The Morning Call---A budget deal?

The Morning Call

12/5/13

The Market

           

    Technical

            The indices (DJIA 15889, S&P 1792) continued their nap yesterday but closed within uptrends across all time frames: short term (15451-20451, 1736-1860), intermediate term (15451-20451, 1646-2227) and long term (5015-17000, 728-1850).

            Volume advanced slightly; breadth was mixed though the flow of funds indicator looks pretty bad.  The VIX was up, finishing within a short term trading range and an intermediate term downtrend.

            The long Treasury fell, remaining within a short term trading range and intermediate term downtrend; it continues to build a head and shoulders formation.

            GLD bounced 2%, but closed within both its short and intermediate term downtrends.  It is a positive that GLD couldn’t challenge the lower boundary of its long term trading range.  However, before even thinking about getting more positive on GLD, it has to start taking out some resistance levels.  I am watching but doing nothing.

Bottom line:  while the Averages were off again yesterday, they came back a lot from a big mid day sell off.  So I think the read remains that that the pin action reflects consolidation from an overbought condition.

That suggests another leg up.  My most likely upside targets are the upper boundaries of the Averages long term uptrends (17400/1900).  But I can’t get to higher prices because (1) fundamentals and (2) the growing number of divergences. 

I can’t emphasize strongly enough that I believe that the key investment strategy today is to take advantage of the current high prices to sell any stock that has been a disappointment or no longer fits your investment criteria and to trim the holding of any stock that has doubled or more in price.

European stock markets breaking down (short):

            http://theshortsideoflong.blogspot.com/2013/12/european-equities-breaking-down.html

   

            More on sentiment (short):

            http://www.zerohedge.com/news/2013-12-04/last-two-times-happened-things-didnt-end-well

            And (short):

            http://www.bespokeinvest.com/thinkbig/2013/12/5/individual-bullish-sentiment-drops-below-45.html

            Weak first half of December historically means strong second half (short):

            http://blog.stocktradersalmanac.com/post/First-Half-December-DJIA-SPY-QQQ-IWM-Weakness-Sets-Up-Strong-Finish

    Fundamental

    

     Headlines

            Yesterday’s US economic news was mixed:  weekly mortgage and purchase applications fell; September new home sales were disappointing though they were more than offset by a big October number; the ADP private payroll report was better than expected; the October US trade deficit was in line; the ISM nonmanufacturing index was lower than anticipated.  Finally, the Fed released its latest Beige Book report which changed very little; the bottom line being that the economy continues to grow at a ‘modest to moderate’ rate in all geographic areas.

            Meanwhile, overseas both the Chinese and EU service PMI’s fell short of estimates

           

            ***over night the ECB left interest rates unchanged.

            There was enough bad news in all of this that in a ‘bad news is good news’ world, stocks advanced early in the day.  Then worries about tapering, when and how much, worked its way back into investor focus and prices softened. 

Of course, what baffles me is not that investors are worried about Fed policy, it is that they are not worried enough.  In light of my constant ranting and raving on that subject, I am assuming that I don’t need to explain that.

In any case, later in the day, stocks rallied on rumors that congress was close to some compromise on the budget---the specifics being that level of the spending cuts mandated by the sequester would remain the same but that they would be applied more selectively.  If (the operative word) that occurs, it is great news.  One, because the republicans will have held firm on the spending cuts; and two, because a more rational allocation of spending cuts helps everyone.

Bottom line: in the end, we don’t know the outcome of the budget negotiations, the economic data is still mixed and no one including the Fed itself has a clue what to do next about monetary policy.  And if the Market wasn’t so grossly overvalued, I would just leave it at that.  The problem is (1) the Market is grossly overvalued, (2) sooner or later either the Fed or the Markets are going to change their strategy and (3) when that happens, cash or its equivalent is going to look pretty good.  So it you don’t have any, get some.

            The latest from Doug Kass (medium):

            http://www.thestreet.com/story/12133147/1/kass-everybody-in-the-pool.html

                       

            The coming global tax hike (medium):

            http://online.wsj.com/news/articles/SB10001424052702304355104579232480552517224

            The latest from Jim Rogers (7 minute video):

            http://www.zerohedge.com/news/2013-12-04/jim-rogers-cautions-be-prepared-be-worried-and-be-careful-going-end-badly

      Investing for Survival

            Tips for retirees to avoid running out of money (medium):

            http://www.cnbc.com/id/101215485

            And:

            http://www.usatoday.com/story/money/columnist/2013/12/02/retire-pension-financial-invest/3757971/

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.