Waiting for a correction; how frustrating is that?
Steve Cook on Disciplined Investing

Syndication

Have You Seen This?

News

  • Make money by accessing all our Portfolios, the supporting research and Price Disciplines using our paid subscription blog, Strategic Stock Invetments. Our work is focused on making money for our Portfolios not as some academic exercise in Internet investing. Check our performance (audited)--our Dividend Growth Portfolio has beaten the S&P by 500 basis points per year for the last seven years but with a beta of only .62. (Mandatory Disclaimer: past performance is not a guarantee of future results.) We give you everything you need to duplicate our results, in particular, a strict price discipline for both Buying and Selling.

Have You Seen This?


The Market
    
    Technical

    Stocks had a great day, the Averages (DJIA 11755, S&P 1285) closing comfortably within both their intermediate term up trend (11063-14551, 1158-1593) and their short term up trend (11420-12335, 1235-1340).  Near term resistance exists at 11811, 1311--and that’s not that far away.

    Volume actually declined, not a good sign on an up day; breadth improved; the VIX fell sufficiently to call into question the developing reverse head and shoulders pattern.  Any negation of that formation would be a positive for stocks. 
    http://scottgrannis.blogspot.com/2011/01/fear-subsides-equity-prices-rise.html

    The flow of funds into (out of) mutual funds continues to look nasty (short):
    http://www.zerohedge.com/article/2011-starts-bang-42-billion-outflows-domestic-equity-funds

Further, checking our internal indicator: in a Universe of 162 stocks, 82 are above the S&P breakout level of 1220, 50 are not and 26 are too close to call.  This is a positive reading and suggests that stocks have more upside.

    Gold (GLD) rallied modestly and remains within that very tight 133.80-139.60 trading range.  The fact that it recently bounced off a triple top but couldn’t break near term support, I view as a positive.  As I noted yesterday, any break above 139.60 or below 133.80, confirmed by our time and distance discipline, is an actionable event.

    Bottom line: as wrong as I was not to put additional cash to work when the S&P reversed a head and shoulders formation (1220) and as conflicted as I remain, our discipline is to not chase stock prices up.  It is painful, especially with our internal indicator giving a positive reading; but at current Valuations, I can’t in good conscience let the technicals override the fundamentals.  So I await a sufficient enough correction to bring more stocks into their Buy Value Range.  In the meantime, as I have previously stated, several of our holdings inch ever closer to their Sell Half Range.

    Other signs of a toppy Market:
    http://www.bespokeinvest.com/thinkbig/2011/1/12/bullish-sentiment-back-near-recent-highs.html
    http://www.bespokeinvest.com/thinkbig/2011/1/12/down-days-disappear.html

   Fundamental
     
      Headlines

    Stocks were up in early trading based on a better than anticipated reception of a Portuguese bond offering and then remained in positive territory the rest of the day.  Clearly, investors don’t share my pessimism on this point.  However, until I see a reasoned argument for why I am wrong, I am sticking with my guns--this problem is not going away and it will likely not end well.

    More on the EU debt crisis (medium):
    http://www.nakedcapitalism.com/2011/01/satyajit-das-european-death-spiral-%E2%80%93-end-games.html

    The economic data was slightly positive: the December US budget deficit was better than expected ($80 billion versus $85 billion anticipated); and the Fed’s latest Beige Book was mixed, that is, while it acknowledged that the economy, particularly manufacturing and retail, was better than its prior estimates, it also conceded that inflation was also rising faster than forecast.  One would hope that the latter is a sign that QE2 is on a short string, but nothing else in the report suggested such.
   
    Finally, on an item unlikely to have any macroeconomic implications, at least in the short term, the Illinois legislature voted to raise corporate and individual income taxes to address the state’s budget deficit.  If signed into law, it will set up an interesting and hopefully enlightening experiment among the mid western states.  Illinois is surrounded by states that are taking a different tack in dealing with their current revenue shortfall, to wit, cutting spending. How effective these two disparate fiscal strategies are in dealing with a common problem should prove a great lesson in economics no matter what the outcome and certainly bears watching.

    Bottom line: I continue to be encouraged by economic developments in the US; but nothing has occurred that isn’t already in our forecast and our Valuation Model.  To get to higher Valuations than currently exist, some combination of fiscal and monetary constraint and a positive to response from business has to take place.  While there are encouraging signs, it is simply too early, in my opinion, to bet money on such an outcome.  

Economics

   This Week’s Data

    The December budget deficit came in at $80 billion slightly less than expected:
    http://scottgrannis.blogspot.com/2011/01/budget-update-continued-improvement.html

    Weekly jobless claims rose 35,000 versus expectations of a 1,000 increase.
    http://www.calculatedriskblog.com/2011/01/weekly-initial-unemployment-claims.html

    The December producer price index (PPI) came in up 1.1% versus estimates of up.8%; the core PPI was reported up 0.2% in line with forecasts.
    http://econompicdata.blogspot.com/2011/01/ppi-hits-four-handle.html

    The November international trade deficit was recorded at $38.3 billion versus an anticipated $40.5 billion--this in spite of higher oil prices.
   
   Other

    The argument for breaking up the big banks (long, but a must read):
    http://www.washingtonsblog.com/2010/12/economy-cannot-recover-until-big-banks.html

    And a related article on foreclosure-gate (medium):
    http://www.zerohedge.com/article/jp-morgan-told-judge-stop-paying-mortgage-become-eligible-loan-modification

    And for those of you who believe Bernanke that there is no inflation (medium):
    http://www.zerohedge.com/article/food-price-shock-cometh
    http://www.zerohedge.com/article/2-dead-4-injured-chile-gas-price-hike-protests-turn-deadly  (short)











Posted 01-13-2011 8:25 AM by Steve Cook