Wednesday, October 10, 2012

The Morning Call--Are investors finally figuring it out?

The Market
           
    Technical

            The indices (DJIA 13473, S&P 1441) traded lower yesterday, but remained within their primary trends: (1) short term uptrends [13334-14165, 1431-1523] and (2) intermediate term uptrends [12503-17503, 1319-1917].  Additional resistance exists at 14190/1576 and 13653/1469, support at 13302/1422 and 1442.  Clearly, the S&P dipped below the 1442.  Since this level is minor support, I am not reading much into it; though it could be an early warning signal.  13302/1422 is much more important.

            Volume lifted a bit; breadth was rotten.  The VIX rose, closing below the upper boundary of its short term downtrend and the lower boundary of its intermediate term trading.  This is a pretty wide gap; so there is not a lot of information in that statement.  The information is that the VIX couldn’t remain below the upper boundary of its very short term downtrend and couldn’t successfully penetrate the lower boundary of its intermediate term trading range.  That suggests a positive tilt to the VIX which is negative for stocks.

            GLD fell again, making yesterday the second day below the lower boundary of its very short term uptrend.  A repeat of that today will negate that uptrend.  Approximately 2 ½ points lower, GLD would break a second support level.  If that (168.4) is taken out, there is a ten point air pocket before it would find the lower boundary of its short term uptrend,  Since a large portion of our GLD position is partly a trading one, a break of 168.4 would likely lead to a lightening up on this holding.

            Bottom line: the primary price trends continue to the upside; though the Averages look increasingly toppy.  That is not a prediction; although given my recent record, if it was, I wouldn’t even take it serious.  That said, I firmly believe that at some point I will be correct that prices are way overextended.  Whether or not the current pin action is signaling it, I am not going to venture a guess.  I am still focused on our Sell Discipline.

    Fundamental
    
     Headlines

            One minor economic datapoint yesterday---weekly retail sales which were upbeat.

            Three other news items that were impacting prices:

(1)      Merkel visited Greece for six hours and was not greeted warmly by the unwashed masses.  Meanwhile, the German press is characterizing the average Greek citizen in fairly unattractive terms.  I am not smart enough to know when this fairy tale ends.  However, I believe that it will end (medium):.

                  The ECB’s toxic debt loop (medium):

(2)      the IMF issued a new set of predictions on global growth as well as that of individual countries.  While I don’t have any more confidence in this institutions forecasts than I do in the World Bank, nonetheless, they did not make pleasant reading and investors reacted negatively to this last report.

And this other less publicized report---equally ugly (medium):

I don’t know whether or not this means that investors are finally waking up to the realization that economic conditions are not rosy; but recognition has to start somewhere (medium).

(3)      Apple stock, the darling of investors’ eyes, is starting to suffer some whackage.  It is getting more notice from the talking heads, has be concerning to all the lemmings that pored money into this stock in its latest Titan III imitation and represents 4% of the S&P; so when, as and if, this stock starts declining in earnest, the door probably isn’t wide enough for a controlled exit.  That likely means there are some nervous feet and may be carrying over into the Market in general.

Meanwhile, earnings season started with a so so report from Alcoa followed by poor guidance from Chevron and Cummings.

Bottom line: stocks are overvalued (as measured by our Model); and save for the potential of a Romney victory in November which could lead to more responsible fiscal, monetary and regulatory policies, I see nothing else that could take equity prices higher.  In fact, the US is facing several problems (see above) with enormous ‘tail risks’ which if they occur would put some real hurt on stock prices. As a result, in my judgment, the risk/reward equation for stocks at current price levels is way out of whack.  So I choose not to play.

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