The Morning Call--Nothing has changed + Subscriber Alert

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The Market

           

    Technical

            Yesterday witnessed another down day.  Nevertheless, the indices (DJIA 13413, S&P 1433) closed within their (1) short term uptrends [13265-14935, 1413-1507] and (2) intermediate term uptrends [12420-17420, 1310-1910].  The S&P remained below the 1442 resistance, turned support level for the second day. A close below 1442 today will eliminate 1442 as a resistance/support level.  The next support level is 13302/1422.

            Volume fell; breadth was mixed.  The VIX jumped another 9%.  The move of the last two days is large enough that the distance element of our time and distance discipline negates the very short term downtrend.  That said, the VIX is still below the upper boundary of its short term downtrend.

            GLD fell again.  Intraday, it touched the lower boundary of its very short term uptrend and bounced---a very positive sign.  It also remains above the lower boundaries of its short term uptrend and its intermediate term trading range.

            Gold production down in South Africa (medium):

            http://www.zerohedge.com/news/2012-09-26/39-south-african-gold-production-now-offline

            Bottom line:  stocks experienced initial follow through from the down Monday and Tuesday; but I am still hesitant to call three down days a trend.  That said, every downtrend started with at least three down days in a row.  In addition, the breach of the S&P 1442 level supports the notion that there could be further downside. 

Nevertheless, the primary trends are up and will remain so until they are not.  As long as this is so, it provides the opportunity to make sales where appropriate. So I will continue to focus on the Sell side except for GLD.

            Market performance in October in election years (short):

            http://blog.stocktradersalmanac.com/post/Market-Casts-its-Vote-in-October-SPX

            Update on the Shanghai Composite (short):

            http://advisorperspectives.com/dshort/commentaries/Shanghai-Composite-Update-120926.php

    Fundamental

            Yesterday’s economic news was slightly negative. While weekly mortgage and purchase applications turned up, August new home sales were really lousy.  That along with the continued protests in Spain and a resumption of violence in Greece, kept investors nervous throughout the day.  Hence the drift lower all day.

    

            The new Greek unrest is more evidence that the EU tail risk is re-emerging (or as I have contended, never went away).  It doesn’t guarantee it; but as a friend of mine used to say  ‘if you want a guarantee, go buy a Sears refrigerator’. 

But a few euphoric days following the ‘all in’ announcements of  Draghi and Bernanke notwithstanding, there have been no policy actions that would lead one to conclude anything has changed.  In the case of both Span and Greece, no matter what austerity measures have been enacted and how much bailout money has been received, the results have always fallen short of the stated objective, requiring more bail out money contingent on still more austerity and pissing off the electorate even more.  That has been the pattern and that hasn’t changed.  The only thing that has, is that the continent is in worse economic shape than ever---not a condition likely to make solving a bankruptcy problem any easier.   So while some investors may still be unwilling to acknowledge the existence of tail risk and Spain and Greece manage to quell the current unrest, it is clear that (1) it will not be smooth sailing for the PIIGS regaining fiscal solvency and (2) plenty of tail risk remains. 

            Nothing has changed (medium):

            http://www.washingtonpost.com/blogs/ezra-klein/wp/2012/09/26/europe-still-has-that-pesky-economic-growth-problem/

            A solution still evades the eurocrats (medium):

            http://www.nakedcapitalism.com/2012/09/in-europe-its-debt-vs-jobs.html

           

Bottom line: stocks overvalued (as defined by our Model), reality seems to be taking its turn at bat and that combination does not make for higher stock prices.  To be sure, Draghi can make all statements he wants about his intent; but without substantial fiscal reform from the politicians and enormous political reform in the governmental machinery and workings of the EU, it is just so many words and/or so much money printing---neither of which do anything to lessen the tail risk of a sovereign or bank insolvency. 

‘That said, remember that our forecast is for Europe to ‘muddle through’.  Where I part company with the crowd is (1) how you value a ‘muddle through’ scenario---I happened to think that it will be painful and long lasting and (2) the odds of this scenario not happening [only slightly better than even] and the downside if it doesn’t.’

            Reality is hell (short):

            http://www.thereformedbroker.com/2012/09/26/castle-on-a-cloud/

            What if the Fed is wrong (medium):

            http://www.ritholtz.com/blog/2012/09/what-if-the-fed-has-it-all-wrong/

            The latest from SocGen (short):

            http://www.zerohedge.com/news/2012-09-27/socgens-albert-edwards-lowers-equity-allocation-minimum-fears-fed-will-destroy-world

            Not to be left out, the Bank of China joins the easing fest (short):

            http://www.zerohedge.com/news/2012-09-27/overnight-sentiment-better-china-joins-global-easing-fest-sort

      Subscriber Alert

            At the Market open this morning:

            Our Portfolios are going to take advantage of the recent modest decline in GLD price to up their exposure by another 1-1 ½%.

            In addition, in the High Yield Portfolio:

           

            The price of Kimberly Clark stock has traded above the lower boundary of its Sell Half Range.  Accordingly, it is being reduced to a one half position.

            NuSkin Pharmaceuticals has traded below an important support level, so its position is being pared to a one half position.

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.