Thursday, November 14, 2013

The Morning Call--No Sellin' with Yellen

The Morning Call

11/14/13

The Market
           
    Technical

            The indices (DJIA 15831, S&P 1782) had a good day, both remain within uptrends across all time frames: short term (15273-20273, 1715-1869), intermediate term (15273-20273, 1624-2206) and long term (5015-17000, 728-1850).

            Volume was up but is still anemic; breadth improved.  The VIX declined, finishing near the lower boundary of its short term trading range and within its intermediate term downtrend.

            The long Treasury was up slightly, closing within its short term trading range and its intermediate term downtrend.

            GLD rose but remained below the lower boundary of its very short term uptrend.  If it ends today below that boundary, the break will be confirmed.  It continues in its short and intermediate term downtrends.

Bottom line:  all trends of both indices are up, despite numerous signs that breadth is deteriorating.  However, I continue to believe it reasonably likely that the Averages will take a run at the upper boundaries of their long term uptrends (17000/1850). 

If a trader wants to play this potential leg up but I would do so only if tight stops are used.  As a longer term investor, I would take advantage of the current high prices to sell any stock that has been a disappointment and to trim the holding of any stock that has doubled or more in price.

If one of our stocks trades into its Sell Half Range, our Portfolios will act accordingly.

            16 ways to improve performance (medium):

            S&P breaks out to more overbought position (short):

    Fundamental
  
     Headlines

            One secondary US economic indicator was reported yesterday: weekly mortgage and purchase applications fell.  Not really that big a deal.  However, overseas Japanese machinery orders fell as did EU industrial output.  That brought hints from the ECB that QE of some sort may be on the way.   

            And:

            ***overnight, Japanese third quarter GDP was up but not at the pace of the first and second quarters; German GDP also slowed in growth; French and Italian GDP’s were negative and as a result, the EU GDP was below expectations

            The above hint from the ECB along with the release of Yellen’s prepared remarks for her confirmation hearing today---which were ultra dovish---got investors jiggy and provided the fuel for another big up day.  That Yellen is a dove is not exactly new news; but I guess yesterday was another one those ‘any news is good news’ days. You know my thoughts---the longer this goes on, the worse the outcome.

            Kevin Warsh piles on (medium):

            Major central bank asset growth versus GDP (short):

            The other item worth mentioning is the resumption of budget talks.  The initial Dem position is to rescind the sequester and spend more money---what else is new.  To that end there were hearsay reports (though I have nothing concrete)  that the CBO’s next series of budget projections will be show a shoot the moon deficit without rescinding the sequester.  That, of course, is way down the road.  The immediate issue is how our ruling class comes up with a FY2014 budget; if indeed they can do it at all.

Bottom line: the assumptions in our Economic and Valuation Models remain on track, including those of any over easy Fed that bungles the transition from easy to tight money and a half assed solution to our fiscal problems.  Of particular concern to me is the former which I worry will end far worse than is reflected in our Model.

I remain confident in the Fair Values generated by our Valuation Model; hence, stocks are overvalued.  Of course, there is some likelihood that they can get even more overvalued if the large number of underperforming money managers choose to chase potential higher returns through year end. 

This doesn’t mean that stocks are a value; it means that catching up is an economic necessity for those trailing money managers.  It may also mean that by the end of December, a Chevy Market could be carrying not a Cadillac, but a Mercedes price.
                        


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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