The Morning Call--EU seems to be going from bad to worse

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The Morning Call

2/22/13

The Market

           

    Technical

            The indices (DJIA 13880, S&P 1502) traded off again yesterday, but still closed well within both (1) their short term uptrends [13449-14103, 1463-1533] and (2) their intermediate term uptrends [13390-18390, 1415-2010].

            Volume declined slightly, although it remained at an elevated level.  The high volume on the two days of this decline is not a good omen for future direction.  Breadth was mixed.  The VIX rose but remains within its intermediate term downtrend.

            http://downtowntrader.com/declining-breadth-needs-to-be-watched/

            GLD bounced, but still finished below the lower boundary of its short term downtrend.  It wouldn’t surprise me if it traded back inside that downtrend.  In other words, a further rise would only keep it within a defined down move.

Bottom line: the emotional level moderated somewhat yesterday.  I continue to believe that the most that we can say technically at this point is that stocks are correcting with the boundaries of their short and intermediate term uptrends.  It is also probably way too soon to either give up on prices advancing to the 14140/1576 area or, conversely, assume that this is the beginning of a reversion in price back to Fair Value.  Follow through.

            Insider sales hit two year high (short):

            http://www.zerohedge.com/news/2013-02-21/retail-investors-sheared-again-insider-sales-hit-two-year-high

            Hedge funds reached record net long position in fourth quarter 2012 (short):

            http://www.zerohedge.com/news/2013-02-21/hedge-funds-have-never-been-more-bullish-stocks-and-bearish-gold

            Is this the end of low volatility (short):

            http://blog.stocktradersalmanac.com/post/Is-This-The-End-Of-Our-Low-Volatility-Period-VIX-DIA-UVXY

            Will the Market break out to the upside (short):
            http://advisorperspectives.com/dshort/guest/Chris-Kimble-130221-Market-Update.php

            Market goes from overbought to neutral (short):

            http://www.bespokeinvest.com/thinkbig/2013/2/21/from-overbought-to-neutral.html

    Fundamental

    

     Headlines

            Lots of economic data yesterday, most of it neutral/mixed: January CPI, jobless claims, January existing home sales and the January leading economic indicators were all more or less in line with estimates.  The outlier was the February Philly Fed index which plunged versus a forecast for a positive print. The latter along with disappointing PMI data out of Europe kept a negative cloud over investors’ heads. 

            I am not so concerned about yesterday’s mediocre US data; though if there is more poor follow through in the industrial sector of the economy, my confidence meter (in no recession) will start to decline. 

On the other hand, the lousy EU PMI stats were on the back of a couple of weeks of  unsatisfactory economic releases.  Another month of this consistently subpar data and I will have to consider revising the international growth assumptions in our Economic Model---unless Chinese expansion comes in better than expected.  Perhaps more concerning, recession in Europe raises the risk of sovereign/bank insolvencies (remember Spain’s second largest bank went toes up on Tuesday)---which could really impact our Model if our ‘muddle through’ scenario gets more questionable.

***over night (1) Spain reported a budget deficit equal to 10.2% of GDP, (2) the second scheduled LTRO bank repayment came in one half of expected and (3) the European Commission said that it expects recession in the eurozone to continue into 2014..

Bottom line:  the economy continues to track our forecast, the Fed is unlikely to begin tightening for at least another six to nine months, Wednesday’s FOMC minutes notwithstanding and sequestration, if it even happens, will not have much impact on the economy.  The only near in problem that could potentially alter our Economic Model is a crisis in Europe---the probability of which will likely rise if the European economy continues to sink.  That said, it will take another month of lousy data to warrant considering revisions to our Model.

That said, psychology which in my opinion has driven stock prices for the last 7-8% advance, can turn on a dime and there is lots of catalysts out there that could do just that: (1) if bond investors decide that they simply must be compensated for the risks that they taking, i.e. higher interest rates, and/or the FOMC minutes are a sign of things to come.  In either case, a spike in interest rates could be very detrimental to Markets---even if the Fed does nothing, (2) if Obama and/or His chattering class sycophants convince the unwashed masses that sequestration is an economic disaster.  Remember, we are still faced with negotiations on the debt ceiling and the 2014 budget within the next 30-45 days.  Even if Obama loses on sequestration, it is highly likely that He will be crying wolf at the top of lungs through this whole process.  So investors are in for a snoot full of continuous dire warnings for some time to come.

            The good news is that our cash coffers are well stocked; and if we get no bad news and stock resume their rise, we will have more.

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.