The major indices continued their winning ways yesterday, with both the Nasdaq (2241.71) and Dow (10392.90) recapturing their 50 day moving averages for the first time in a month. The action of the past month has been frustrating. Earnings have beaten estimates by an average of 11%, an historic beat, and especially in Technology it is hard to conceive they could have done any better, as investors were greeted to one blow out quarter after another. Now considering a portfolio of Intel (INTC), Cisco (CSCO), IBM (IBM), Microsoft (MSFT) and Corning (GLW), for example, trades at 10.6x the forward earnings estimate after cash (an historic low) it is absurd to say the price reflects the good news, when the earnings yield of the stock is two or three times that of the 10 yr Treasury! Given our bullish view, we would like to just buy and keep adding on weakness, but the lesson of ’08 is that irrespective of one’s opinion, we have to listen to the message of the tape and act accordingly. So while we may look near term foolish on occasions as we swing long, defensive, long again at ill timed moments, it is imperative that we set a pivot point and be prepared to apply defense even if those indicators don’t always give an accurate reading. This is our insurance and experience tells us that we have to purchase it, even if we are occasionally whipsawed. Fortunately by selling index and individual calls against our portfolio we are able to smooth the impact of applying that defense at inopportune moments. It has been a strange month indeed. First the market greeted the stellar earnings with a sell the news mentality, then we got Obama’s populist attack on banks and Wall Street in general, then we got the specter of global sovereign debt contagion, and now, big news indeed, we hear that the Fed is starting the long process of removing the monetary punch bowl. The “exit strategy” has begun! Well it’s only the discount rate, but surely the bears can make a case for the end of the party, day of reckoning scenario yada, yada. After all, this is just a false illusion, a government sponsored near term blip from reality. And yet, the bull train just turns on a dime, accelerating through resistance as though it does not matter. The futures are down a little this morning, but nothing dramatic. We are now looking at the 1081/1085 area on the S&P 500 (1106.75) and 2185 on the Nasdaq as our buy set up point. The S&P 500 closed right under its 50 day average yesterday, and this would ordinarily be a great consolidation point, especially when we are near term overbought. We are switching hats and now looking to add long side exposure on weakness.
The core CPI was reported this morning, a negative reading of -0.1%. As we have been saying ad nauseam, inflation is not now, or in the intermediate future an issue. It can’t be when you are running at historically low capacity utilization rates. It undermines that whole “too few goods” part of the equation because we can easily meet demand. The spin from the right is of sudden fiscal indiscipline, spiraling deficits and the whole “inflation is a monetary phenomenon” view that will lead to runaway 70’s style inflation immediately. It hasn’t played out that way, and even if that argument gathers validity, it won’t be for a few years.


S&P 500 (1106.75) the 50 day average is at 1108.50, and we are perched just under it having shot up a quick 6% since the lows on Feb 5th. This would be a natural place for some consolidation. Any break below 1100 today should see some accelerated selling pressure. The 10 day/20 day convergence at 1081/1085 is now support and represents our primary buy set up point. Any subsequent break below the Jan low at 1071 would mean yet more whipsawing action and a return to defense, but for now, we want to add exposure on weakness, and this is particularly true at the 1081/1085 level.

Nasdaq (2241.75) watch support at the 50 day at 2231. A move below that would be similar to a move below 1100 on the S&P 500 and set the stage for some accelerated selling pressure. The 10/20 day now converge exactly at 2184, and a move down towards that level fills the gap of Feb 16th and provides us with a solid entry point. We are overbought near term, and either a move back to support, or some drifting consolidation that “digest” the recent up surge are needed before we add back long side exposure with any increased conviction.