I am using this morning's weakness to nibble
Steve Cook on Disciplined Investing

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Have You Seen This?


The Market
    
    Technical

    The indices (DJIA 11452, S&P 1204) had another good day.  The pin action of the last week suggests that the Averages have re-set their intermediate term trend from an up trend to a trading range (10725-12919, 1172-1372)--at least temporarily.  By that I mean that while last week mostly had the feel of a bottom, there is probably a one in four chance that we haven’t seen the worst; and as I noted in yesterday’s Morning Call, there is likely at least even odds that last week’s intraday lows will be challenged.

    Volume was low, though breadth was very strong.  The VIX has clearly re-set its trading range to much wider parameters; at current levels, there appears to be some down side which is good for stocks.

    GLD was strong and seems to be headed for a test of the upper boundary of its intermediate term up trend.  As I noted yesterday, technically this will have the affect of overextending it price-wise to the upside. So another big up day may give our Portfolios the opportunity to further chip away at this position.

    Bottom line: the indices have re-set from an intermediate up trend to a trading range.  Prices are still near the low end of that range so further selective buying continues to make sense.  That said, I think that there is at least a 50/50 chance for a re-test of the last week’s intraday lows; therefore, there is no reason to go all in.

    For the bears amongst you (short):
    http://www.ritholtz.com/blog/2011/08/turning-japanese-spx-vs-nikkei-index-10-year-lag-2/

    Fundamental
         
     Headlines

    The juice for yesterday’s rally was provided by (1) a better than expected Japanese second quarter GDP report and (2) a manic merger Monday: Google buying Motorola Mobility; Times Warner buying Insight Communications from Carlisle; Transocean buying Aker Drilling.  In truth, I suspect that the latter had the most profound influence in that it suggests that corporate America considers itself undervalued.  And if our Model is anywhere near accurate, that would be a correct judgment.  As I noted above, I don’t believe it time to get jiggy with stocks; but many stocks have become attractively valued in the past week.

    We did get some disappointing news in the form of the NY Fed’s August manufacturing index.  But (1) this is a secondary economic indicator and (2) when viewed in the context of the flow of economic data, it is no less reflective of a sluggish economy than it is of one in recession.

    Bottom line: the S&P is now undervalued by roughly 10% as calculated by our Model.  More important, numerous stocks in our Universes have reached their Buy Value Range.  Our Portfolios have been gradually accumulating shares in this environment and, as long as the values persist, will continue to do so.  That said, as I discussed above, the technicals suggest that the need for caution. 

    Doug Kass gives some substance to the investment uncertainties that we face (medium):
    http://www.thestreet.com/story/11220366/1/kass-thrown-for-a-loop.html

    The latest from Jeremy Grantham (medium):
    http://www.investmentpostcards.com/2011/08/16/jeremy-grantham-sp-worth-no-more-than-950/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+wordpress%2FVYxj+%28Investment+Postcards+from+Cape+Town%29

Economics

   This Week’s Data

    July housing starts declined by 1.5%, though this was slightly better than expected; building permits were off 3.2%, worse than anticipated.

   Other

    John Hussman gives a lesson explaining why this economy will remain sluggish (medium/long):
    http://hussmanfunds.com/wmc/wmc110815.htm

    Warren Buffett aside, income tax rates as well as taxes paid as a percent of income are progressive (medium):
    http://mjperry.blogspot.com/2011/08/average-federal-income-tax-rates-by.html











Posted 08-16-2011 8:07 AM by Steve Cook