Investors should have paid more attention to the durable goods number
Steve Cook on Disciplined Investing

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The Market
    
    Technical

    The indices (12394, S&P 1320) finally got a bounce yesterday, though not much and on little volume.  They remain within their intermediated term up trends (12266-15684, 1289-1718).  Short term they are in search of a lower boundary to their new trading range.  Possible candidates include the lower boundary of intermediate term up trend (12266, 1289) and the shoulder line of the recent inverse head and shoulders (11995, 1293).  The upper boundary is the recent high 12919, 1372. 

I continue to think that the most important levels to watch right now are (1) the down trend off the recent high [12529, 1336] and (2) the aforementioned lower boundary of the intermediate term up trend.

    Volume was light; breadth continued to do better.  The VIX was down but finished within its current trading range.

    GLD was flat but still closed a tad above the lower boundary of its former short term up trend.

    Bottom line: the strong underlying momentum in stock prices is in the midst of a test.  The critical point will be a challenge to the lower boundary of the intermediate term up trend simply because it marks the trend line back to the March 2009 low.  Given that this level is amazingly close to our Model’s Fair Value, I can see that challenge going either way.  Indeed, as I have already noted, when, as and if it happens, our Portfolios will likely put some money to work.

    Margin debt near record highs (short):
    http://www.zerohedge.com/article/levered-beta-uber-alles-nyse-borse-margin-debt-jumps-three-year-highs-investor-net-worth-rem

   Fundamental
     
    Headlines

    The chattering class spent the day mourning the loss of CNBC’s Mark Haines; everything else took a back seat.  That was made easy enough by the fact that there wasn’t much economic news: weekly mortgage applications were stronger than anticipated, April durable goods orders were disappointing. 

However, absent Haines death, my guess is the latter number would have gotten more attention.  After all, the only private sector of the economy that has shown any consistent strength in the recent recovery has been the industrial sector; and this stat coupled with the recently reported poor regional production managers’ indices raises concerns.  If the business sector is starting to slow at the same time that QE2 is winding down, this may force additional downward revisions in Street GDP estimates (see below).  At the moment, I am not worried about our own forecast because we are at the low end of consensus.  However, if analysts start marking their estimates down, there could be further downside in the Market.

The other factor worth mentioning is the faltering in the recent dollar rally.  As you know, stocks and commodities have been inversely related to the dollar in recent months (dollar down, stocks and commodities up and visa versa).  One of the driving forces behind the recent decline in stock and commodity prices has been a rebounding dollar which in turn was the result of the current sovereign debt problems in Europe (Greece)--euro bad, dollar good.  Investors seem to have concluded that a Greek default won’t be all that bad; so the dollar rally has stumbled and commodities have bounced hard.  To date, stocks haven’t done quite as well though perhaps yesterday the linkage was re-setting itself.  That said, the real issue is whether or not investors are correct in their assumption that a Greek default won’t have severe negative ramifications.  We will likely know soon enough.

As an aside, a weakening economy perhaps suggested by yesterday’s durable goods orders and rising commodity/prices are clearly not consistent.  I have no explanation for this.  But I am glad that I reversed those recent buys quickly; because when inconsistency starts showing up, cash brings me comfort.

Bottom line: values have gotten more reasonable of late, though not so much so that our Portfolios are producing new Buy candidates.  Given the continuing uncertainty generated by the EU finance ministers’ inability to deal with a bankrupt Greece, our own political class game of chicken with the debt ceiling along with a weakening technical picture, I am, at least for today, more worried about being over invested than under invested.

Economics

   This Week’s Data

    Weekly jobless claims rose 13,000 versus expectations of a decline of 5,000.
    http://dshort.com/articles/weekly-unemployment-claims.html

    First quarter GDP was revised down to +1.8% versus the prior reading of +2.2%; the chain weighted price index (inflation) was +1.9% unchanged from the first report; corporate profits came in +5.8% versus +11.4% in the fourth quarter of 2010.

   Other

    Somebody is getting nervous about a technical default on US debt (chart):
    http://www.businessinsider.com/chart-of-the-day-us-vs-uk-1-year-cds-2011-5?utm_source=Triggermail&utm_medium=email&utm_term=Clusterstock%20Chart%20Of%20The%20Day&utm_campaign=Clusterstock_COTD_052511

Politics

  Domestic

    Tom Coburn on why both parties have to give on budget reform (medium):
    http://www.bloomberg.com/news/2011-05-24/how-we-can-solve-the-debt-crisis-really-.html

    And not to beat a dead horse, more budget math (medium):
    http://advisorperspectives.com/commentaries/firstpacad_52511.php

    More on the corrupt connection between Wall Street and Washington:
    http://www.zerohedge.com/article/fed-does-it-again-80-billion-secretive-bank-subsidy-program-uncovered-providing-bank-loans-0

  International War Against Radical Islam

    Tony Blankley on Obama’s Middle East speech (medium):
    http://townhall.com/columnists/tonyblankley/2011/05/25/mideast_communications_chaos

    Greece stumbles toward default (medium):
    http://www.telegraph.co.uk/finance/economics/gilts/8534065/Greece-crisis-worsens-amid-political-stalemate.html









Posted 05-26-2011 8:18 AM by Steve Cook