Technically speaking, yesterday was more than just a down day
Steve Cook on Disciplined Investing

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The Market
    
    Technical

    The Averages (DJIA 11346, S&P 1213) had their first disappointing day in some time. Indeed, it was more than just disappointing; it was a flashing red light--it had several characteristics of a key sign of a reversal.  Not to get too deep in the weeds, but (1) when prices intraday trade at higher highs than the previous day and lower lows than the previous day and then close down for the day and (2) when stocks, bonds and gold all decline in a single session, technicians start worrying about a change in trend.

The DJIA closed above the upper boundary of its recent trading range (9645-11257); however, the S&P did not (1042-1220).  That means that, under our time and distance discipline, the trends of the major indices are once again divergent: the DJIA remains in an up trend (10517-13831) while the S&P did not re-set to an up trend and finishes the day within its current trading range (1042-1220).  If we get further weakness, I will be watching the lower boundaries of the very short term up trends in both Averages (11200-11724, 1193-1251) for initial support.

    Volume improved; breadth was really whacked; the VIX rose 4% but is still within its current down trend.
   
    Bottom line: my hypothetically re-setting up trend thesis took a blow yesterday.  On the other hand, thank goodness for our time and distance discipline for keeping us from jumping the gun.  I am cautious after yesterday’s pin action; but most important, I almost never initiate transactions when the major indices are diverging.
   
    Gold experienced the same intraday trading pattern as stocks which also starts the red light flashing on this holding.  As I have noted previously, GLD is in a very well defined short term up trend.  I am watching that trend’s lower boundary.  Any violation that passes our time and distance discipline, I may consider (again) taking some profits.

    Gold, a hedge against inflation or a weak dollar?  There is a difference. (medium):
    http://economix.blogs.nytimes.com/2010/11/09/the-myth-of-record-high-gold/

   Fundamental
     
     Headlines

    There was not much economic data yesterday: retail sales were OK and wholesale inventories were up more than expected, but sales trailed which is not particularly good. Nothing to spawn the kind of poor technical showing that occurred.  That I think came from the continuing fall out from QE2: (1) the international community continued to bash the policy and given the proximity of the G20 meeting [starts tomorrow], investor concerns grew about the impact of possible retaliatory measures being announced at that meeting, (2) there was a US Treasury auction which went fine, but bond prices sank afterwards and that put the ‘bond bubble’ chatter into overdrive.  In addition, the dollar was strong (putting downward pressure on stock prices) over mounting concerns regarding EU sovereign debt problems.

    I have said repeatedly that neither QE2 nor the sovereign debt problems will end pleasantly.  I don’t know if these issues will continue commanding the headlines; and of course, I can’t be sure that I will be proven correct in my assessments of them, if they do; but it seems they depressed investors, at least yesterday.

    Here is an argument for why the Fed won’t follow through on QE2 (short):
    http://scottgrannis.blogspot.com/2010/11/market-gives-big-thumbs-down-to-qe2.html

     Bottom line: yesterday may have started a technical test of equity prices.  Certainly, there is plenty of potential for negative news from QE2, EU sovereign debt and foreclosure-gate to justify it. We will know more in a day or so.  If a correction has started I don’t see it as a major concern in as much as stocks are close to Fair Value, i.e. not overvalued.  Hence, no action is needed outside of those resulting from our Price Disciplines. 

    The latest from David Rosenberg (long):
    http://advisorperspectives.com/commentaries/gluskin_110910.php

    The latest from Andy Xie (long):
    http://www.ritholtz.com/blog/2010/11/to-hell-through-qe/

    Another great thought from Barry Ridholtz (short):
    http://www.ritholtz.com/blog/2010/11/the-uncertainty-myth/

Economics

   This Week’s Data

    The International Council of Shopping Centers reported weekly sales of major retailers up 1.3% versus the prior week and up versus the comparable period a year ago;  Redbook Research reported month to date retail chain store sales up 2.6% on a  year over year basis.

    September wholesales inventories rose 1.5% versus expectations of a 0.6% increase; unfortunately wholesale sales did not keep pace advancing only 0.4%.

    Weekly mortgage applications rose 5.8%.
    http://www.calculatedriskblog.com/2010/11/mba-mortgage-purchase-applications_10.html

    Weekly jobless claims fell 24,000 versus forecasts of a drop of 9,000.
    http://www.calculatedriskblog.com/2010/11/weekly-initial-unemployment-claims_10.html

    The September US trade deficit came in a $44.0 billion, in line with estimates.

   Other

    Trucking index softens (chart):
    http://scottgrannis.blogspot.com/2010/11/diesel-trucking-activity-has-slumped.html

    More on the mounting EU sovereign debt problem (medium):
    http://www.bloomberg.com/news/2010-11-09/euro-crisis-enters-new-phase-with-credit-pinch-commentary-by-daniel-gros.html

    The energy source of the future (chart):
    http://www.businessinsider.com/chart-of-the-day-coal-fired-electrictiy-generation-by-region-2010-11?utm_source=Triggermail&utm_medium=email&utm_term=Clusterstock+Chart+Of+The+Day&utm_campaign=Clusterstock_COTD_110910

    More on foreclosure-gate (medium):
    http://www.nakedcapitalism.com/2010/11/securitization-trustees-in-the-crosshairs-in-mortgage-mess.html

Politics

  Domestic

Boehner on earmarks (medium):
http://www.nationalreview.com/articles/252673/earmarks-aren-t-even-beginning-andrew-c-mccarthy

Another great example of our tax dollars at work (short):
http://www.powerlineblog.com/archives/2010/11/027645.php

    Raising the retirement age (medium):
    http://www.aei.org/article/102749

    Another example of your tax dollars at work (medium):
    http://www.ritholtz.com/blog/2010/11/oil-slickonomics-part-13-idle-iron/

  International War Against Radical Islam

    Narco-trafficking in Venezuela (medium):
    http://www.american.com/archive/2010/november/chavez-the-cocaine-capo










Posted 11-10-2010 8:10 AM by Steve Cook