Market
    
    Technical

    Once again, the bears didn’t have enough fire power to provide any follow through.  The Averages (DJIA 11107, S&P 1178) bounced nicely yesterday on good volume, dramatically improved breadth and a 4% decline in the VIX (leaving it in a solid down trend).  They remain well within the boundaries of both their current trading ranges (9645-11257, 1042-1220) and my hypothetical re-setting up trend (10390-13660, 1083-1491).

    Bottom line:  sellers couldn’t even get the indices to test the former resistance, now support level (10725, 1149).  Gold did test its shortest up trend line and rebounded quickly.  As a result, our Portfolios bought back one half of shares that they Sold last week.  Beyond that there is nothing to do but watch the  previously mentioned resistance (11257, 1220) and support (10725 & 10390, 1149 & 1083) levels.

    Update on the money flow in/out of mutual funds (short):
    http://www.zerohedge.com/article/24th-consecutive-outflow-domestic-stock-mutual-funds-books

    Bearish sentiment at five month low (short):
    http://www.bespokeinvest.com/thinkbig/2010/10/20/bearish-sentiment-sinks-to-a-five-month-low.html

   Fundamental
     
     Headlines

    For whatever reason currency traders pushed the dollar back down Tuesday night and that had its usual salutary affect on stock prices in yesterday’s early trading.  The rally got additional fuel from better than forecast earnings reports from Boeing and Wells Fargo.  Then mid afternoon, the Fed released its periodic Beige Book (once every six weeks anecdotal look at the economy) report--which had an improved tone and a slightly better descriptive account of how the economy is performing.

    Five quick points:

(1)    if the economy, by the Fed’s measure, is doing somewhat better than it was six weeks ago, then Angel it is a clear positive and another stake in the heart of a ‘double dip’ but Beer that should lower the need for QE2.  So I challenge again the thesis that it is QE2 that is driving stock prices up.

But no ‘double dip’ doesn’t mean growth will accelerate (short):
http://pragcap.com/economic-sluggishness-ahead

(2)    the world wrote off the ‘China is raising its interest rates which will negatively impact global growth’ notion as commodities, emerging markets bounced and the dollar rolled over,

(3)    confusion continues to reign in foreclosure-gate,

A look at the mortgage servicers in foreclosure-gate (medium):
          http://www.ritholtz.com/blog/2010/10/foreclosure-fraud-for-dummies-3-why-are-servicers-so-bad-at-their-job/

         More on the Pimco et al threatened suit against Bank of America (medium):
          http://www.nakedcapitalism.com/2010/10/more-on-why-the-pimco-blackrock-freddie-ny-fed-letter-to-countrywide-on-putbacks-is-way-overhyped.html

          An interview with a real estate pro (long but worth the read):
          http://www.zerohedge.com/article/guest-post-getting-real-about-real-estate

(4)    earnings re-surfaced as a motivating force for investors [Boeing and Wells Fargo].  A long those lines, after hours yesterday Netflix and EBay [Market favorites] reported better than expected profits.  That should help the early hours pin action today.

(5)    I am very encouraged by British Prime Minister Cameron’s presentation yesterday to Parliament in which he announced that country’s  fiscal budget is being cut by 19%.  First, it bolsters my  hope that there is actually a politician out there that has cojones to stand before a deliberative body and speak the truth.  Second, it is reminiscent of Mrs. Thatcher’s reign which anticipated the Ronald Reagan lower spending, lower taxing, lower regulation, free trade era.  We can only hope that some of these clowns in Washington were watching.

Bottom line: equity prices are near Fair Value.  QE2 will do nothing but hurt.  Sooner or later a declining dollar will turn into a negative for stocks.  Foreclosure-gate lacks clarity but has the potential to alter Valuations.  In my opinion, the only thing that can improve the economic/Market outlook is a political revolution on November 2 and an immediate follow through on policy reversal.

    This earning season’s ‘beat’ rate to date (short):
    http://www.bespokeinvest.com/thinkbig/2010/10/20/q3-earnings-season-stats.html

Economics

   This Week’s Data

    Weekly jobless claims fell 10,000 versus expectations of a 7,000 decline.
    http://www.calculatedriskblog.com/2010/10/weekly-initial-unemployment-claims_21.html

   Other

    Unemployment is some historical perspective (short):
    http://www.ritholtz.com/blog/2010/10/the-output-gap-and-unemployment/

    Debt, taxes and politics (charts):
    http://dshort.com/articles/2010/debt-to-gdp-and-taxation.html

    China’s GDP grew 9.6% in the third quarter (short):
    http://econompicdata.blogspot.com/2010/10/when-96-growth-isnt-enough.html

Politics

  Domestic

Another example of the corruption within the CIA (medium):
http://www.powerlineblog.com/archives/2010/10/027502.php











Posted 10-21-2010 8:18 AM by Steve Cook