Patience is important
Steve Cook on Disciplined Investing

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News

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Have You Seen This?


The Market
    
    Technical

    The Averages (DJIA 11613, S&P 1256) suffered more serious whackage yesterday.  While technically the 11985, 1294 support level is still subject to our time and distance discipline, the ‘distance’ element is so extended that it is highly likely that it will join the short term up trend in the graveyard.  That leaves the indices within their intermediate term up trends (11595-15018, 1219-1648); although the DJIA is obviously a short hair away from its lower boundary.  This level should offer good support.  More important, it will be the ultimate arbiter of whether this correction is a pause to give the bulls a rest or a significant top.

    Volume rose; breadth was terrible, of course and the flow of funds indicator has definitely rolled over breaking an intermediate term up trend; the VIX did a moon shot  negating the recent trading range.  It is now in a very short term up trend, which is not good for stocks.

    GLD was basically flat on the day, leaving it fractionally below the lower boundary of its intermediate term up trend.  I remain nervous about the holding but will take no action until there is a definitive move.

    Bottom line: the downward momentum has been surprisingly powerful, blowing through two support levels with such ease that I see no reason to step in front of this freight train as it approaches the intermediate term up trend.  Prudence suggests that we wait for some sign of an end to the selling before taking any action.

    Percentage of S&P stocks above their 50 day moving average (charts):
    http://www.bespokeinvest.com/thinkbig/2011/3/16/26-of-sp-500-stocks-currently-above-50-day-moving-averages.html

    The S&P is now oversold (chart):
    http://www.bespokeinvest.com/thinkbig/2011/3/16/sp-500-most-oversold-since-june.html

    The argument for patience (short):
    http://www.fundmymutualfund.com/2011/03/you-dont-need-to-catch-bottom.html

   Fundamental
     
     Headlines

(1)    the day started with some very disappointing economic numbers: mortgage applications as well as purchase applications were down; housing starts were abysmal and well below expectations; while the headline producer price index was more than double estimates.  I won’t even attempt to put any lipstick on that pig.  However, I will reiterate that in a sluggish recovery, mama said that there would be days like this.  On the other hand, all those bulls that were anticipating a normal economic rebound as little as a week ago are getting a dose of reality--which is not all that bad if it adjusts valuation expectations to more reasonable levels.

(2)    Japan continues to get the majority of the air time.  We seem to be going through a cycle where there is no new news, investors’ spirits start to lift, then we get news, it is bad and stocks get banged again.  What is surprising is how little we are hearing from Japanese authorities; it is like they are deer frozen in headlights.  Which makes this situation all the more difficult to get a handle on because we don’t even know what we don’t know.  Until there is some clarity, this will likely remain a source of potential headaches for the Markets,

(3)    The Bahraini government declared a three month state of emergency and stepped up the level of force in dealing with protestors--killing five.  The extent of the Saudi army involvement in the violence is unclear; but the pundits are increasing portraying this turmoil as a Sunni/Sh’ite, Saudi/Iranian standoff which doesn’t inspire a lot of confidence.  This problem is apparently a back burner issue for the main steam media; but if suddenly the Saudi’s and Iranians are eyeball to eyeball, the implications for global and US economic growth are far greater than anything short of a nuclear explosion in Japan,
http://www.ritholtz.com/blog/2011/03/keep-one-eye-on-middle-east-and-north-africa-mena/

And lest we forget about Libya:
http://www.zerohedge.com/article/let-bombing-commence-un-imposes-no-fly-zone-over-libya


(4)    Moody’s downgraded Portugal’s debt [again] by two notches.  Have I said this before: this problem is not going away and it will likely not end positively.

Bottom line: stocks keep getting cheaper; the S&P is now below Fair Value as calculated by our Valuation Model.  In the end, the return to more rational valuation can only benefit our Portfolios.  Of course, prices are down for reasons; but at least a portion of these are already in our Model.  My task is to focus on those that are not (potential nuclear holocaust in Japan and/or oil supply disruptions in the Middle East) and be sure that any new developments are properly reflected in our Model.  Given the current uncertainties, that suggests defense is the best strategy.

Economics

   This Week’s Data

    Weekly jobless declined 12,000 versus expectations of a 7,000 drop.
    http://www.calculatedriskblog.com/2011/03/weekly-initial-unemployment-claims_17.html

    The February consumer price index (CPI) came in +0.5% versus estimates of +0.4%; core CPI was up 0.2% versus forecasts of up 0.1%.


Politics

  Domestic

Tony Blankley of the republicans’ 2010 budget dilemma (medium):
http://townhall.com/columnists/tonyblankley/2011/03/16/deficits,_promises_and_destiny

Want some good news?  If you haven’t seen the reports on the recall of Miami’s major, read this.
http://www.miamiherald.com/2011/03/15/v-fullstory/2117129/9-of-10-say-yes-to-ousting-alvarez.html#ixzz1Gm08UHvg











Posted 03-17-2011 8:09 AM by Steve Cook