The Morning Call---Wiil they or won't they?

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The Morning Call

12/14/12

The Market

           

    Technical

            The indices (DJIA 13170, S&P 1419) had a rough day.  The S&P traded back below the upper boundary of its short term trading range (1343-1424); that negates the break above 1424 and puts it back into sync with the Dow within its trading range (12460-13302) as well as the previous very short term tight trading range (12982-13302, 1395-1424).  Both remain above their 50 day moving averages (13108/1414) and within their intermediate term uptrend (12934-17935, 1365-1960).

            Volume declined; breadth was negative.  The VIX rose, closing right on its 50 day moving average.  It remains between the upper boundary of its short term downtrend and the lower boundary of its intermediate term trading range.

            GLD fell big but stayed above the lower boundaries of its short term uptrend and its intermediate term trading range.

            http://www.zerohedge.com/news/2012-12-13/10-things-you-didnt-know-about-gold

Bottom line: yesterday’s down draft re-synced the Averages within their short term trading ranges as well as that tight trading pattern of the last three weeks.  The technical question is, was this pin action just a respite before an all out assault on the upper boundaries of the short term trading ranges or did it presage a move below the 50 day moving averages and toward the lower boundaries of those same trading ranges? 

With stocks at the top end of a trading range, there is no real technical incentive to Buy.  Indeed, a bounce off the upper boundary of the short term trading range is an inducement to Sell for short term traders.   

    Fundamental

    

     Headlines

            Yesterday’s economic news was generally upbeat: jobless claims and PPI were better than expected, November retail sales were up but short of estimates and while business inventories were up, sales were down.  This data helps to offset some more anemic numbers reported earlier in the week and, therefore, leaves our forecast undisturbed.

            ***overnight China’s PMI printed above expectations while European PMI’s were mixed.

            The rest of the day was a highlight film of investor confusion over the fiscal cliff (will they or won’t they?) and QEIV (what the f**k does this mean?); and as you might expect on a confusing day, nothing occurred or was said to clarify either.  As usual, confusion = lower prices.

            It is the spending, stupid (short):

            http://scottgrannis.blogspot.com/2012/12/washington-needs-to-control-spending.html

            Interpreting the Fed (short):

            http://gregmankiw.blogspot.com/2012/12/interpreting-fed.html

            Richmond Fed’ Jeffery Lacker on QEIV (medium and a must read):

            http://www.zerohedge.com/news/2012-12-14/good-cop-time-feds-voting-voice-reason-explains-his-objection-qe4eva

            Who’s zoomin’ who (short):

            http://www.zerohedge.com/news/2012-12-13/us-cleanest-dirty-shirt-or-just-kidding-itself

Bottom line:  QEIV will not help the economy nor solve the unemployment dilemma.  It will continue to distort the math of investment returns, add to future inflationary pressures, rob savers and line the bankers’ pockets.  The fiscal cliff will likely not happen and if it does it will be short lived.  Unfortunately, like QEIV, any compromise on the fiscal cliff will also probably not help the economy nor solve the unemployment problem.  It will continue the status quo, meaning below average growth for the economy as a result of too much spending, too high taxes, too much regulation.  The good news is that this is all discounted in our Models which at the moment price stocks at slightly above Fair Value.

‘As I have noted before, under similar valuation environments I have in past Bought stocks on our Buy Lists.  However, the magnitude of the potential downside from another chapter in the EU sovereign debt crisis makes me content to hold an oversized cash position and risk missing some upside if I am wrong.’

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.