Thursday, July 18, 2013

The Morning Call + Subscriber Alert---All eyes on 15550/1687

The Morning Call

7/18/13

The Market
           
    Technical

            The indices (DJIA 15470, S&P 1680) returned to their winning ways yesterday.  They remain within their short term trading ranges (14190-15550, 1576-1687) and the intermediate term (14364-19364, 1525-2113) and long term uptrends (4918-17000, 715-1800).  The flattish pin action of the last week is just what the bulls ordered---working off an overbought position by marking time.  Without any additional movement to the downside, this trading pattern appears to be setting up for another assault on 15550/1687; and the longer it goes on, the more likely it is to be successful.

            Volume inched up; breadth improved. The VIX fell but remained above the former lower boundary of a very short term uptrend; so I am delaying making a call on the successful negation of that uptrend for another day.

            GLD dropped, falling back below the lower boundary of its short term downtrend.  Ugh.

Bottom line: ‘the indices remain in that price zone just shy of a major resistance level (15550/1687).  One good day could put them above those levels; but a major down day would strengthen the resistance power of 15550/1687, leave the short term trading range in tact and could start to raise questions about a double or triple top.  But until one or the other occurs, there is nothing to do but watch the process.

            Another indicator is flashing a Sell signal (short):

            Hot Julys are generally followed by a rough autumn (short):

    Fundamental
    
     Headlines

            The two primary datapoints yesterday focused on the housing market: weekly mortgage applications were down, though the more important purchase applications were up; June housing starts and building permits were quite negative.  Immediately after the release of those housing numbers, pundits jumped all over the figures and pronounced them an aberration---citing weather and other factors for the shortfall. 

            I am inclined to accept that explanation---for the time being.  Certainly, the stats are an outlier viz a viz the recent data flow.  So the issue is, are they, indeed, an outlier or are they a sign of things to come?  As I said, I will accept the former explanation unless the current flow of stats takes a turn for the worst.

            Here is the apologists argument:

            The remainder of the day was taken up by the Fed.  First, we were rewarded with an hour or so of very cautious testimony by Bernanke before the house.  We learned little new from either the pre-released official comments or his Q&A.  We did learn, as Art Cashin so apply observed, that even with the early release of his remarks, the house members still couldn’t or wouldn’t challenge him on a single issue---very disappointing.

            I am also left grappling with the issue of investor trust in the Fed.  As you know, my argument has been that the whole ‘tapering’ fiasco took the ‘bloom off the Fed QEInfinity rose’.  With stocks below the May 22 high and Bernanke having completely walked back his original statement, I think that the issue is still undecided.  However, a move up above 15550/1687 would disprove my thesis, at least for the moment.

            Goldman Sachs on Bernanke’s testimony (short):

            Bernanke’s quote of the day or Thursday morning humor (short):

            He apparently hasn’t seen these charts (medium):

            Later in the day, the Fed released its latest Beige Book report.  As might be expected from the recent data flow, the overall look at the economy was that it was progressing at a modest to moderate pace.  Again no new news (see below for the most relevant excerpts from the text). 

Bottom line:  stocks are overvalued fundamentally, at least as measured by our Valuation Model.  In addition, a risk/reward analysis based on the major technical trends is not particularly attractive (upside about 3-6% versus 6% downside if stocks return to the short term lower boundary, 9% if they slide to the intermediate term lower boundary, 18% if they return to Fair Value and 57% if they make it all the way to the long term lower boundary).

         So I see few reasons to be Buying stocks at current levels.   A move above 15550/1687 would encourage a continuation of Selling as our stocks move into their Sell Half Ranges while any move down needs to be sufficiently dramatic to alter the current risk/reward equation before any Buying would make sense.

            Robert Shiller on speculative bubbles (medium and a must read):

            The dash for trash (short):

       Subscriber Alert

            The stock price of CR Bard ($112) has traded above the upper boundary of its Buy Value Range.  Accordingly, it is being Removed from the Dividend Growth Buy List.  The Dividend Growth Portfolio will continue to Hold BCR.

            The stock price of Atrion ($237) has traded above the upper boundary of its Buy Value Range.  Accordingly, it is being Removed from the Aggressive Growth Buy List.  The Aggressive Growth Portfolio will continue to Hold ATRI


The stock price of ConocoPhillips (COP-$65) has traded into its Sell Half Range.  Accordingly, the Dividend Growth and High Yield Portfolios reduce their holdings to 50% positions.



Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973. His 40 years of investment experience includes institutional portfolio management at Scudder, Stevens and Clark and Bear Stearns. Steve's goal at

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