S&P now back to Fair Value; technicals rule
Steve Cook on Disciplined Investing

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The Market
    
    Technical

    The indices (DJIA 11952, S&P 1271) are (1) in a short term down trend (11958-12338, 1271-1314) and are challenging the lower boundary of that trend.  Given the lack of any meaningful rebound yesterday, it may indicate a mounting momentum to the downside, (2) searching for a lower boundary to its new intermediate term trading range.  Upper boundaries are 12919, 1372.  Candidates for lower boundary are 11552/11257 and 1247/1220.

    Volume was modest; breadth improved slightly.  While the VIX traded up, it remains within its current trading range.

    GLD traded down through the lower boundary of its short term up trend.  Support exists at the lower boundary of its intermediate term up trend which is only 3-4 points lower.  If it breaks the latter boundary, our Portfolios will likely lighten up.

    Bottom line: the good news is that Averages are back trading in unison; the bad news is that they are weak and appear likely to get weaker.  Ultimately though, that will lead to a buying opportunity.  What we need now is to see the Averages find support and hold it.  When that occurs, our Portfolios will use the cash that they raised to take advantage of those new buying opportunities.

   Fundamental
 
      Headlines

    There was no economic release yesterday.  We did get two M&A announcements: (1) the acquisition of Timberland by VF Corp and (2) the merger of Allied World Assurance with Transatlantic Holdings.  I view these transactions positively, indicating that corporate America seems to believe that it is priced attractively.

    I actually thought that the above headlines along with the technical pressure to rebound from Friday’s oversold condition would lead to a decent day.  Not so.  The only other news was Greece related: (1) the downgrading of its credit rating by S&P [again] and (2) a discussion of the time table of a series of meetings by EU authorities which are supposed to resolve to the Greek tragedy by next Friday.  I have said repeatedly that this is not going to end well; and that end may well being drawing nigh.  It may be that investors are also coming to that realization.

    Here is the first quantification of US financial exposure to the PIIGS that I have seen in over a year.  Skip the first section (Is it time to buy a house).  It is a bit long but today’s must read:
    http://www.ritholtz.com/blog/2011/06/time-to-get-outraged/

    Bottom line: equity values are becoming more reasonable as reflected by the growth in our Buy Lists.  Much of the heart burn that has led to this decline is related to the fear of a ‘double dip’ which, at this moment, I don’t think a likely outcome.  However, I have no clue how long this heartburn lasts and whether it becomes more severe.  Certainly, this week’s full schedule of economic news could provide an answer. So could the outcome of the EU/Greek/PIIGS sovereign debt problem.

    In the end, since our Portfolios have a growing number of Buy candidates, technical factors will determine the timing of the re-investment of cash.

  
Economics

   This Week’s Data

    The May producer price index (PPI) rose 0.2% versus an expected decline of 0.6%; core PPI increased 0.2% in line with estimates.

    May retail sales fell 0.2% versus forecasts of drop of 0.6%; ex autos, sales jumped 0.3% versus an anticipated +0.1%.
    http://www.calculatedriskblog.com/2011/06/retail-sales-declined-05-in-may.html

   Other

    Liz Ann Sonders is usually too ‘middle of the road’ in her economic forecast for my taste; but here I think she nails the likely course of the economy (medium):
    http://advisorperspectives.com/commentaries/schwab_061011.php

    I have mentioned several times a slowdown in economic growth in China as one of the sources of our own recent drop in economic activity.  Here is a very thorough analysis of what is going on in the Chinese economy and why the worst is probably over (long):
    http://www.investmentpostcards.com/2011/06/14/china%e2%80%99s-growth-down-to-9-2-time-to-start-nibbling-on-stocks/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+wordpress%2FVYxj+%28Investment+Postcards+from+Cape+Town%29

Politics

  Domestic

More mischief in Obamacare (medium):
http://www.jewishworldreview.com/cols/will06111.php3

    And this on the Boeing versus the NLRB (short):
    http://www.powerlineblog.com/archives/2011/06/029231.php








Posted 06-14-2011 8:08 AM by Steve Cook