Thursday, November 7, 2013

The Morning Call--The ECB joins the easy money crowd

The Morning Call

11/7/13

The Market
           
    Technical

            The indices (DJIA 15746, S&P 1770) were up yesterday.  The Dow hit a new all time high, but the S&P is still within its trading range of the last week and a half.  They both are within all major uptrends: short term (15211-20211, 1707-1861), intermediate term (15211-20211, 1622-2204) and long term (5015-17000, 728-1850).

            Volume was up.  Breadth improved; but the flow of funds and on balance volume indicators are weak.  The VIX fell but closed within its short term trading range and intermediate term downtrend.

            The long Treasury was up slightly, but its pin action remains squirrelly.  It finished within its short term trading range and intermediate term downtrend.

            GLD was up, continuing to trade above the lower boundary of a very short term uptrend.  However, it is also in short and intermediate term downtrends.

Bottom line:  the indices are in uptrends across on timeframes.  Given the Dow’s performance yesterday, stocks may be ready for another leg up.  If so, I am looking at the upper boundaries of the Averages (17000/1850) long term uptrends as the most logical price objectives.  On the other hand, the bond market has not been acting well and that makes me a bit nervous.

A trader might want to try to play this next potential leg up but I would do so only if tight stops are used.  My strategy is to sell a portion of any of our stocks that trade into their Sell Half Range.

            Market performance in the second year of the four year presidential cycle is the worst (medium):
   
            Update on investor sentiment (short/medium):

            Chart of the day (short):

    Fundamental
    
     Headlines

            Investors spent most of the day anticipating the IPO of Twitter after the close along with the nonfarm payroll number on Friday.  So the economic news was put on the back shelf.  In the US, mortgage and purchase applications were down; these stats were offset by the leading economic indicators coming in on consensus.  Overseas, September EU composite PMI and retail sales  were below estimates, while German factory orders were up strong.  In other words, the data is mixed---which has been the case for the last couple of weeks.  Nothing here to disturb our forecast.

            ***overnight, Spanish industrial production edged slightly higher and Ireland is scheduled to receive its last tranche of bail out money.  Most important, the ECB lower interest rates which sent the euro plunging and US stocks higher pre-Market opening.

In the end, I think that rising price talk on Twitter, the increased chatter about a potentially easier Fed (discussed in yesterday’s Morning Call) coupled with the Market having worked off an over bought condition helped stocks remain on the plus side for most of the day.

Bottom line:  despite what appears to be a set up for another leg up, I remain confident in the Fair Values generated by our Valuation Model---meaning that stocks are fundamentally overvalued.  So overvalued, in fact, that I couldn’t sleep at night if I tried to get cute for a further move up.  I am happy to own cash and would be unconcerned if higher prices pushed our Portfolios into even higher cash levels.

            For investors in general, my best advice at the moment is to use the current high prices to sell any asset that hasn’t performed as expected or has done far better than expected.  You don’t have to sell everything (our Portfolios are 60% invested in stocks), just put some of your profits in your pocket.

            Ritholtz on Shiller’s valuation model (medium):

            What exit strategy? (16 minute video):

            Update on this season’s earnings ‘beat’ rate (short):

      Investing for Survival

            A great article on diversification (medium):




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 Investing For Survival is to help other investors build wealth and benefit from the investing lessons he learned the hard way.

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