The Morning Call--Conditions aren't that good

The Morning Call

10/17/12

The Market

           

    Technical

            Yesterday witnessed another gangbusters performance from the indices (DJIA 13551, S&P 1454).  Both remained within their primary uptrends: (1) short term [13401-14232, 1440-1532] and (2) intermediate term [12554-17554, 1324-1922]. 

            While overall breadth improved, on balance volume remains weak, total volume declined and the VIX was down only fractionally---quite unusual for a big up day in price.  At this point, I will be watching the recent highs (13653/1469) as a sign of whether the last two days were a strong bounce from an oversold position or a new leg up.

            GLD rose and finished well off its interim support level (168.4) as well as above the lower boundaries of its short term uptrend and the intermediate term trading range.

            The future of gold, oil and the dollar (medium/long):

            http://www.zerohedge.com/news/2012-10-16/guest-post-future-gold-oil-and-dollar

Bottom line: the Averages clearly provided strong follow through from Monday’s bounce.  Now the question is, can they successfully challenge the recent highs (13653/1469). 

I hate sounding like a broken record, the Market’s internal structure continues to weaken (see below).  I still believe that we will see lower prices and accordingly, I remain focused on our Sell Discipline.

            S&P e-mini futures contract’s net long position is the largest since December 2008 (short):

            http://www.zerohedge.com/news/2012-10-16/equity-traders-longest-2008-will-history-repeat

    Fundamental

     Headlines

            Another day that included a big economic number---in this case, industrial production up 0.4%.  While that is not a blowout stat, nonetheless, it is difficult to maintain a recession forecast when production and retail sales (from Monday) are improving.  Also reported was weekly retail sales which were OK and September CPI which was a tad warmer than expected.  However, again, industrial sales was a positive and set the tone for yesterday’s pin action. 

            Investors also got a boost from rumors suggesting that Spain was considering taking bailout money.  That added to the upward Market momentum.  However, later in the day, in what has become a recurring theme among the eurocrats, Spanish officials denied earlier reports.  Then later, the ECB/IMF officials (now in Greece to discuss an extension of the Greek bailout) and the Greeks broke off talks.  Apparently, investors didn’t care as they continued to tip toe through the tulips.  Have I said that this is going to end ugly?

    

            Iberian pain (medium and today’s must read):

            http://www.nakedcapitalism.com/2012/10/iberian-pain-only-getting-worse-as-spanish-population-falls-portugal-goes-all-in-for-more-failed-austerity.html

            Confusion reigns (medium):

            http://www.zerohedge.com/news/2012-10-16/confusion-reigns-europe

Bottom line:  the good industrial production number following right on the heels of the better September retail sales is a positive for our sluggish growth, no recession forecast.  However, even under our outlook, stocks are overvalued; and yesterday, they got even more so. 

No matter who wins in November, the US has pain in its future.  If Romney is victorious, correcting out of control fiscal and monetary policies will be tough and likely lead to another recession---if he follows through with his campaign pledges.  If Obama wins, then we plunge headlong toward fiscal bankruptcy and inflation.  So  I repeat, no matter who wins, our economy must sober up and that will likely be an unpleasant experience.  The only difference is the timing (sooner if Romney wins) and the magnitude (less if Romney wins) of that pain.  Indeed, I am tardy in producing a 2013 forecast simply because the winner will have an influence on it (assuming Romney can/will enact his pledges).

And this ignores the clusterf**k that is going on in Europe.  The southern half of the continent is falling apart economically and all the eurocrats can do is yak, drink whisky, smoke cigars and tell each other how smart they are.  They may somehow manage to pull their chestnuts out of the fire, but I doubt it more each day. 

So with stocks overvalued and the above staring me in the face, I can’t bring myself to chase stocks up from these levels in the absence of an extraordinarily positive exogenous event.