Tuesday, January 8, 2013

The Morning Calls--The perils of being early

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The Morning Call

1/8/13

The Market
           
    Technical

            The indices (DJIA 13384, S&P 1461) took a rest yesterday, but remained within both their short term uptrends (12951-13595, 1405-1473) and their intermediate term uptrends (13089-18089, 1383-1978).  This subdued pin action following a big up move is generally a positive sign that stocks are going higher.

            Volume rose; breadth deteriorated.  The VIX fell, closing below the upper boundary of its short term downtrend as well as below the lower boundary of its intermediate term trading range for the second day in a row---another plus.

            GLD declined, finishing within its short term downtrend but above the lower boundary of its intermediate term trading range.  It also closed below the lower boundary of its very short term uptrend.

            Bottom line: the momentum remains to the upside; and our strategy remains unchanged, i.e. chipping away at stocks that trade either into their Sell Half Range or to a technically important resistance level. 

            Historically, our Sell Discipline has generally moved our Portfolios into a large cash position ahead of a Market top.  The time frame can be as short as three to six months and as long as a year plus (1999-2000 comes to mind).  That Discipline can cause heart burn especially when Markets are accelerating into overvalued territory.  Certainly, this is one of those times.  I try to temper the timing of Sales by taking the technical picture into account; but in the end, our Portfolios are almost always at max cash when sentiment is at its euphoric high.  Now is the time for patience.

            GLD was unable to the recover its very short term uptrend; so momentum remains to the downside.  As a result, our Portfolios are lowering their GLD positions to 2-3%.

            For the bulls amongst you (medium):

            Chart porn for the bears (medium):

    Fundamental
    
      Headlines

            Not much news yesterday economic, political or otherwise.  The news media spent the day getting every pundit that they could find to give their 2013 forecast.  Most are fairly positive---much more so than our outlook.  Of course, many are expecting a more responsible resolution of our government’s spending problem than I; and if they are correct, I will probably have to raise our economic and Market forecasts.  But our political class is going to have to prove itself before I do that.

            Bottom line: stocks, as measured by the S&P, remain overvalued, as measured by our Valuation Model.  But as you know, it is not because our outlook is negative.  I expect (1) the economy to continue to grow albeit at a historically sub par rate, (2) corporate profits to grow, (3) inflation to remain reasonably stable and (4) Europe to continue to ‘muddle through’.  However, I believe that the economic problems in Europe, Japan and the US will cause enough heartburn that the more optimistic valuations will be repeatedly challenged.

            The math of middle class entitlements (medium):

            The ECB continues to hold the EU together with accounting gimmicks (medium):

            Along with the help of the Bank of Japan---what could possibly go wrong here?:

            Welcome to Greek bailout #4 (medium):



Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973. His 40 years of investment experience includes institutional portfolio management at Scudder, Stevens and Clark and Bear Stearns. Steve's goal at Strategic Stock Investments is to help other investors build wealth and benefit from the investing lessons he learned the hard way.

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