Investing for Survival: The Morning Call---the S&P still can't make new highs

The Morning Call

4/2/13

The Market

Technical

The DJIA (14572) continues to trade above its former all time high (14190) and the upper boundary of its short term uptrend (13859-14539). It remains out of sync with the S&P (1562) which has failed to date in surpassing its comparable levels (1576) and (1515-1589) respectively.

Both of the Averages are within their intermediate term uptrends (13608-18608, 1440-2034) and their long term uptrends (4783-17500, 688-1750).

Volume was anemic; breadth much more negative than I would have expected. The VIX popped about 7% but remains within its short and intermediate term downtrends.

http://www.bespokeinvest.com/thinkbig/2013/4/1/weak-breadth.html

GLD was up and finished within its short term downtrend. The good news is that the developing support level continues to build.

http://www.minyanville.com/sectors/precious-metals/articles/Why-Have-Investors-Lost-Interest-in/4/1/2013/id/48964

Bottom line: the S&P continues to be unable to surmount its former all time high and join the Dow’s move to the upside. Until that occurs or the DJIA stages a substantial sell off, the question remains open on whether the Market is topping or forming a base for another push upwards. I continue to focus on the Sell side.

Fundamental

Headlines

Yesterday’s economic news was so so: the March ISM manufacturing index was down though still positive while February construction spending was up a tad more than anticipated. The ISM number was likely the main contributing factor to yesterday’s down Market.

Cyprus and the implications of the ‘Cyprus template’ continue to dominate the media and investors’ attention. I keep hearing that its economy is too small to have an effect on the EU much less the global economy. While there is no question that it is a wart on goat’s ass, I have argued that the problem is not Cyprus but the implications of the ‘Cyprus template’ on EU investor psychology and, by extension, the stability of the EU financial system and the growth rate (or lack thereof) of Europe’s economy. I am not going to beat this horse beyond the above repetition of my concerns.

The confusion generated by EU bailouts (medium):

http://www.zerohedge.com/news/2013-04-01/eurozone-roulette

The latest on the Cyprus contagion (medium):

http://www.zerohedge.com/news/2013-04-01/tragic-cyprus-contagion-cripple-1600-greek-businesses

The highlights of the Troika’s terms for the Cyprus bailout (medium):

http://www.zerohedge.com/news/2013-04-01/cyprus-pain-only-just-starting

***over night EU employment and manufacturing data came in at depressed levels (short):

http://www.zerohedge.com/news/2013-04-02/chart-day-euro-area-unemployment-hits-new-record-high

Bottom line: despite my worries about the fall out from Cyprus, I am also encouraged that (1) uncertainty over the validity of deposit insurance and over capital controls will likely drive money to the US, (2) as long as the EU financial system is in a state of flux, the Fed is apt to keep the pedal to the metal [though as you know, I do not consider this a long term positive] and (3) the eurocrats have finally taken steps that are half way sensible [making risk takers versus taxpayers responsible for bank defaults].

‘Yes, there is going to be pain that likely extends far beyond

Cyprus

. But there was going to be pain anyway, sooner or later. In my opinion, anyone who assumed that after years of totally irresponsible fiscal policies that somehow the EU ‘muddling through’ scenario would not involve some pain, at times severe, is suffering from an acute case of naiveté.

So I guess where I part company with those who were pumping up stock prices ... is that I believe (assuming the EU/ECB doesn’t slap another monetary band aid over the next sovereign/bank problem but uses the Cyprus template) that the pain will come near term. True that will mean flows into the dollar which will be a positive. But there will still likely be heartburn sufficient enough to sound the derivative counterparty alarms. Plus Europe will continue to deteriorate economically and that is not going to help the profits of US companies. I don’t believe that this combination of events will play well in an overvalued

stock market.’

Valuation update (short):

http://advisorperspectives.com/dshort/updates/Market-Valuation-Overview.php

http://advisorperspectives.com/dshort/updates/Q-Ratio-and-Market-Valuation.php

http://advisorperspectives.com/dshort/updates/Crestmont-PE-Ratio.php

http://advisorperspectives.com/dshort/updates/PE-Ratios-and-Market-Valuation.php

Negative earnings guidance (short):

http://www.thereformedbroker.com/2013/03/29/factset-negative-earnings-guidance-at-seven-year-highs/

The problem with reaching for yield (medium):

http://www.zerohedge.com/news/2013-04-01/exuberant-reach-yield-spain-leaves-retail-96-losses

The economy/Market disconnect---another great piece of analysis by Lance Roberts (medium and today’s must read):

http://www.zerohedge.com/news/2013-04-01/guest-post-great-disconnect-markets-vs-economy