For today. at least, my skepticism rules
Steve Cook on Disciplined Investing

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The Market
    
    Technical

    The S&P (1132) closed above the 1120 resistance level (after trading back below it for one day) and the down trend off the October 2007 high (1129).  I opined in earlier posts that the down trend would likely constitute strong resistance--and it still may.  As you know, I want to see some time/distance before declaring a trend line permanently broken. 

Supporting my patience are (1) volume yesterday was unimpressive, (2) the DJIA (10583) did not penetrate its own down trend line (10585) and (3) yesterday’s pin action reflected a common pattern for the last several months, i.e. a strong Monday [which have in general been followed by a directionless Market for the remainder of the week] and the positive seasonal impact common during the pre-Christmas to post New Year period.

     On the other hand, the breadth indicators were positive, the VIX declined 7%+, another very positive signal and our internal indicator is on the positive side of neutral (out of 159 stocks, 75 are trading above their recent resistance levels, 72 have not and 12 are actually declining).
    http://www.bespokeinvest.com/bespoke/2010/01/breadth-gets-stronger.html

    The dollar was down (scoreboard: stocks up, gold up, oil up).  I have suggested that this inverse correlation seemed to be weakening; but it may not have completely broken.

    Bottom line: clearly, my comments echo my skepticism regarding a continuing rally.  That said, a follow through to yesterday’s price action will prove me wrong; and if so, I will have to adjust our strategy.  In the meantime, our Portfolios remain circa 25% in cash.
 
    Update on the bull/bear ratio (chart):
    http://www.ritholtz.com/blog/2010/01/record-bullish-ratio/

    An interesting article comparing the financial stocks today with the technology stocks in 2002/03 (short):
    http://www.bespokeinvest.com/bespoke/2010/01/can-the-market-rally-without-the-financials.html

   Fundamental
   
    Byron Wien’s (vice chairman of Blackstone Advisory Services) 10 surprises for 2010 (medium):
    http://www.investmentpostcards.com/2010/01/05/byron-wien%E2%80%99s-ten-surprises-for-2010/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+wordpress%2FVYxj+%28Investment+Postcards+from+Cape+Town%29&utm_content=Yahoo!+Mail

     Headlines

    The economic news (the ISM manufacturing index and the Chinese PMI; see above) got investors feeling jiggy at the open and carried through the day. The sound bite of the day was that these stats were indicative of an economic recovery that would be much stronger than many expect.  To be sure, they were welcome after some lousy numbers in the previous two weeks;  but I don’t think them (nor the overall trend in the datapoints) sufficient to warrant such a prediction. 

Of course, they could be a harbinger of things to come; but I think that it would take at least two or three weeks of consistently strong numbers to justify altering our forecast.  Even then, it would represent a faster than expected cyclical snap back in economic activity and would have nothing to do with the longer term secular growth on which our Model is based.  Nothing has changed with respect to a damaged financial system, a fiscally irresponsible budget process, the likelihood of higher taxes, an increasing inefficient economy resulting from rising government regulations, the crowding out of corporate investment capital by the government and rising protectionist sentiment in congress.

That said, some optimistic pundits are suggesting that in addition to a more powerful recovery, stocks are also forecasting a trashing of the Dems in November (and hence a reversal of its more socialist agenda).  We can only hope.  But at the moment that is all it is; and it is probably a bit too soon to be betting (Your) money on such an outcome.

The other, though much less discussed,  news item yesterday was Bernanke’s performance over the week end (linked to in yesterday’s Morning Call) in which he absolved the Fed of any responsibility for the housing/credit crisis.  Most investors were stunned by such a self serving analysis and attributed the dollar weakness/gold strength to the implications of Bernanke’s remarks for future Fed policy.

Bottom line: my abhorrence at the passage of the healthcare bill and the potential for follow up ‘cap and trade’ and/or ‘card check’ legislation as well as a seemingly clueless Fed heavily influences my technical bias.  

Economics

   This Week’s Data

    The December Institute for Supply Management’s manufacturing index was reported at 55.9 versus expectations of 54.8 and 53.6 recorded in November.
    http://mjperry.blogspot.com/2010/01/ism-manufacturing-index-reaches-44.html
    http://scottgrannis.blogspot.com/2010/01/ism-what-deflation.html

    November construction spending dropped 0.6% versus estimates of a 0.2% decline.
    http://scottgrannis.blogspot.com/2010/01/construction-spending-still-weak.html

   Other

    The Chinese production manager’s index (PMI) came in much stronger than anticipated.

    Before getting too optimistic about the above ISM and Chinese PMI numbers, consider the trend in bank C&I loans (chart):
    http://www.businessinsider.com/chart-of-the-day-commercial-and-industrial-loans-of-weekly-reporting-large-commercial-banks-2010-1?utm_source=Triggermail&utm_medium=email&utm_campaign=Clusterstock%20Chart%20of%20the%20Day%2C%20Monday%2C%201%2F04%2F10

    The latest small business sentiment poll (short):
    http://www.nakedcapitalism.com/2010/01/52-of-small-businesses-see-conditions-worsening-in-next-six-months.html

    A country by country comparison of debt to GDP (chart):
    http://paul.kedrosky.com/archives/2010/01/sovereign_debt_1.html

Politics

  Domestic

Your coming tax increases (medium):
http://www.bloomberg.com/apps/news?pid=20601039&sid=aQeHqIgeLqr4









Posted 01-05-2010 8:27 AM by Steve Cook