International problems making rough sledding at home
Steve Cook on Disciplined Investing

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Have You Seen This?


The Market
    
    Technical

    The Averages (DJIA 11993, S&P 1296) finished below the lower boundary of their respective short term up trends (12193-13169, 1325-1428) for the third day; if they remain below those trend lines at the close today, the break will be confirmed. The short term trend will then be re-set to a trading range (tentatively 11985-12405, 1294-1345). They remain well within their intermediate up trends (11572-15005, 1214-1643).

Positively, even though stocks sold off early in the day, both index closed above the 11985, 1294 short term support level.  If these levels hold, then they would form the lower boundary of the new short term trading range.

The other trend line to watch is the very short term down trend off the recent trading high (12405, 1345).  For the S&P, this level is now at 1319.

Volume increased; breadth was down and it appears that the flow of funds indicator is rolling over; the VIX rose and finished above the upper boundary of its recent trading range.  That potentially could be a matter for concern; however, with all the volatility of late above and below that resistance level, the VIX needs to confirm an upside breakout before getting too worried.

Gold (GLD) traded up on the day; but it remains stuck between the lower boundary of its intermediate term up trend and that pesky quadruple top.  I think any action before it breaks one of these two trend lines doesn’t make a lot of sense.
http://www.zerohedge.com/article/eric-sprott-debunks-gold-bubble-myth

Bottom line: it appears as if the indices will break their short term up trends.  The upper boundary of the subsequent short term trading range will be the recent trading high (12405, 1345).  The lower boundary will depend on how much support the 11985, 1294 level can muster.  It is this level that I am watching for a signal on future direction.

The intermediate term up trend is currently not in danger of being violated. 

    The latest from Trader Mike (short):
    http://www.tradermike.net/

    Update on the long bond chart:
    http://dshort.com/articles/Kimble/2011/0314-30-year-bond-update.html
   
   Fundamental

     Headlines

(1)    the tragedy in Japan dominated the airwaves.  Punditry abounded; but I am not sure anyone really knows how this will play out for the Japanese or the global economies.  The wild card, of course, is the how well the potential nuclear emergency is contained; and I have no idea how to assess that risk. 

Unfortunately, that seems to be deteriorating by the second (short):
http://www.zerohedge.com/article/panic-evacuations-strike-tokyo-food-hoarding-empties-stores-capital-fallout-projected-blow-p

     And (short):
     http://www.zerohedge.com/article/does-ring-fire-guarantee-least-one-magnitude-8-aftershock-and-ten-magnitude-7-or-higher

Another wild card is that Japanese deficits and debt levels relative to the country’s GDP are among the highest in the world.  Given the enormity of the clean up effort, there is clearly going to be a much larger increase in both than would have otherwise occurred; that in turn could add considerably to global inflationary pressures.
      http://www.zerohedge.com/article/baseline-japan-disaster-cost-estimates-3-5-gdp-could-be-high-1-trillion

On the other hand (short):
http://www.ritholtz.com/blog/2011/03/japan%E2%80%99s-international-investment-position/

(2)    getting less attention but potentially as great a threat to world growth is the ongoing turmoil in the Middle East.  The violence in Libya continues with Gaddafi forces defeating rebel forces in several locations. Perhaps more disturbing, the Saudi’s sent troops into Bahrain to help that government maintain order.  The good news, of course, is that to date the damage to global oil production has not been that great; so may be the worst is behind us. But we simply don’t know and until we do, a little caution seems appropriate.

Meanwhile, back home in the banana republic (short):
http://www.zerohedge.com/article/treasury-cash-drops-just-142-billion-and-no-bond-auctions-until-next-week-america-about-run-

Bottom line:  the risks to our forecast that I have been focused on of late has been (1) the Fed being past the point of no return with respect to withdrawing liquidity in time to avoid rising inflation.  The obvious necessity of the Japanese government to go deeper into debt and create additional liquidity within their economy could very well spill over into global markets adding even more to underlying inflationary pressures, and (2) the potential negative impact of rising commodity costs on economic demand causing a premature end to the current recovery. The threat to oil prices from a severe disruption in supply would certainly exacerbate that risk. 

Of course, Markets have absorbed a lot of bad news in the last couple of weeks and save what appears to be the negation of the short term up trend in stocks, they have handled that bad news fairly well.  That said, stocks remain overvalued.  That suggests that there could be more downside; so I remain cautious.
          
 
Economics

   This Week’s Data

    The New York Fed’s March manufacturing survey came in at 17.5 versus expectations of 15.0 and February’s reading of 15.43.
    http://www.calculatedriskblog.com/2011/03/empire-state-manufacturing-survey.html

   Other

    Uneven global recovery (long but you should read it):
    http://advisorperspectives.com/commentaries/hussman_31311.php

    Last weekend the EU applied yet another tourniquet to the growing financial crisis in Greece.  Here is an analysis of what is going on and how it will end (hint: it is not good) Today’s must read:
    http://www.nakedcapitalism.com/2011/03/eu-puts-peripheral-countries-on-the-rack.html

    The latest data on bank reserves (short and you read this also):   
    http://www.minyanville.com/businessmarkets/articles/pomo-permanent-open-market-operations-fed/3/14/2011/id/33333?camp=featuredslidealso&medium=home&from=minyanville

    Global update on corporate tax rates (medium):
    http://mjperry.blogspot.com/2011/03/usa-will-be-1-in-2-weeks-for-oecd-tax.html









Posted 03-15-2011 8:11 AM by Steve Cook