Wednesday, July 17, 2013

The Morning Call---All eyes on Ben


The Morning Call

7/17/13

The Market
           
    Technical

            I know that many are stunned to know that stocks can go down in price, but the indices (DJIA 15451, S&P 1676) did so yesterday.  They remain within their short term trading ranges (14190-15550, 1576-1687) and the intermediate term (14362-19362, 1524-2112) and long term uptrends (4918-17000, 715-1800).

            Given the proximity of close of the Averages on Monday to those short term trading range upper boundaries/May highs, it is tempting to judge yesterday’s pin action as the end of a failed attempt to challenge those levels.  However, the paucity of the indices decline yesterday on weak volume is probably not a good sign of a failed challenge---it just got a  little less overbought.  Even if I chose to interpret it as a valid rejection, normally, stocks will assault major resistance a couple of times before the final determination of a break is known. 

            Volume was up slightly; breadth was mixed.  The VIX was up 4%+, putting it back above the lower boundary of a very short term uptrend that it negated the day before.  I am going to stick with my original call for at least another day or so.  However, if the VIX continues to advance with as much momentum as it displayed yesterday, I will re-instate that very short term uptrend---which would be negative for stocks.

            GLD rose and now is trading within both its short term and intermediate term downtrends.  However, it remains below the upper boundary of a very short term downtrend.  Until it breaks this downtrend, I will not even begin to consider thinking about re-establishing a position in GLD.

Bottom line: the indices remain in that price zone just shy of a major resistance level (15550/1687).  One good day could put them above those levels; but a major down day would strengthen the resistance power of 15550/1687, leave the short term trading range in tact and could start to raise questions about a double or triple top.  But until one or the other occurs, there is nothing to do but watch the process.

            Small and mid caps starting to outperform (short):

    Fundamental
    
      Headlines

            The US data flow yesterday provide an assortment of results: CPI was a bit hotter than expected; weekly retail sales were mixed; industrial production was better than anticipated as was the NAHB homebuilders index.  These numbers are right in line with an economy buffeted by headwinds but managing to move forward.  So there is nothing new here that would impact either our Economic or Valuation Models.

            Of course, none of this matters as investors’ attention remained fixed on Bernanke’s testimony today and tomorrow before congress.  I noted earlier that given the Market schizophrenia that he induced in his May/July comments, I can’t imagine Bernanke will say anything that varies from his last statement.  But you never know what will come out in the Q&A sessions especially in the house.

            ***over night the UK put QE on hold.

          Bottom line:  stocks are deep in overvalued territory, at least as measure by our Valuation Model.  At the moment, investors are looking at a Market at a critical technical juncture plus earnings season is just getting rolling and Bernanke, who has been the premier Market mover over the last two years, about to give two days of  congressional testimony.  

          In my opinion, that is not a scenario to be making Market bets irrespective how bullish or bearish one might be.  That said, if our Valuation Model is correct, a move above 15550/1687 would encourage a continuation of Selling as our stocks move into their Sell Half Range while any move down needs to be sufficient to dramatically alter the current risk/reward equation before any Buying would make sense.



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

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