We may have seen the bottom; but it will likely be subject ot more testing
Steve Cook on Disciplined Investing

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The Market
    
    Technical

    The Averages (DJIA 11516, S&P 1162) rallied hard yesterday, leaving the DJIA solidly within its intermediate term trading range (10725-12929).  Unfortunately, the S&P remained below the lower boundary of its intermediate term trading range (1172-1372).  Yesterday was the fourth day of its challenge to the 1172 level and that is usually sufficient to confirm a break. And I am making that call. 

So the issue is now, is 1101 the real lower boundary (see yesterday’s Morning Call for a full discussion) or has the S&P re-set to a down trend?  Arguing for the former is that the indices rallied off the 10791, 1120 level (the low in the recent test of the early August lows [10725, 1101]--(again, see yesterday’s Morning Call for more detail); so we now have a successful test of the August lows at a higher low.  Further, yesterday’s rally was on decent volume and breadth.

On the other hand, while the DJIA is trading above the very short term down trend line off its late July high, the S&P is not and won’t be till it breaks the 1210 level.  Therefore, the Averages are somewhat out of sync; plus it is uncertain where the lower boundary of an S&P trading range is located if indeed it is in a trading range.  Finally, while the VIX was off yesterday, it remains at elevated levels; and that is not positive for stocks.

GLD (177) suffered some serious whackage.  Given the fundamental environment, I don’t see much likelihood of a trend reversal; but it could decline to 168 and not break its short term up trend, to 164 and remain above the UPPER boundary of its long term up trend, to 157 and not break through the lower boundary its intermediate term up trend and to 99 without penetrating the lower boundary of its long term up trend.  The point here is that I don’t have to challenge my own forecast regarding inflation or the likelihood (or lack thereof) of a sudden epiphany by our ruling class that would significantly alter the fiscal/monetary/regulatory landscape to accept that GLD could go lower, at least in the short term. 

Bottom line: yesterday was a good day technically speaking: the 10791, 1120 level held and on good volume.  However, I am under no illusion that stocks are off to the races, simply because nothing has occurred to reduce the risks that everyone was worried about Monday.  Certainly, the odds are now slightly better that stocks have seen the worse on the general premise that investors recognize that those risks are properly reflected in current prices.  That said, I hate buying stocks following a 4% up day.  So I await another test to put more money to work.

    More technical analysis on gold (short):
    http://www.minyanville.com/businessmarkets/articles/jeff-cooper-jeffrey-cooper-market-analysis/8/23/2011/id/36502?camp=featuredslide&medium=home&from=minyanville

    Fundamental
    
     Headlines

    Yesterday’s US economic news was not great: the Richmond Fed’s manufacturing index fell as did new home sales.  Investors didn’t seem to care; though according to the talking heads, they did get excited about positive manufacturing data out of China and Germany, indicating that the Market continues to be more sensitive to foreign than domestic economic data.  It may be that the ‘double dip’ fear hinges on how well the rest of the world performs economically-speaking.

    Again the talking heads were touting the hope of monetary easing that would be revealed in Bernanke’s Friday speech.  I can’t see it.  One, there is already more money on bank/corporate balance sheets that can be spent or loaned out than could possibly put to work in the next two to three years.  Two, why would gold be down $50 an ounce yesterday if investors thought there was going to be additional easing?  Three, the Fed has been subject of a lot of criticism for its overly easy money policy.  That said, I have no doubt that Ben is getting pressure from the commander in chief to contribute to His re-election; and to be sure, cynicism has been the best philosophy in anticipating the moves by our political class.  We will know Friday.

    A somewhat different view (medium):
    http://pragcap.com/a-look-inside-the-feds-limited-toolkit

    Bottom line:  stocks are undervalued as calculated by our Model, assuming the euros can get their act together.  Until that happens, I don’t see stock prices getting away to the upside; and if it doesn’t happen, then I will likely have to lower the growth assumptions in our Model.  However, the issue is how much of the latter is already in the price of stocks?  I don’t know, but clearly the potential for multiple country restructurings  is not an unknown.  In the meantime, any further tests of the early August low can be used to continue to build our Portfolios’ equity position.

    An interview with the Dutch finance minister (medium):
    http://www.spiegel.de/international/spiegel/0,1518,781622,00.html

    The earnings outlook continues to look positive (short):
    http://www.investmentpostcards.com/2011/08/24/earnings-%e2%80%93-outlook-worsens-but-growth-cycle-still-alive/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+wordpress%2FVYxj+%28Investment+Postcards+from+Cape+Town%29

 
Economics

   This Week’s Data

    The International Council of Shopping Centers reported weekly sales of major retailers down 1.0% versus the prior week but up 3.0% versus the comparable period last year; Redbook Research reported month to date retail chain store sales up 0.2% versus the similar timeframe the prior month and up 3.6% on a year over year basis.

    July new home sales fell 7.3% versus expectations of a 0.6% decline.
    http://www.bespokeinvest.com/thinkbig/2011/8/23/new-home-sales-not-as-bad-as-they-look.html

    The Richmond Fed’s August manufacturing index came in at -10 versus July’s reading of -1.

    Weekly mortgage applications dropped 2.4% while purchase applications plunged 5.7%.
    http://www.calculatedriskblog.com/2011/08/mba-mortgage-purchase-activity-at.html

    July durable goods orders rose 4.0%, twice expectations of up 2.0%.

   Other

    Two anecdotal pieces of evidence that the economy is slowing (both short):
    http://www.calculatedriskblog.com/2011/08/dot-vehicle-miles-driven-decreased-14.html
    http://www.calculatedriskblog.com/2011/08/ata-trucking-index-decreased-13-in-july.html

Politics

  Domestic

When the NY Times understands a policy is bad, there must be something to it (short):
https://mail.chapmanhext.com/owa/?ae=Item&t=IPM.Note&id=RgAAAACao2ilNAElQrneCS4VkP7VBwBwSL0gAx0qRa5T2h5meP5eAAAA%2f8hKAABwSL0gAx0qRa5T2h5meP5eAAAW96vFAAAJ#x_6











Posted 08-24-2011 8:16 AM by Steve Cook