This Market may be over sold short term but it is still time to sell
Steve Cook on Disciplined Investing

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Economics

   This Week’s Data

    September new home sales fell 6.2% versus expectations of a 2.5% increase.

    Weekly jobless claims declined 1,000 versus estimates of down 6,000.
    http://www.calculatedriskblog.com/2009/10/weekly-initial-unemployment-claims-530.html

    Real third quarter gross domestic product rose 3.5% versus forecast of a 3.1% increase, while the personal consumption expenditure index (inflation) was up 0.8% versus expectations of a 1.4% rise.
    http://www.calculatedriskblog.com/2009/10/bea-gdp-increases-at-35-annual-rate-in.html
    http://econompicdata.blogspot.com/2009/10/q3-gdp-subsidized-consumption-edition.html

   Other

Politics

  Domestic

How about this editorial from the Chicago (as in where Obama is from) Tribune (as in liberal) on healthcare (medium):
http://www.chicagotribune.com/news/opinion/editorials/chi-1028edit1oct28,0,958091,print.story

    Comments of Barney Frank’s to big to fail bank reform bill (long):
    http://www.ritholtz.com/blog/2009/10/congress-and-tbtf-%E2%80%93-bring-in-the-bomb-squad/

    This one is shorter:
    http://www.nakedcapitalism.com/2009/10/guest-post-government-is-trying-to-make-bailouts-for-the-giant-banks-permanent.html
   
  International War Against Radical Islam

The Market
    
    Technical

    The DJIA (9762) joined the S&P (1042) in breaking its up trend off the March low.  This is the first time since March that the DJIA has challenged the up trend whereas the S&P has violated its trend twice but then re-established it later.  The dollar continued to trade above the upper boundary of the down trend from the March 2009 high; while the VIX penetrated the upper boundary of its down trend off its October 2008 high.  All in all, not a pretty picture from the technical standpoint. 

Adding to this, our internal indicator also deteriorated further--of 161 stocks in our universe, only 88 remain in an up trend (versus 111 at last count).  The good news is that 106 remain above their November 2008 trading high (versus 108 at last count) and 122 remain above the down trend off their 2008 highs (versus 133 at last count)--which I choose to interpret as suggesting that while stocks may be in for a period of sideways action, we are not currently in any danger of retesting the March lows. 
 
Yesterday’s S&P pin action satisfies my ‘distance’ parameter for defining this as a break in the up trend.  Given my disappointment with the progress on the economic/fundamental issues, I think it time to take money off the table.  This morning our Portfolios will move to 17.5% cash versus 12.5% at the beginning of the week (see below).

Now we assume that the S&P is in a trading range.  We know the upper boundary--the last high (circa 1100).  So we let stocks find support (the lower boundary) and there are four obvious candidates: S&P 1020, 990, 978 and 870.

    Finally, gold busted through the lower boundary of a short term up trend, so we are lightening up on this position as part of the move to a higher cash position,

    The latest from TraderFeed:
    http://traderfeed.blogspot.com/2009/10/look-at-recent-market-weakness.html

    And Trader Mike:
    http://tradermike.net/2009/10/october_28_2009_stock_market_recap

    The percentage of stocks above their 50 day moving average drops bit time:
    http://bespokeinvest.typepad.com/bespoke/2009/10/percentage-of-stocks-above-50dmas-falls-sharply.html

    And small stocks are really getting whacked:
    http://bespokeinvest.typepad.com/bespoke/2009/10/small-caps-stumble.html
       
   Fundamental
   
Jeremy Grantham thinks that it is time for a pause (medium):
    http://online.barrons.com/article/SB125667716785411189.html?mod=BOL_hpp_dc

    Is the reflation trade shifting into reverse? (medium):
    http://online.barrons.com/article/SB125661551423109597.html

    This is a must read on the challenges facing investment strategy (medium):
    http://www.capitalspectator.com/archives/2009/10/the_challenge_a.html#more

     Headlines

    Weak new home sales (see above) got stocks headed down yesterday.  That was helped along by another day of a strong dollar.  Both of these factors contributed to the cumulative effects of trends already in place; that is, the economic data has not been good for the last ten days and after five up days the dollar broke a seven month down trend.

    Adding to this was the re-emergence of the (costly) public option to healthcare as a likelihood and with it the fear that gridlock may not work its magic.

    My bottom line is that while the economy continues to improve, stocks no longer appear impressed with its rate of progress.  Further, we are probably not going to get any meaningful increase in that rate of progress anytime soon.  Hence, we may be in for a period in which the equity market digests the stunning rise in prices since March.

    Further, I do not believe that the risk of rising inflation has gone away.  So long term I intend to stick with this theme.  However, it appears that lots of speculative money has been piling into this trade (declining dollar, rising stock, gold and commodities prices), putting it in a very ‘overbought’ position.  Plus the Fed is saying that it will no longer be buying Treasuries (keeping rates low and the dollar weak). That likely means a retreat in gold and our foreign currency ETF’s short term.  My intent is to trade a small portion of this long term position; hence the sale of a part of our gold position this morning.

    Least surprising headline of the day (short):
    http://cafehayek.com/2009/10/least-surprising-headline-of-the-day.html





Posted 10-29-2009 8:33 AM by Steve Cook
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