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Steve Cook on Disciplined Investing

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Have You Seen This?


The Market
    
    Technical

    The indices (DJIA 11052, S&P 1187) had another one of those days of high volatility (in yesterday’s case to the downside) only to close near the flat line.  They remain at the upper end of a trading range defined by 9645-11257, 1042-1220.   Resistance exists at the upper boundaries, near term support at 10725, 1149.

    The S&P is testing its 50 day moving average (chart):
    http://www.bespokeinvest.com/thinkbig/2010/11/29/sp-500-testing-50-dma.html

Volume was pathetic; breadth poor; however, the VIX was surprisingly down.  In my absence, it has broken out of the latest down trend (a negative) and is now in a trading range. 
http://www.investorplace.com/24184/mr-vixs-wild-ride/?cp=stocktwits&cc=synd

Gold continues to cling to the lower boundary of its short term up trend.

Bottom line: it is actually surprising to me that prices have held up as well as they have in the face of the pessimism over the EU sovereign debt crisis; and that leaves open the possibility of another challenge to the upper boundaries of the current trading ranges.  On the other hand, the risk still exists that the Averages have made a double top.  In addition, down Friday/down Monday performances are almost always followed by further weakness. In other words, there is sufficient uncertainty to keep me on the sidelines.

    The latest from Trader Mike (short):
    http://tradermike.net/2010/11/november-29-2010-recap-is-that-a-bear-flag/

    Fundamental
      
     Headlines

(1)    EU sovereign debt crisis: despite an apparent bailout of Ireland, the bond vigilantes are driving to the hoop on all the PIIGS propelled by the mathematical reality of the need to reduce government spending.  Whatever the ultimate outcome and whenever it occurs, there is likely to be, at least, a short period of highly charged uncertainty that will weigh on US equity prices.  To be sure, a default/devaluation/exit from the EU will likely prove to be an impediment to economic growth short term; though it seems to me to be inevitable and therefore, the quicker it happens, the better.  As I have said, I have slow European economic growth factored into our Model; and I am not sure that the ultimate outcome of this crisis will be any worse than that.  Clearly, there is a risk that it will; but until we know how the Euros address the problem, uncertainty remains.

For the pessimists (medium):
http://www.minyanville.com/businessmarkets/articles/ireland-bailout-european-central-bank-ecb/11/29/2010/id/31383?camp=featuredslide&medium=home&from=minyanville

      And (medium):
      http://www.zerohedge.com/article/footnote-irish-bailout-plan

      For the optimists (short):
      http://scottgrannis.blogspot.com/2010/11/life-goes-on-in-europe-despite-all-bad.html

As always Barry Ridholtz has some insightful comments on the goodness/badness of currency devaluation (short):
      http://www.ritholtz.com/blog/2010/11/asked-and-answered/

(2)    ‘Black Friday’ sales were passable and expectations were upbeat for ‘Cyber Monday’ sales.  I would grade this as another positive signal for the US economy; and I would speculate that one of the major reasons why stocks haven’t been hurt more by the EU sovereign debt crisis is the continuing improvement in our own economy.

(3)    politics: Angel surprisingly good news--yesterday, Obama proposed freezing Federal civilian employee pay for two years, Beer today, He meets with both republican and democratic leaders {a first} to discuss priorities in the lame duck session--one of the most important of which is extension of the Bush tax cuts, and Coffee this week the Obama appointed ‘fiscal commission’ is scheduled to release its recommendations.  None of these are particularly earth shattering; and I remain a skeptic when it comes to an Obama shift to the center.  However, taken together they are on the surface a hopeful sign that fiscal responsibility has a chance.  That said, what is important is how each of these developments play out--and we don’t know that yet.

Bottom line: stock prices are near Fair Value.  They face a number of headwinds (EU debt crisis, QE2, foreclosure-gate, Chinese monetary policy), any one of which could blow our Model’s calculations if my assumptions are proven wrong.  On the other hand, an improving US economy likely limits the downside risks. Until developments in one or more of the above factors alter our Model, our asset allocation reasonably reflects that facts on the ground.

    International exposure and stock price (short):
    http://tickersense.typepad.com/ticker_sense/2010/11/is-international-exposure-important.html

Economics

   This Week’s Data

   Other

    The case against deflation (medium):
  
http://tickersense.typepad.com/ticker_sense/2010/11/is-international-exposure-important.html

    Wikileaks next target (medium):
    http://www.zerohedge.com/article/wikileaks-next-target-big-us-bank

    Good news: productivity up; bad news: jobless recovery (short):
    http://mjperry.blogspot.com/2010/11/good-news-output-per-worker-and-profits.html

    More evidence of rising consumer confidence (short):
    http://www.calculatedriskblog.com/2010/11/restaurant-performance-index-highest-in.html

Politics

  Domestic

How single payer healthcare works in Canada (short):
http://mjperry.blogspot.com/2010/11/markets-in-everything-cash-for-fast.html

    Winners and losers in the Simpson/Bowles social security plan (medium and today’s must read):
    http://www.economics21.org/commentary/winners-and-losers-under-simpson-bowles-social-security-plan

  International War Against Radical Islam

    Krauthammer on START (medium):
    http://www.washingtonpost.com/wp-dyn/content/article/2010/11/25/AR2010112502232.html











Posted 11-30-2010 8:20 AM by Steve Cook