The Morning Call
The Market
Technical
The
indices (DJIA 13077, S&P 1408) tried to rally yesterday but couldn’t
sustain it. They closed below the lower
boundaries of their short term trading ranges for the fourth day in a row,
negating that trend.
The task now is
to find a lower boundary of a short term trading range. Candidates include (1) the former resistant
now support levels of 13302/1422. The
problem with this alternative is that they are going through their own
challenge---with both of the Averages finishing for the second day in a row
below these levels and (2) the 12973/1395 minor support level.
The indices also
closed below their 50 day moving average---the Dow for the third day, the
S&P for the second day.
They remain above
the lower boundaries of their intermediate term uptrends (12619-17619,
1339-1928).
Volume fell
while breadth was mixed. The VIX
declined (unusual for a down day in prices) but stayed within striking distance
of the upper boundary of its short term downtrend. It is well above the lower boundary of its
intermediate term trading range.
GLD closed down
for the fourth day below the interim support level, negating that support. It also closed for the second day below its
50 day moving average. It remains well
above the lower boundary of its short term uptrend and its intermediate term
trading range.
The recent
decline in GLD prices have been closely related to a stronger dollar. That strength is coming from two possible
sources:
(1)
conditions in Europe are
deteriorating and traders are selling euro denominated assets and buying dollar
denominated assets. Forgetting the fact
that the US US Europe . This trade could, of course, reverse itself
once investors realize that the least worse alternative can still be
awful---not too dissimilar to investors chasing stocks up recently because
equities were perceived as a less bad place to put their money than bonds.
Hence, all other things being equal, this strong dollar, weak gold trade may
have a short shelf life,
(2)
however, all things are never equal. In this case, it may be the investors are
starting to price in a Romney, victory assuming [the operative word] that he
changes the Fed chief and advocates tighter money [a stronger dollar]. I would love to embrace this scenario but [a]
the elections aren’t over and [b] I am not convinced at all that the GOP has
changed its stripes. So GLD still has a
place in our Portfolios. But
if Romney wins and attacks the budget deficit and easy money as he says he
will, then the long term appeal of GLD will be less. That said, that is a bet that I am not yet
ready to make beyond what I have already done---Selling our Portfolios’ trading
position in GLD.
Bottom
line: yesterday was hardly the rebound
from an oversold Market that I had expected.
Indeed, if the morning rally was that bounce back, then the triple
support level (lower boundary of short term uptrend, 50 day moving average, the
13302/1422 support) is apt to be broken.
The lower boundaries of the short term uptrend have now been taken out
under our time and distance discipline; the 50 day moving averages and 13302/1422
support level are teetering on the edge.
The total breakdown of the triple support zone may not be a fait
accompli but it is in the eighth inning.
If so, next stop
is 12973/1395 minor support, 12973/1375 the 200 day moving average and the
lower boundaries of the intermediate term uptrends
A final note,
more of our Portfolios’ stocks are either approaching or closed or right on
significant technical support yesterday; so a further plunge could trigger some
trading sales.
Our Portfolios’
GLD trading positions have been eliminated.
The holdings are now at 10%.
Fundamental
Headlines
The
economic news yesterday was on balance mixed to positive: weekly mortgage and
purchase applications were pretty bad but September new home sales were
robust---the latter being a much more important indicator of the economy in
general and housing in particular than the former.
In
addition, the Fed wrapped up its latest FOMC meeting and the accompanying
statement said little that was new.
The
Fed statement:
A
Romney Fed (medium):
Finally,
as I mentioned in yesterday’s Morning Call, EU PMI ’s
came in very disappointing.
The
eurocrats just can’t get it right (medium):
Especially
the Greeks (watch video for your Thursday morning humor):
Bottom line:
stocks are creeping back to Fair Value which is a positive; and the primary
economic indicators continue to turn in a solid performance which makes our
forecast right on.....but I continue to believe that in the absence of clarity
on how the eurocrats are going to hold the eurozone together and maintain it as
a viable economic entity, caution is essential for the principal reason that
the economic downside for the US and its banking institutions is so great. At the risk of being repetitious, I am not
saying the EU will implode. I am saying
that the probability of such is high enough and the damage it would do to our
economy is high enough, that an above average cash position is warranted at
current price levels.
We also can’t
forget about the ‘fiscal cliff’. As I
noted yesterday, the odds of it occurring have increased of late; however, I
don’t think that it carries the magnitude of downside that an implosion in the
EU does. In addition, as I have also
mentioned, a Romney victory is more likely to lead to more immediate economic
pain than an Obama win---we should be so lucky.
Investors have to come to grips with this idea (Romney win, more
immediate pain) and that could cause stock price heartburn while it is
happening.
All that said, a
decline to the 1270-1330 zone would find me a buyer.
Warren
Buffett thinks that stock prices are ‘difficult’ (short):
Investing for Survival
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