The Morning Call
The Market
Technical
Yesterday,
the indices (DJIA 14973, S&P 1656) finally got the much anticipated bounce
off of a very oversold condition.
However, the Dow remained within its new trading range
(14190-15550). That leaves it out of
sync on a short term basis with the S&P which closed within its short term
uptrend (1628-1783). Both finished within
their intermediate term (14629-19629, 1553-2141) and long term uptrends
(4918-17000, 715-1800).
Volume
rose measurably; breadth improved, though the flow of funds indicator remains
quite negative. Further, both of the
Averages closed below their 50 day moving averages. In the case of the S&P, it finished right
below this indicator. A move above that
would be a plus for stocks, while a bounce off it to lower levels would be
negative. The VIX fell 7% but remained
within its short term trading range and its intermediate term downtrend.
GLD
rose, closing above the developing very short term uptrend but will within its
short and intermediate term downtrends.
Bottom
line: the Averages remain out of sync
which means the Market trend is indecisive and that patience is at a
premium. As I noted above, the S&P
closed very near its 50 day moving average; how it handles this resistance
point should give us a hint as to near
term Market direction.
Technical
chart book from Fusion Analytics (medium):
The
historical performance of the Market in September (short):
Sentiment update
(short):
Fundamental
Headlines
So
there was plenty of good news to lift investor spirits and provide the fuel for
an oversold price bounce. Indeed, it
did, with stocks up all day.
One
exogenous event that bears comment: mid day, the NASDAQ shut down for three
hours due to a technical glitch (which is yet to be explained); that commanded
media attention for the rest of the day.
My take is that (1) on a short term basis, this is not a big deal except
for the short term traders that had trades unfilled or cancelled as a result,
(2) longer term, [a] it is a signal that our complex trading systems are not
infallible and, in this case, the NASDAQ has a problem to solve and [b] it
potentially could negatively affect the individual investor’s confidence in our
financial system.
As you know,
this latter point has been a recurring theme in our list of risks to the
economy. I am not suggesting that
investors will throw up their hands and desert the equity markets; but I will
suggest that if this had happened in 2008, it would not have been received as
nonchalantly as it was. The point here
is that a huge part of stock valuation is based on confidence and anything that
gives investors a reason to not have confidence can potentially be a negative
for pricing.
As a result of
the above, ‘tapering’ got shoved off center stage, at least temporarily---despite
the fact that the ten year Treasury broke above 2.9% (a much watched level by
the bond guys). However, opinions on the
FOMC minutes and ‘tapering’ kept coming fast and furiously.
The
clueless Fed (medium):
A
survey of the primary dealers shows that they believe ‘tapering’ will start in
September (short):
Counterpoint:
BofA’s
take on the FOMC minutes (short):
Another
optimistic take (medium):
Bottom line: the
US economy
continues to track our outlook for slow economic growth, while the data out of
the EU is suggesting a nascent recovery.
So far, so good. But (1) stocks
are valuing the above scenario far too generously, plus (2) the transition from
easy to tight money seems likely to begin somewhere in the near future
[‘tapering’], (3) while I am uncertain of the exact date, I think it near
enough that Markets are starting to worry about [a] the historical ineptness of
the Fed in executing past transitions and [b] the unprecedented extreme level
from which this transition must commence.
To be sure, the
Fed could come out tomorrow and state that QEInfinity will be in place for as
far as the eye can see AND investors could
believe it. If that happens, I will be
wrong. But until that occurs, our Portfolios remain
cautious and better sellers.
Barry
Ritholtz on Jeremy Grantham’s expected returns (must see 3 minute video):
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