The Morning Call + Subscriber Alert

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The Morning Call

12/20/12

The Market

           

    Technical

            Yesterday, the indices (DJIA 13251, S&P 1435) gave up some of their recent gains.  Nevertheless, the S&P closed the day above the upper boundary of its short term trading range (1343-1424) for the third day.  For a short term trend, that is sufficient to confirm the break of that trend.  It will now re-set to a short term uptrend which I tentatively have pegged at 1417-1472.

            However, the Dow failed to remain above the upper boundary of its own short term trading range.  As a result: (1) the negates Tuesday’s move above that boundary and (2) returns the Averages to their prior out of sync status.  As I have noted under our time and distance discipline both of the indices must confirm the break a trend for overall trend to re-set.

            Both finished the day well within their intermediate term uptrends (12985-17985, 1371-1966).

            Volume was flat with Tuesday’s elevated level; breadth was weak.  The VIX jumped 11%, closing back above its 50 day moving average and between the upper boundary of its short term downtrend and the lower boundary of its intermediate term trading range.

            GLD fell again, finishing for the second day below the lower boundary of its short term uptrend.  Under our time and distance discipline, a finish below this lower boundary at the close today will confirm the break.  That will likely trigger a lightening up of our Portfolios positions in GLD.

Bottom line: the technical picture became a bit more cloudy with the fall of the DJIA back below the upper boundary of its short term trading range and the S&P remaining above its comparable boundary.

When the Averages are out of sync, our Portfolios almost never initiate trades.  That said, if the Market upswing continues, our Portfolios will likely chip away at several stocks that are at critical technical levels.

    Fundamental

    

     Headlines

            We got a couple of datapoints on the housing market yesterday: weekly mortgage and purchase applications were abysmal and November housing starts were down slightly more than anticipated.  Housing has been one of the bright spots in the economy of late; so clearly these stats are a bit of a disappointment.  Nevertheless, it is way too soon to conclude that the housing market is starting to roll over.

            Once again, investors remain focused on the kabuki dance over the fiscal cliff.  Obama and Pelosi repeated their opposition to Boehner’s Plan B.  Boehner responded by indicating that he would bring Plan B to House floor today for a vote.  Neither side commented on any other aspect of the negotiations.  The good news is that the sides are still talking; the bad news is that tone of the public statement are becoming somewhat more acrimonious. 

            My opinion on the outcome of this circus hasn’t changed: we will get some agreement sooner or later but it will do nothing to improve the economy.

            Rand Paul on the fiscal cliff (medium):

            http://news.investors.com/ibd-editorials-perspective/121812-637557-fiscal-cliff-tax-debate-skirts-real-issue-too-much-spending.htm

Bottom line: stocks, in general, remain overvalued (as calculated by our Model); and this incorporates an agreement on the fiscal cliff and a muddle through scenario in Europe.  In other words, the assumptions in our Models are generally positive (a grand bargain would be very positive).  Hence, any failure to achieve those outcomes would likely bring lower prices.

The more immediate risk is with the fiscal cliff; that is, if it looks like a compromise won’t be reached, equities could be in for a rough ride.  As you know, I believe that there is a decent chance that the only thing that will push politicians to an agreement is panic in the financial markets.  The point here is that if a deal is priced into the Market and it happens, there is little upside; but if doubts are raised, then lower prices are a possibility. 

At the moment, I am happy with our Portfolios’ cash position.  Absent a grand bargain, any further move to the upside by stocks should be used to lighten up on stocks that either trade into their Sell Half Range or fail at critical technical prices in the top quarter of their Price Value Range.

            Equities as an inflation hedge.  I agree with the writer’s analysis, I just disagree with his conclusions.  He must not have been around in the mid to late 1970’s (medium):

            http://scottgrannis.blogspot.com/2012/12/equities-as-inflation-hedge.html

            Pimco’s outlook for the EU (medium):

            http://advisorperspectives.com/commentaries/pimco_121912a.php

            More problems for the EU (medium):

            http://www.spiegel.de/international/europe/imf-demands-cyprus-debt-haircut-as-precondition-for-aid-a-874085.html

    Subscriber Alert

            The stock price of Philip Morris Int’l (PM-$80) traded below the upper boundary of its Buy Value Range.  Accordingly, it is being Added to the High Yield and Dividend Growth Portfolio Buy Lists.  Both Portfolios own full positions in PM; hence no new shares will be purchased.

            The stock price of Blackrock (BLK-$208) traded above the upper boundary of its Buy Value Range.  Hence, it is being Removed from the Aggressive Growth Buy List.  No shares will be Sold.

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.