Friday, October 26, 2012

The Morning Call--Up but not away

The Morning Call

10/26/12

I am going to fade the Closing Bell again this week.  OU plays Notre Dame at home.  So I leave after publishing this note for another party/football weekend.  See you on Monday morning.  Go Sooners.

The Market
           
    Technical

            The indices (DJIA 13103, S&P 1412) tried to rally again yesterday with a bit more luck.  However, the assault on the triple support level (short term uptrend, 50 day moving average, 13302/1422 support) continued.  The Dow closed for the third day below 13302 and for the fourth day below its 50 day moving average (13346).  The S&P finished for the third day below 1422 and its 50 day moving average (1433).  Without more follow through to the upside, at the close today, the Averages will confirm the break of all components of the triple support level.  That’s not positive.

            As I noted yesterday, the task now is to identify the lower boundary of a newly re-set short term trading range.  The nearest candidate is a minor support level at 12973/1395.

            The indices remain well within their intermediate term uptrends (12627-17627, 1331-1929).

            Volume declined; breadth improved somewhat.  The VIX fell slightly but remains near the upper boundary of its short term downtrend and above both its 50 day and 200 day moving averages (not positive).  It is also above the lower boundary of its intermediate term trading range.

            GLD was up a bit but is trading below the upper boundary of a developing very short term downtrend.  On the other hand, it is well above the lower boundaries of its short term uptrend and its intermediate term trading range.

Bottom line:  stocks tried to rally again yesterday on the back of some pretty solid economic numbers reported early in the day.  Yet once again, even though the indices ended up on the day, they could not finish any where near their intraday highs nor did they recoup much of the ground lost since challenging all components of the triple support levels.  So the underlying strength of this Market deteriorated further. 

Support exists at 12973/1395 (minor support), 12973/1375 (the 200 day moving averages) and the lower boundaries of their intermediate term uptrends.  If I had to guess, I would view the latter as the most likely area to provide stabilization---all other things being equal (i.e. no collapse in EU).

    Fundamental
    
     Headlines

            The day started with some positive economic news: weekly jobless claims fell more than anticipated and, more important, September durable goods orders were stronger than expected.  The latter along with Wednesday’s solid new home sales continues the string of better growth among the primary economic indicators and helps to further the distance of the economy from recession---at least for the near term.  It also keeps me confident in our forecast.

            Nevertheless, it is important to point out that conditions could begin to change radically after the elections.  As I have noted, an Obama victory will likely raise the odds that we will experience the ‘fiscal cliff’, while a Romney win may improve the chances of some resolution to that problem.  On the other hand, if he gets tough on bringing the budget deficit under control and fires Bernanke, we will probably get a recession by mid 2013---though as I have said, that is really the good news scenario (take less pain sooner versus more pain later).

            David Einhorn on Bernanke and Fed policy (long but a must read):

            The point here is that as happy as an improvement in the readings that we are getting on the economy makes me, the country is nearing a policy crossroads that could profoundly influence (assuming Romney does what he has said that he is going to do) our forecast for 2013 and beyond.

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.’
   
            The latest from Hugh Hendry (medium):

            China as a leading indicator (short):

            Will France follow Spain into the crapper (medium):

    Subscriber Alert

            The stock price of Sigma Aldrich (SIAL-$70) has traded into its Buy Value Range.  Accordingly, it is being Added to the Dividend Growth and Aggressive Growth Buy Lists.  Both Portfolios own a full position in SIAL, so no new shares will be Bought.

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