What me worry?
Steve Cook on Disciplined Investing

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Have You Seen This?


The Market
    
    Technical

    The Averages (DJIA 12266, S&P 1312) staged a comeback yesterday and closed within their intermediate term up trend (11919-15341, 1253-1682) and their short term trading range (11554-12405, 1247-1345).

    The S&P clearly held the 1290-1310 zone; so it continues to build a solid right shoulder to the developing reverse head and shoulders. A move above 1345 would point to higher prices.  On the other hand, despite yesterday’s rally, it still closed below its 50 day moving average.

    Volume fell; breadth improved dramatically.  The VIX fell but remained within its short term trading range; and the NYSE reported margin debt at near record highs (not good).

    Gold (GLD) closed flat for the day and remains solidly within its intermediate term up trend.

    Bottom line: the indices must resolve their differences in trend sooner or later.  The developing reverse head and shoulders formation suggests that it will be decided to the upside (i.e. the short term trading range resets to an up trend).  However, our time and distance discipline has taught me never to bet on or even guess what the Market is going to do.  So for the moment we await for either the intermediate term up trend to go flat or the short term trading range to turn up.  We have an investment strategy in response to either course which I have already outlined.  In the meantime, we wait.

   Fundamental
   
     Headlines

    So much for investor concern about the US credit standing.  Clearly they weren’t worried enough to produce any price follow through--or the bears were just using the news as an excuse to try to push stocks down.

    Not helping the bears was the very positive housing numbers which were the only real news of the day save some after hours earnings reports.  As I reported in yesterday’s Morning Call, housing starts were almost triple expectations, while building permits were nine times the forecast number.  That got trading off on the right foot and stocks remained in the plus column virtually all day. 

To be sure, these are positive stats.  However, they almost had to be.  As you know, housing activity has acted as a drag on the economy.  Sooner or later, it either had to improve or it was going to start impacting the Street’s economic growth assumptions.  And in fact, as I have noted previously, growth estimates are beginning to come down. Indeed, I raised the prospect that our below consensus forecast may even be too high.  Not that this lowering in consensus forecasts is all related to housing; but lousy housing numbers certainly contribute to a lousy economy.  The point here is that this positive report (1)  provides me with some encouragement that our outlook is right on (2) but in no way makes me inclined to raise our growth rate assumptions.

    The other important data point worth mentioning is the after hours earnings reports of Intel, Yahoo and IBM yesterday.  These are three tech giants and they all had better than expected profits.  This should get today’s trading off to a positive start.
   
    Bottom line:  stocks as calculated by our Model are overvalued.  I can’t see this situation being corrected by an improvement in the fundamentals because as I have noted frequently in the last couple of weeks, the fundamentals have at best been mixed.  So the only other way to solve this disparity is for prices to decline.  However, the technicals look to be pointing at higher prices, perhaps significantly higher; and they are supported by a complacency among investors as measured by the VIX and ever more money being pumped into the banking system by the Fed.  If that occurs, our Portfolios will strive to participate through some hedged investment positions but they will not cease to follow our Sell Discipline.

Economics

   This Week’s Data

    The International Council of Shopping Centers reported weekly sales of major retailers up 0.3% versus the prior week and up 3.0% versus the comparable period a year ago; Redbook Research reported month to date retail chain store sales up 0.2% versus the similar time frame last month and up 5.1% on a year over year basis.

    Weekly mortgage applications rose 5.3% and purchase applications surged 10.0%.
    http://www.calculatedriskblog.com/2011/04/mba-mortgage-purchase-application_20.html

   Other

    Update on bank lending; it’s up but not by much (short):
    http://scottgrannis.blogspot.com/2011/04/bank-lending-update.html

Politics

  Domestic

    The new, new version of Medicare (medium):
    http://www.nationalreview.com/articles/265073/road-ipab-rich-lowry

  International

    More on the Greek debt problem (medium)
    http://ftalphaville.ft.com/blog/2011/04/19/548631/hurdles-to-a-greek-debt-restructuring/

    This is an up close and personal look at what is going on in Ireland today (if you have ten minutes to watch this video, it is very instructive)
    http://www.zerohedge.com/article/max-keiser-irish-eco-hell








Posted 04-20-2011 8:02 AM by Steve Cook