That was a surprise?
Steve Cook on Disciplined Investing


Have You Seen This?


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Have You Seen This?

The Market

    The indices (DJIA 12201, S&P 1305) had a rough day though they remain well within both their intermediate term up trend (11905-15327, 1250-1679) and their short term trading range (11554-12405, 1247-1345).

    Yesterday’s pin action keeps in tact the development of a reverse head and shoulders on the S&P.  It also served to move the DJIA into a similar pattern.

    Volume remained high, breadth cratered and the S&P fell below its 50 day moving average..  The VIX was up (1) rebounding off the lower boundary of its short term trading range, (2) but not nearly as much as I would have expected on such a big down day.  This is either a very positive sign for stocks or an indication that complacency is dangerously high. 

    Gold (GLD) was up and is tracking very well in its intermediate term up trend.

    Bottom line: if prices stabilize in the 1290-1310 zone, the reverse head and shoulders formation will continue to develop.  This is a bullish technical pattern; so a subsequent break above 1345 would point to higher prices.  On the other hand, a couple more down days like yesterday will negate that formation and shift my focus to the current lower boundaries of the intermediate and short term trends (1250, 1247). 

Bear in mind that in the end these two divergent trends have to reconcile--either the intermediate term up trend goes flat or the short term trading range turns up.   If the S&P does test/break the lower boundary of its intermediate term up trend, it will be priced below Fair Value.  If it breaks the upper boundary of its short term trading range, it will do so while fighting the calendar which is about to change from positive to negative for stocks [sell in May and go away].


    Dominating investor attention yesterday was the S&P downgrading its outlook for US debt.  To be clear, that is not a downgrade of the rating itself; it is an indication that if conditions don’t improve, a downgrade will be forthcoming.  And, it is hardly more than stating the obvious.  Furthermore, this is from the same group who aided and abetted the financial crisis via rating junk as AAA and have been consistently behind the curve on the EU sovereign debt problem. 

Yet stocks got whacked.  I just can’t believe that this was one of those ‘emperor’s new clothes’ moments.  After all, it is not like the historically high budget deficit, the record level of debt to GDP, the obnoxious excesses in spending of which both parties are guilty are unknown.  Nor is it not obvious that the current group of  clowns running our country will not likely be able to do anything substantive about any of the above problems until after the 2012 elections, if then. 

If yesterday truly was a wake up moment, then it will not be a one or two day phenomenon. On the other hand,  maybe we are just looking at one of those sell offs from  an overbought Market that used the S&P announcement as an excuse.  We will know in the next couple of days. 

Two other items bear mentioning: (1) China raised the required reserves on bank deposits--again.   The point being that the world is tightening monetary policy while our Fed just keeps printing money.  (2) the Greek finance minister is rumored to have asked the IMF and EU to restructure its debt [in essence defaulting]--this problem is not going away and (3) as a follow on to the Columbia free trade agreement, US trade representative Kirk reported that Panama and the US had come to terms on that agreement.  That is a positive.

Bottom line: stocks as calculated by our Model are overvalued.  Whether yesterday’s price action was a sell off from an overbought condition or investors recognizing that the fundamentals don’t justify current prices, we won’t know for a couple of days.  If the Market is headed lower, then our Portfolios are fairly well prepared with a big cash position, a 3% holding in the VXX and a 10% holding in GLD.  If it is headed higher, then as I outlined in last week’s Closing Bell, we will Add to our foreign ETF’s, our GLD holding and perhaps take a trading position in the S&P ETF; plus we will strictly adhere to our Sell Half Discipline. 

   This Week’s Data

    March housing starts rose 7.2% versus expectations of a 2.5% increase: building permits were up 11.2% versus estimates of up0.2%.


    Where the money is (for taxes) (short):

Posted 04-19-2011 8:07 AM by Steve Cook