The Morning Call
The Market
Technical
The
indices (DJIA 13345, S&P 1433) had a roller coaster day but basically
finished flat. They both closed for the
second day in a row below the lower boundaries of their short term uptrends (13475-14306,
1446-1538). In addition, the Dow remains
below its 50 day moving average (13352) for a second day; while the S&P closed
right on its 50 day moving average (1433). They both continue to trade well above the
lower boundaries of their intermediate term uptrends (12543-17543, 1328-1926).
Volume
fell; breadth recovered. The VIX
declined slightly but remained well above the 50 day moving average. It continues to trade in the wide zone
between the upper boundary of its short term downtrend and the lower boundary
of its intermediate term trading range.
GLD
moved up fractionally but finished below the interim support level for the
second day. It is still above the lower
boundaries of the short term uptrend and the intermediate term trading range.
Bottom
line: there was good news and bad news
in yesterday’s pin action. The bad news
was that there was almost no recovery off Friday’s lows; and hence, those
broken short term uptrend lower boundaries and 50 day moving averages are still
broken. The good news is that intraday,
prices moved much lower but rebounded to close flat on the day.
I
continue to believe that because of their proximity, the lower boundaries of
the short term uptrends, the 50 day moving averages and the former resistance
now support levels (13302, 1422) will all work in tandem, i.e. they will either
all break or all hold. My opinion is
that they will break. But I would add
the caveat that I have been wrong for some time now. In any case, I continue to focus on our Sell
Discipline.
Update on the Shanghai
Composite (short):
Fundamental
Headlines
No
economic news yesterday. Trading did
start with (1) an almost universally
negative take on last week’s EU summit and (2) a less than inspiring earnings
report from Market icon Caterpillar.
That resulted in a down beat bias to trading which lasted for most of
the day and was apparently broken when Apple stock staged a late day rally and
pulled the rest of the Market up with it.
Another
EU summit that wasn’t (medium):
Another
hurdle for the ‘bail out’ fund (medium):
And
Greece
Bottom line:
stocks are, in my opinion, overvalued and the continuing stream of sub par
earnings and revenue reports are supporting that notion. Not that I am expecting a catastrophe. Our forecast is for sluggish growth and
sooner or later that means sluggish profit growth. Under that scenario, our
Valuation Model has stocks 3-4% overvalued.
I grant that (1) it is no great shakes and (2) because it isn’t that big
a deal, under normal circumstances, our Portfolios would be roughly 15% in
cash.
But the problems
in Europe which investors are ignoring (for what reason
I cannot fathom) are a big deal; and the downside risk to policy failure there
is really, really big.
In addition, I have
been pretty confident the ‘fiscal cliff’ would not be troublesome because our
elected reps would fix it with some sort of compromise once the election was
over. Last week, Obama introduced some
uncertainty to that notion by vowing to veto any bill that didn’t contain tax
hikes on the wealthy. Now that statement
may have simply been fiscal brinksmanship but it makes me a little
nervous. And like the EU problem, the downside
risk to running off the fiscal cliff in terms of hampering economic growth is
really, really big.
So I remain
content for our Portfolios to own much more cash than would normally be
appropriate for a slightly overvalued Market; and I will take any occasion to
Sell if stocks hit their Sell Half
Range
Risk
appetite at extreme highs (medium):
The
latest from John Hussman (medium):
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