A 'pause that refreshes' or a topping process?
Steve Cook on Disciplined Investing

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The Market
    
    Technical

    Yesterday the indices (DJIA 12066, S&P 1308) experienced a modest bounce, remaining within both their intermediate up trend (11489-15022, 1202-1631) and short term up trend (12029-13004, 1305-1412).  Further resistance is found at 13102, 1437; additional support exists at 11811, 1311.

    While it is a positive that the S&P held above the lower boundary of its short term up trend (1305), it could not regain the 1311 support level--therefore I would have to characterize yesterday’s pin action as positive but only marginally so.  If it can not re-establish itself above 1311, that should create downward pressure.

    Volume was down; breadth improved; the VIX was off but finished above the upper boundary of the recent trading range, leaving it in a modestly negative position.

    Gold (GLD) traded down but remained above the 139.5 level; this is the second day of the break over the quadruple top level.  A little more follow through and our Portfolios will be Adding to this holding.

    Bottom line: the trend in prices is up and will be until it is not.  Yes, the S&P’s second break below 1311 raises questions about the Markets underlying momentum; but until there is a confirmed break below the short term up trend, a correction can not be assumed much less its depth.  Furthermore, any rally in the face of the continuing flow of bad news out the Middle East (i.e. riding oil prices) has to be viewed extra positively.

That said, tops are usually never defined by a specific price from which there is a marked sell off; rather they tend to be a process.  A process not unlike what we have witnessed since last Monday.  
http://tradersnarrative.wordpress.com/2011/03/01/technical-overview-an-excuse-to-sell/

That sounds like I am talking out of both sides of my mouth because I am.  The point here is that two weeks ago, I may have been confused as to why the price trend of the Market was so strong versus weaker underlying fundamentals; but I wasn’t in doubt that the strength was there.  Since then, some of that price vigor has been lost (two near successful challenges of 1311, one unsuccessful and one pending challenge of the short term up trend), raising the question as to what this apparent loss of momentum could mean.  It could be a brief ‘pause that refreshes’ or something worse;  I just don’t know which.  I do know that while the trend is still up, the pin action is now a reason for caution.

    P.S. the futures are quite strong this morning.  If we end the day higher on volume and breadth, this latest move may have indeed been the ‘pause that refreshes’; on the other hand, a disappointing close would be more evidence of the topping ‘process’.  Stay tuned.

    Update on the Treasury swap spread (short):
    http://scottgrannis.blogspot.com/2011/03/swap-spread-update.html

   Fundamental
        
    Headlines

(1)    the economic news continues positive.  Yesterday’s stat was the ADP private employment survey which indicates improvement in the employment picture.

In addition, the Fed released its latest beige book which detailed modest economic growth nationwide though it appears that businesses are starting to pass along higher costs to consumers.

Finally, Bernanke spent another day testifying before congress.  The only thing worth mentioning is that on several occasions he implied that the risk of deflation had decreased substantially, suggesting that there will be no QE3.  This is the first indication that there is an end in sight to the rapidly expanding Fed balance sheet.

If you didn’t see or read about the exchange between Bernanke and Ron Paul, here it is (6 minute video):
http://www.zerohedge.com/article/watch-highlight-todays-congressional-hearing-ron-paul-vs-bernank

And some not-so-good news: this piece addresses China’s latest currency policy moves.  It is a bit long but is today absolute essential read:
http://www.zerohedge.com/article/china-moves-making-renminbi-reserve-currency

(2)    still the chattering class remained focused on the Middle East.  The primary headline was the deteriorating situation in Libya.  Pro-government forces are bombing a key oil transit point. Meanwhile according to some sources, 65% of the foreign workers in the oil industry have fled the country.  What both of these developments suggest is that the loss of oil production from Libya will be greater and last longer than many assumed as little as a week ago.  That is not good news for oil prices and global inflation.

Notwithstanding the offer of a new peace initiative by Chavez, it looks like the violence in Libya will come to head early next week (short):
http://www.zerohedge.com/article/us-naval-update-its-mediterranean-party-and-enterprise-coming-endgame-expected-within-5-7-da

Bottom line: while all is not right on the international (oil) front, I can’t help feeling a bit more positive on domestic developments.  For one, Bernanke acknowledging that deflation was no longer a threat is the first step towards recognizing the inflation is.  If he really means it, then while it is probably too late to avoid a spike in prices but it hopefully gets us off the path to a 1970’s type inflation. 

Secondly, as a follow up to my comments of the likely effects of the congressional budget office’s report on wasteful government spending (i.e. fiscal policy), (1) it looks like the Ohio legislature/governor are going to be successful in reining in public employee benefits.  Whether it becomes an isolated incident or is the first domino to fall in the battle with state employee unions, it is still a positive and (2) listening to congressional dems speaking to the news media yesterday, they sounded far more reticent than in the past.  Again whether they are simply cinching for battle or have recognized the inadequacies of their position on the budget, I am encouraged. 

These may be small steps toward righting our fiscal ship but at least they resemble  those concrete steps for which I have been pining.  We can only hope that there is more to come.
http://townhall.com/columnists/tonyblankley/2011/03/02/tiresome_squabbles_of_discontented_affluence

The operative words above are ‘small steps’; so it is way too soon to alter our Models.  That leaves stocks overvalued, at least as calculated by our Model--so our strategy hasn’t changed.  I still want to be gradually taking money off the table in those stocks that are either at or near their Sell Half Range, that have grown to a disproportionate size or that have broken our recently set tight Stop Loss Price.

Economics

   This Week’s Data

    Weekly jobless declined 23,000 versus expectations of a 9,000 increase.
    http://www.calculatedriskblog.com/2011/03/weekly-initial-unemployment-claims.html

    Productivity in the fourth quarter rose 2.6% versus estimates of being up 2.2%; unit labor costs fell 0.6% versus forecasts of a decrease of 0.4%.

   Other

    The latest from Bill Gross (medium):
    http://www.pimco.com/Pages/Two-Bits-Four-Bits-Six-Bits-a-Dollar.aspx

    More on the financial mismanagement on Wall Street (medium):
    http://www.nakedcapitalism.com/2011/03/a-straightforward-criminal-case-against-wall-street-ceos-and-senior-executives.html

Politics

  Domestic

My favorite liberal blogger on government unions (medium):
http://dailycaller.com/2011/03/01/catchup-to-walker-wisconsin-unions/

This is a good discussion of the ‘fiscal trap’ that the US now faces (medium):
http://www.contraryinvestor.com/moprinter.htm

    At last, some scrutiny of the unholy alliance between the banks and the Fed/Treasury (short):
    http://www.ritholtz.com/blog/2011/03/extend-pretend-bank-practices-attracting/











Posted 03-03-2011 8:06 AM by Steve Cook