The Market
    
    Technical

    The indices (DJIA 11320, S&P 1177) showed good follow through yesterday.  The DJIA remains within its intermediate term trading range (10725-12919).  The S&P actually recovered above the 1172 recent lower boundary (on the fifth day following the break below 1172) of its intermediate term trading range, confusing me further as to whether it or 1101 will ultimately mark the lower boundary of its intermediate term trading range (usually I use three to four days to confirm a break).

    An equally important level to watch is 10791, 1120 which was the first higher low following the early August low (10725, 1101).  The ideal positive pattern would be for stocks to find a low equal to or higher than this low.  This would add strength to the notion that the early August low was the bottom of this recent correction.

    Volume fell; breadth was down slightly, as was the VIX which remains a negative.

    GLD’s (171) pin action was a stomach churner.  It closed down huge.  Because the closing price was near enough to the lower boundary of the short term up trend (169), I intend to wait to see whether or not GLD breaks that barrier.  If it holds, our Portfolios may Add back Tuesday’s sale; if it trashes 169, the next stop is the lower boundary of the intermediate term up trend (151), so additional sales will likely be made.

    Bottom line:  three good days in a row; what a concept.  Hopefully, this and the fact that 10791, 1120 held and provided a higher low, means that the August lows were the bottom of this correction.  Of course, hope is not a strategy, so I am not getting jiggy with that concept.  However, another successful test, particularly one the holds above 10791, 1120 will provide a good opportunity to put more cash to work.

    The October effect (short):
    http://advisorperspectives.com/dshort/commentaries/SPX-Tops-and-Bottoms.php

    Fundamental
    
      Headlines

    The economic news yesterday included the weekly mortgage applications (which were rotten) and July durable goods orders (which were twice as good as expected).  That coupled with another day of severe punishment for GLD were the positive factors fueling the advance. 

The durable goods number was concrete evidence that the corporate sector (which has been the only driver behind the current anemic recovery) was not rolling over. 

However, the decline in the price of gold was merely investors’ interpretation  that the fears that recently pushed stock prices down (collapse of the EU economy, continued fiddling on the debt, jobs and regulation by our ruling class) were subsiding.  As you know, I completely disagree with that notion.  Nothing is occurring to suggest that the risks associated with either factor are any less than they were a week ago. Hence, I believe anyone betting money that the Three Stooges or the Three Blind Mice are about to announce and execute solutions to their respective economic/political crises is making a mistake. 

So then why was gold down?  One word: price.  As I have tried to make clear over the last week, I believe that the fundamentals driving gold prices higher are very much in place.  However, I also believe that at current levels, the price of gold over discounts the risks associated with the current EU/US problems.  As a result, our Portfolios have been Selling a portion of their positions in GLD.  To be sure, one sale was too early.  Clearly, our Price Discipline is not perfect; but it usually gets the big issues right.  To be clear, in the absence of any improvement in the fundamentals, any retreat to more normal price levels will prompt the re-purchase of the shares sold.
   
    A final factor in yesterday’s positive pin action which is something of a corollary of the latter point--was that there was no news out of the EU; and I think that provided a false sense of relief.

    Bottom line:  hopefully this recent rally signals that investors now have a better handle on the proper value of equities assuming bad news out of Europe and no news out of the US.  If the euros actually do something constructive to deal with their sovereign debt issues, then stocks are undervalued.  If nothing is forthcoming, prices will probably go nowhere; but at least they will have stopped going down.  That is not a wildly optimistic viewpoint; neither is it a doomsday scenario.  To me the key to valuation right now is what measures are taken to effectively deal with the sovereign debt issues in Europe.  Until we know that, there is no reason to make big moves one way or the other.  Nonetheless, some stocks are currently at compelling values; so our Portfolios will continue to nibble into weakness.

    The price of doing nothing (medium):
    http://blogs.reuters.com/christopher-whalen/2011/08/23/barack-obama-and-the-cost-of-doing-nothing/

 
Economics

   This Week’s Data

    Weekly jobless claims rose 9,000 versus expectations of a 3,000 decline.
    http://advisorperspectives.com/dshort/updates/Weekly-Unemployment-Claims.php

   Other

    The three myths about capitalism (3 minute video):
    http://gregmankiw.blogspot.com/2011/08/jeff-miron-on-capitalism.html

    The impact of austerity (short):
    http://scottgrannis.blogspot.com/2011/08/tale-of-two-piigs.html