Was Tuesday an outlier?
Steve Cook on Disciplined Investing

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Have You Seen This?


The Market
    
    Technical

The Averages (DJIA 11045, S&P 1191) bounced decently yesterday.  Indeed, I was surprised at the lack of follow through on the downside, especially in light of S&P downgrading Spain’s credit rating.  As a result, they remain firmly in their up trends off the March 2009 low (10863-13303, 1162-1477).  Additional resistance exists at 11811, 1311 and 11154, 1214 and support at 10725, 1150.

    Volume was off a bit; breadth rallied huge; the dollar was up and closed right on the upper boundary of its current trading range (scoreboard: stocks up, gold up, oil up).  The VIX declined big time though it remains well within its current trading range. 

Surprisingly, our internal indicator has actually improved since Monday.  I gotta tell you, I have never seen a divergence between our indicator and the Market quite like what has taken place Friday through yesterday. Usually, when the Market is struggling with a top/bottom/resistance/support level, our indicator may (sometimes it doesn’t) anticipate (as it did last week) either a break or a bounce.  If that happens, then historically its biggest limitation has been that it was too early; and that may be what is going on now (i.e. stock prices will make new highs, just not tomorrow).  That said, I have never seen it anticipate a break through a resistance level (like it did before Friday/Monday) and then have the Market move big in the opposite direction.  Yesterday’s bounce makes me wonder if our indicator was early and Tuesday’s pin action was simply an outlier.  We will see; I am not making any bets, yet.

Bottom line: stocks are in an up trend; and Tuesday’s performance notwithstanding, our internal indicator was stronger at the close Wednesday than it was on the close last Friday or this Monday.  I am not looking for redemption from a bad call on Monday, just stating the facts.  I am even acknowledging that I am not certain what this means since I have never seen this kind of divergence in the trading patterns of the indices and our indicator.  However, I am also suggesting for those bears amongst you who interpreted Tuesday’s Market action as a precursor to a much lower Market to be careful.

    The latest sentiment indicator (chart):
    http://www.investmentpostcards.com/2010/04/29/stock-market-sentiment-%E2%80%93-indicating-market-top/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+wordpress%2FVYxj+%28Investment+Postcards+from+Cape+Town%29&utm_content=Yahoo!+Mail

    The latest from Trader Mike:
    http://tradermike.net/2010/04/april-28-2010-stock-market-recap/

   Fundamental
        
     Headlines

    The S&P continued its European reign of terror by lowering the credit rating of Spain.  However, unlike Greece and Portugal, the downgrade was by only one notch and left it with the investment grade status.  Still, it indicates that the sovereign debt problem extends beyond Greece and is becoming increasingly recognized.  The key is how widespread the contagion becomes.  If it stays localized to a few European countries, it is probably a plus for the US because it will drive investment to the US as the least bad alternative.  That will in turn let the Fed stay looser longer than it might otherwise (i.e. the fixed income markets won’t be pushing prices lower [rates higher] because of the positive inflows)  If the crisis becomes more widespread as the housing/real estate did, no one, including the US, is likely to be unscathed.

    All that said, given the Markets’ reaction to the Greek/Portuguese downgrades on Tuesday, one would have thought that this latest S&P action would have resulted in another push to the downside for stock prices.  The fact that it didn’t makes me wonder (as I suggest above) if Tuesday’s pin action was all the correction that we are going to see.

    A look at past sovereign debt crisis (medium):
    http://www.marketwatch.com/story/what-greece-means-for-the-stock-market-2010-04-28

    And the alternatives to the current Greek problem (medium):
    http://www.nakedcapitalism.com/2010/04/the-inevitability-of-greek-default.html

    The message from commodities (short):
    http://scottgrannis.blogspot.com/2010/04/commodities-say-forget-greece.html

    Emerging details of the IMF bailout (medium):
    http://www.zerohedge.com/article/greek-inverse-dip-update-bailout-loans-be-junior-existing-claims

    The latest FOMC meeting adjourned yesterday.  Rates were left unchanged.  The language in the ensuing press release was ever so slightly more positive.  As CNBC’s Steve Liesman said, it was the least possible upgrade in language from unchanged.  So monetary policy stays easy; and, at least on a short term basis, low rates and plenty of liquidity are positives for stocks.

    After the Market close, the senate finally passed a cloture vote on the financial regulation bill.  Republican leaders finally decided to allow members to vote as they saw fit.  So debate began immediately.  Rumors are that (1) both sides are near a compromise on too big to fail, (2) there is no deal on derivatives; however, Obama is apparently agnostic on the issue which suggests compromise is possible, (3) dems are unwilling to compromise on the consumer protection portion.  It is important to note that nothing is fixed yet; so it is too early to get optimistic or pessimistic.
    http://townhall.com/columnists/TonyBlankley/2010/04/28/the_return_of_social_utility (long)

    Bottom line: if our economic forecast is near correct, then stocks, in general, are fairly valued.  I have suggested that my recent revisions may not have gone far enough; though, at the moment, I am not making any changes.  However last week, I allowed our technical indicator to weigh heavily on the likelihood of upward revisions.  Then Tuesday’s pin action seemingly trashed that notion; but as I noted in the above Technical section, the subject may not be completely off the table.   At the moment, color me cautious but not pessimistic.

    This is today’s must read article.  It concerns the logic (or lack thereof) behind blaming Wall Street for the financial crisis (long):
    http://www.ritholtz.com/blog/2010/04/keep-the-casinos-open/

    Barry Ridholtz summarizes his view of the economy and the Market (medium):
    http://www.ritholtz.com/blog/2010/04/macro-overview-economy-markets/

    Earnings guidance is very strong (short):
    http://www.bespokeinvest.com/thinkbig/2010/4/28/guidance-remains-strong.html
   
Economics

   This Week’s Data

    Weekly jobless claims fell 11,000 versus expectations of a 6,000 decline.
    http://www.calculatedriskblog.com/2010/04/weekly-initial-unemployment-claims-at_29.html

   Other

    A macro view of US debt (charts):
    http://www.minyanville.com/businessmarkets/articles/the-national-debt-united-states-china/4/26/2010/id/27976

    A look at consumer debt (chart):
    http://paul.kedrosky.com/archives/2010/04/consumer_debt_s.html

    And current liquidity (chart):
    http://paul.kedrosky.com/archives/2010/04/americans_still.html
   
Politics

  Domestic

    More on our pathetic efforts at an Israeli/Palestinian peace (medium):
    http://www.powerlineblog.com/archives/2010/04/026178.php

    Another Obama judicial nominee (short):
    http://www.powerlineblog.com/archives/2010/04/026177.php

    The unfortunate fallout of Obamacare (short):
    http://www.powerlineblog.com/archives/2010/04/026176.php











Posted 04-29-2010 8:15 AM by Steve Cook