Yesterday failure to hold early strength is worrisome
Steve Cook on Disciplined Investing

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Have You Seen This?


The Market
    
    Technical

    After a gang busters opening, the DJIA (10854) closed up a little bit while the S&P (1123) finished the day unchanged.  That leaves the Dow within its intermediate term trading range (10725-12919) and the S&P struggling to recover to the lower boundary of its intermediate term trading range (1172-1372).  There is some probability that 1101 not 1172 may ultimately prove to be the lower boundary of the S&P intermediate term trading range.  I am not smart enough to know if one or the other or, for that matter, either will prevail; we just wait for the Market to tell us.  That said, that stocks couldn’t hold on to yesterday’s powerful opening suggests one or more tests are coming; and since 1172 is nowhere is sight, 1101 may be the number if indeed that level can hold.

    My immediate focus is (1) whether or not stocks can hold the 10791, 1120 levels--which were the lows that the Averages reached in their recent test of the early August lows (10725, 1101).  Clearly they were higher lows than the early August low.  If stocks can bounce from those levels or higher, they will be setting a pattern of higher lows which may indicate that the worst is over and (2) if stock prices are not strong enough to hold 10791, 1120, then they certainly need to hold 10725, 1101 in order to keep the trading range in tact.

    Volume was down from last week’s levels; breadth improved a bit.  The VIX was down fractionally but remains near the upper boundary of its current trading range--which is not a good sign for stocks.  Finally, our own internal indicator continues to hold up well and is not giving any hint of internal weakness.

    GLD absolutely smoked again.  It has now touched the upper boundary of both its intermediate and short term up trends. So this morning, our Portfolios are going to Sell some more.  I recognize that (1) GLD may be going parabolic and hence have much more to run and (2) I have already been premature once and could be making the same mistake again.  However, I simply can’t ignore our Price Disciplines.  For those of you that expressed violent disagreement with our Portfolios’ first sale, (1) you have clearly been right and (2) this decision is a price decision not a fundamental one, i.e. I agree that all the economic signs point to more fiscal irresponsibility and  more debasement of currencies.  But this decision is no different than me loving CR Bard but still selling a portion of the holding when it reaches an absurd valuation.

    Cramer on gold (2:45 minute video):
    http://www.thestreet.com/video/11226936/cramer-gold-is-a-currency-not-a-bubble.html?puc=_booyah_html_pla1&cm_ven=EMAIL_booyah_html&s=1#1123541128001

    And this from a technical perspective (short):
    http://www.chrisperruna.com/2011/08/21/a-gold-climax-top/

    Bottom line:  I am a little unclear as to the where the lower boundary of this Market’s current trading range is located, assuming that stocks are in a trading range and that the worst is over. The good news is that the indices have given us one test and held at a higher level.  Even so, there will likely be more tests.  Indeed, stocks failure to hold yesterday morning’s strong opening may well be signaling that another test is coming soon.  However, with each successful test, if they are successful, the strength of support will grow. I remain very cautious; but at current valuation levels I am still willing to average into stocks that have traded into their Buy Value Ranges.

    This chart is an interesting look at how the consumer staples stocks are performing relative to the consumer discretionary stocks and what that might mean for the Market (short):
    http://www.minyanville.com/businessmarkets/articles/investing-strategies-equity-markets-summer-crash/8/22/2011/id/36469?camp=featuredslide&medium=home&from=minyanville

    Fundamental
 
      Headlines

    Yesterday started out a very positive note: the Libyan civil war seemed to be reaching the end game. Investors began anticipating the return of that country’s oil production and its impact (down) on oil prices.  While that is unquestionably a major plus, estimates of when that production will be back in full swing range from six to eighteen months; and the recognition of that fact sort of cooled the initial enthusiasm.

    However, as the day wore on, financial stocks were subjected to another beat down and gold was soaring as concerns about the EU fiscal mess again surfaced.  I don’t know how many times I have to say this; but until the euro political class addresses the sovereign debt issues in a manner that alleviates concerns about banking system, this Market may turn into one of those Chinese water torture tests that completely guts investor confidence and forces me to incorporate the much feared ‘double dip’ into our forecast.
    http://pragcap.com/merkel-we-will-not-be-bullied-by-the-markets

    The latest from Mohamed El Erian (medium):
    http://advisorperspectives.com/commentaries/pimco_82211.php

    Investors also started worrying/thinking about Bernanke’s Friday Jackson Hole speech.  I am sure that speculation will run rampant on the content of this address and every new piece of news will be judged on its potential impact on that speech/policy announcement.  So this week we could see a continued high level of volatility.

    Finally, there was one economic indicator reported, that of the Chicago Fed business activity index and it was a positive surprise.  Of course, it is a secondary indicator and no one paid any attention to anyway.  But as long as I am on the subject of Fed bank economic indices, I thought this piece on the Philly Fed index that caused so much heart burn last week was interesting:
    http://www.ritholtz.com/blog/2011/08/the-fear-of-self-fulfilling-prophecies/

    Bottom line:  stocks are undervalued and they will likely remain so at least until the leadership of the western world returns from lying on the beach and drinking marguerites.  The problem, of course, is that once they get back if they continue to pursue their current policies, we will probably wish that they had stayed on vacation. 

As pessimistic as that sounds, none of this is unknown; so the question is how much of it is already in the price of stocks.  I am not smart enough to know.  On the other hand, (1) I do have confidence in our Price Disciplines and (2) I don’t believe the US economy is at the same level of risk as it was in 2008.  So I believe that any stock bought off our Buy Lists today will look like a great purchase eighteen months from now.  The problem is what happens in the meantime; and for that I rely on the technicals. 

    Barry Ritholtz latest thoughts on the Market (medium):
    http://www.washingtonpost.com/smacked-by-big-market-swings-investors-should-alter-their-outlook/2011/08/18/gIQAriG8RJ_story.html

    And the latest from Doug Kass (medium):
    http://www.thestreet.com/story/11227072/1/kass-selling-storm-might-be-clearing.html?puc=_atb_html_pla3&cm_ven=EMAIL_atb_html

    Richard Russell thinks that the worst may be behind us (short):
    http://www.investmentpostcards.com/2011/08/22/richard-russell-fair-chance-that-most-of-bear-market-is-behind-us/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+wordpress%2FVYxj+%28Investment+Postcards+from+Cape+Town%29

    A great look at the Market (it’s too pessimistic):
    http://scottgrannis.blogspot.com/2011/08/this-market-seems-way-too-fearful.html

 
Economics

   This Week’s Data

   Other

    The latest reading on the Baltic Dry Index (short):
    http://www.bespokeinvest.com/thinkbig/2011/8/22/baltic-dry-index-up-16-in-a-week.html

    The consumer continues to rebuild his balance sheet (short):
    http://scottgrannis.blogspot.com/2011/08/consumers-credit-card-health-has.html

Politics

  Domestic

    More shenanigans in emigration (short):
    http://michellemalkin.com/2011/08/22/white-house-deportation-waivers-by-executive-fiat/

    And even worse: S&P CEO gets fired (medium):
    http://www.zerohedge.com/news/sp-board-fires-ceo-telling-truth-be-replaced-coo-citibank












Posted 08-23-2011 8:26 AM by Steve Cook