Signs of a profit squeeze and/or economic slowdown?
Steve Cook on Disciplined Investing

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Have You Seen This?


The Market
    
    Technical

    Yesterday the Averages (DJIA 12263, S&P 1314) experienced some rough going but remained well within their intermediate term up trend (11840-15262, 1243-1672) and their short term trading range (11554-12405, 1247-1345).

Both indexes could be setting up a reverse head and shoulders formation.  It would require the S&P to hold the 1290-1310 level then bounce and take out the upper boundary of its short term trading range.  The last time stocks traded through a similar pattern was back in the June-September 2010 when it penetrated 1126.  I am making no predictions here and certainly not betting any money on this transpiring.  At the moment, I am simply alerting you to watch the 1290-1310 S&P level for a bounce as a first sign that this could happening.

Volume increased a little; breadth continued to deteriorate; the VIX rose but not as much as I would have expected on a day of lousy pin action. This tepid bounce coupled with the plunge in Monday’s mixed trading suggests a positive bias for stocks; that is, if this was the only indicator I looked at, I would say that there is not much downside in the current Market.

Bottom line: clearly, stocks have lost at least some of the momentum that we have witnessed over the past weeks in which prices advanced however bad the news.  It doesn’t necessarily mean the Market is going down; indeed, as I suggested above, there is some probability that the price action of the Averages is potentially developing into a  reverse head and shoulders--which portends higher prices. 

In short, there are cross currents that seem to indicate less directional force in equity prices.  In addition to the boundaries of the intermediate term up trend and short term trading range, I am watching the S&P 1290-1310 level as keys to the future course of prices.

   Fundamental
      
     Headlines

    There were a number of negatives in the headlines yesterday.  None by themselves would have been enough to create the whackage that took place; but together their cumulative effect was sufficient to spook investors:

(1)    the disappointing Alcoa quarterly financial report,

(2)    another earthquake in Japan and the government’s raising the damage rating of the Fukushima nuclear facility to 7--equal to the Chernobyl disaster,

(3)    a negative recommendation from Goldman Sachs on oil; though a reading of that opinion indicates that this was a short term call and that longer term they believe that oil is still going higher,

(4)    an IMF forecast of slowing economic growth in the US and Japan kept pressure on commodities and the stocks of their producers.

Bottom line: in the Closing Bell each week I list the risks that I believe pose the biggest threat to our forecast.  One of those is that rising commodity prices will squeeze profit margins, dampen consumer demand and slow the economy’s growth to a pace even lower than I anticipate possibly even pushing it back into recession.  Items (1), (3) and (4) above deal directly with that point.  That is not to say that this is occurring but it does suggest that the risk may be rising.  For the moment, we watch and continue to pay close attention to our Sell Discipline.

   
Economics

   This Week’s Data

    The International Council of Shopping Centers reported weekly sales of major retailers up 0.1% versus the prior week and up 2.9% versus the comparable period last year; Redbook Research reported month to date retail chain store sales down 0.3% versus the similar time frame the prior month but up 4.7% on a year over year basis.

    The US Treasury reported the March budget deficit at $188 billion versus expectations of $185 billion; that is down from February’s deficit of $222 billion but up from March 2010 of -$65 billion.

    Weekly mortgage applications fell 6.6% while purchase applications were down 4.7%.
    http://www.calculatedriskblog.com/2011/04/mba-mortgage-purchase-application_13.html

    March retail sales were up 0.4% versus estimates of up 0.5%; ex autos, sales wee up 0.8% versus forecasts of up 0.7%.
    http://www.calculatedriskblog.com/2011/04/retail-sales-increased-04-in-march.html

   Other

    Another good argument why inflation is not a threat (medium):
    http://www.ritholtz.com/blog/2011/04/fade-the-inflation-hysteria/

    The latest from Van Hoisington (medium/long and today’s must read):
    http://advisorperspectives.com/commentaries/hois_41211.php

    The latest Gallup poll on economic optimism (medium):
    http://www.gallup.com/poll/147056/Economic-Optimism-Plummets-March.aspx?utm_source=alert&utm_medium=email&utm_campaign=syndication&utm_content=morelink&utm_term=Economy%20-%20USA

Politics

  Domestic

Here is a side by side comparison of the Ryan plan and Bowles Simpson:
http://budget.house.gov/News/DocumentSingle.aspx?DocumentID=236151











Posted 04-13-2011 8:19 AM by Steve Cook