Thursday, February 20, 2014

The Morning Call---FOMC pitches a curve ball

The Morning Call

2/20/14

The Market
           
    Technical

            The indices (DJIA 16040, S&P 1828) declined off of an overbought position yesterday, remaining within their short term trading ranges (15330-16601, 1706-1858).  The Dow closed within its intermediate term trading range (14696-16601) and once again fell below its 50 day moving average, while the S&P is in an intermediate term uptrend (1714-2494) and above its 50 day moving average.  Both are in long term uptrends (5050-17400, 728-1900).

            Volume fell; breadth was lousy.  The VIX surged 11%+, finishing within its short term trading range and intermediate term downtrend.  It bounced up off of its 50 day moving average---a negative for stocks.

            The long Treasury fell, closing within its short term trading range and intermediate term downtrend.  With the decline, the head and shoulders formation remains in play.

            GLD was also down, staying within a very short term uptrend but a short and intermediate term downtrend.  As you know, I am watching for the level where GLD finds support on a decline.

Bottom line:  the big technical question on yesterday’s pin action is: what powered the Averages’ decline, a third bounce off their all-time highs (a big negative) or simply a sell off from an overbought condition (little significance)?   The answer is likely the latter; although only time will provide it. 

Meanwhile, we have a Market in a trading range, whose upper boundary remains a serious resistance level; so there is really not much to do save using any price strength that pushes one of our stocks into its Sell Half Range and to act accordingly.
           
    Fundamental
    
     Headlines

            The lousy economic data continues to flow in both here and abroad.  Overseas, the UK unemployment rate rose.  In the US, mortgage and purchase applications were down and January housing starts were terrible.  On a neutral note, January PPI came in as expected.  On a confusing note, the Fed released the minutes of its January FOMC meeting.  Two signals rattled investors, which was the prime driving force of the day’s sell off:

(1)   tapering is still on.  This represents a bit of cognitive dissonance to investors who have been tip toeing though the tulips of late on the notion that the new Yellen Fed would fold like a cheap umbrella on its tapering policy if the economics numbers softened.  Since the stats are somewhat more than soft, this re-affirmation of tightening was not well received,

(2)   new forward guidance on further tightening is likely to be forthcoming in the near future but there was no hint on what the criteria would be.  That squeezed a few sphincter muscles around Wall Street.  At least stating that tightening was still on could be measured.  But new unstated guidelines are an unknown; and we all know how investors hate unknowns.

Bottom line: more lousy economic numbers but no added clarity as to the extent that weather played.  No doubt that it has played a role; but I question whether it is wise for investors to be assuming that it is the dominant factor.  That said, I have observed that our economy has hit a number of soft patches over the last five years with no permanent damage.  So I am not altering our forecast until we get a better read.  The issue I have is how to price stocks in view of a less certain future.

Of course, until the release of the FOMC minutes many on Wall Street seemed to be depending on the Fed to make sure that the future was not less certain, to wit, QE if there was even a hint of trouble.  Now that has been drawn into question, anxiety levels seem to be headed higher---at least they were yesterday.

Not to be repetitious, but I have tried to be clear that whatever the economic data turns out to be, I am not convinced Fed policy---tapering or not---will have much impact,  It hasn’t so far (except for QEI); so I see no reason to assume it will in the future.   Hence, I don’t think that investors are worried about the economic impact of any change in Fed policy.  I think that they are concerned about the stock market impact---as well they should be.  A subject that for me has reached the stage of beating a dead horse.   So I will stop there.

  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.

            On economic growth

            The latest from John Hussman (medium):

            Emerging market melt upcoming? (medium):

            Are muni’s a bargain? (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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