Tuesday, June 25, 2013

The Morning Call---S&P challenges the 2007 high

The Morning Call

6/25/13

The Market
           
    Technical

            The indices (DJIA 14659, S&P 1573) had another very volatile day.  The most important development was that despite a nice afternoon intraday rally, the S&P still broke the 2007 high (1576) support level.  As you know, I speculated that 1576 could provide strong support.  While it ultimately could (if we get a bounce near term), yesterday’s pin action was not impressive.  This leaves the S&P still in search of a lower boundary to a new short term trading range (1576 [?]-1687).

            The Dow remained above its 2007 high (14190), leaving open the possibility that 14190 could become the lower boundary of a short term trading range (14190 [?]-15550).

            The Averages closed within both their intermediate term (14227-19227, 1508-2096) and long term uptrends (4783-17500, 688-1750).

            Volume fell; breadth was poor.  The VIX rose.  It is now searching for an upper boundary of a short term trading range; but remains within its intermediate term downtrend.  Finally, last week’s S&P trading formed an ‘outside down week’ (the high of last week was higher than the high of the prior week and the week’s close was a low lower than the prior week’s low).  Remember how negative the May 22 ‘outside down day’ proved; now the Market must contend technically with an ‘outside down week’---an even bigger negative.

            GLD declined again and is now searching for a lower boundary of a new long term trading range.  No candidates are apparent.

Bottom line: the S&P has broken its short term uptrend and is now challenging the 1576 (former all time high) support level.  I don’t know whether it will establish a trading range or continue to fall.  Until we know, I think it too risky to be making any portfolio changes unless you are fully invested.  If we get an oversold bounce near term (which seems likely), it would provide the opportunity to lighten up.  

            The S&P and historical post election year performance (short):

            Is a global slowdown at hand (short):

    Fundamental
    
     Headlines

            Yesterday’s economic data was mixed: the Chicago National Activity Index came in slightly below expectations while the Dallas Fed manufacturing index was much stronger than anticipated---nothing to disturb our forecast. 

            However, the rapidly changing Market psychology continued to dominate the headlines.  Our trading day started facing another major decline in the Chinese markets as investors worry over the end game of the current Bank of China managed squeeze of its credit markets. The securities markets opened down big and sank further. 

Then several (3) regional Fed bank chiefs tried to come to the rescue.  In speeches they attempted to walk back Bernanke’s ‘tapering’ comments last week.  Their effort was initially successful as stocks rallied.  Unfortunately, prices rolled over again.

            Two observations:

(1)    the Bank of China is taking the necessary steps to quell speculative lending in their ‘shadow banking’ system.  That said, the data out of China is so suspect, we don’t know the extent of the credit problem; so we don’t know how much damage will ultimately be done before this problem is fixed.  As a result, the risk is that the unintended consequences of the current tightening could measure a 10.0 on the Richter scale,

(2)    I speculated last week that the Fed would not be able to put the QEInfinity genie back in the bottle.  Given what seems to be a new full court press to tone down Bernanke’s ‘tapering’ comments, we are likely to know pretty quickly whether or not I was correct in that assessment.  The Fed’s initial try was unsuccessful but I imagine that there is more to come.

Bottom line: I continue to believe that Bernanke’s ‘tapering’ comments and (hopefully) subsequent action are the right course for the economy on a long term basis.  (I also believe that it was about time that he did something right.)  To be sure, it will not likely be positive for the Markets in the short term.  However, the main beneficiary of QEInfinity has been the Market which is now grossly over valued while the economy, which QE was supposed to benefit, limps along partly as a result of the distortions it has caused.   

Further, I believe that Bernanke’s comments were a ‘emperor’s new clothes’ moment for investors, suggesting that any and all attempts to walk back his policy statement will be greeted with skepticism.  If I am correct, we will probably get the opportunity to Buy stocks at or near Fair Value.

            Buy cash (medium):

            And (medium):

            Money can’t buy you love or a better economy (medium):

            Morgan Stanley: bad news is no longer good news (medium):

            The latest from John Hussman (medium):




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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