Wednesday, March 5, 2014

The Morning Call--Better US economic data more important than Ukraine

The Morning Call

3/5/14
The Market
           
    Technical

            The indices (DJIA 16393, S&P 1873) staged a powerful comeback yesterday.  The S&P pushed back above the upper boundary of its short term trading range.  Under our time and distance discipline, that re-starts the clock on the confirmation period.  So it needs to remain above 1848 through the close next Monday (time) or close above 1885 (distance) whichever comes first.  The S&P remained within its intermediate term uptrend (1724-2504) and above its 50 day moving average.

            The Dow finished within its short (15330-16601) and intermediate (14696-16601) term trading ranges and above its 50 day moving average.  Both of the Averages are within long term uptrends (5050-17400, 736-1910).

            Volume was down (note); breadth improved though the follow of funds indicator is lagging.  The VIX was down, leaving it within its short term trading range and intermediate term downtrend and below its 50 day moving average.  A check of our internal indicator shows almost no change from the last review which you will recall is completely unsupportive of higher prices.

            The long Treasury declined, bouncing off the upper boundary of its short term trading range.  It remains within an intermediate term downtrend but above its 50 day moving average.

            GLD also sold off though by much less than Monday’s advance.  It closed within a very short term uptrend and a short and intermediate term downtrend.  It also stayed above its 50 day moving average.

Bottom line:  I opined yesterday that ‘it seems reasonable to me that the bulls will gather their wits and make another assault on the highs.’  Little did I know?  The S&P has again entered a confirmation period following a break (Monday’s decline re-set the clock).  That will be over next Monday at the close or if it trades over 1885.  At the risk of repeating a discussion from last week: even if the S&P does confirm the break above 1848, the Dow (and transports) is still in a trading range and hence out of sync with the S&P.  Meaning that the Market will remain trendless.  The other note of caution that I would inject is that yesterday’s rally was on anemic volume, there was a lot of short covering and our internal indicator showed no improvement.

That said, the price move was far too powerful to ignore.  So we again need to be assuming that it is likely that the Averages will ultimately move to the upside and challenge the upper boundaries of the long term uptrends.
Meanwhile, 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

            Only one economic data point available yesterday and that was weekly retail sales which were mixed.

            However, it was politics that held center stage:

(1)   Putin appeared to back off the threat to invade Ukraine, sending the troops back to the barracks.  That dropped investor heartburn level dramatically; although it is clear that Russia is still in control of the Crimea---something that for the time being everyone seems to be ignoring.  Speculation is that Putin was surprised by the drubbing that the ruble as well as the securities markets took in the wake of his initial military actions; and for a country heavily dependent on international trade and finance, those are meaningful consequences.  Of course, that doesn’t mean that Putin will allow the markets to ultimately dictate policy; but it could mean that they have an impact on the pace of policy implementation.

(2)   Obama released His FY2015 budget plan.  We already knew that one of the changes coming was a re-do in defense spending.  Also there was higher taxes [$1 trillion, yes with a ‘T’] on the wealthy and lower taxes on the poor [though one half of the country pays no taxes].  Just what our subpar growth economy needs.  What planet is this Guy on?

The good news is that consensus is that it, like the house tax reform proposal, is DOA.  As I said with respect to the latter, this is an election year and big policy changes generally don’t occur in those years.  Indeed both documents are likely not much more than election year position papers.  For that we can be grateful.

      Obama releases His 2015 FY budget proposal (short):

     Obama’s budget in two charts (short):

     Ron Paul on the proposed cuts in defense spending (medium):

Bottom line: despite stocks’ euphoric reaction to Putin turning down the heat, I have my doubts that Ukraine will just fade away---although I do believe that whatever ultimately occurs, it will have little economic impact globally (with my caveat that the politicians resist the temptation to do something stupid).  Rather I still think that the important news this week has been our own surprisingly positive economic data and the impact it could have on Fed policy.  So far, investors have either ignored it or are assuming a goldilocks outcome.  As you know, I believe that if the Fed tapers by an extra $10 billion each month (which is the current stated policy), sooner or later it will have an impact on bond and stock prices.

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.

            Bear in mind, this is not a recommendation to run for the hills.  Our Portfolios are still 55-60% invested and their cash position is a function of individual stocks either hitting their Sell Half Prices or their underlying company failing to meet the requisite minimum financial criteria needed for inclusion in our Universe.

            It is a cautionary note not to chase this rally.

            Seth Klarman on the market (medium):

            Five investing don’ts from Warren Buffett (medium):
            http://www.cnbc.com/id/101460659

            The consensus portfolio (short):

            A century of policy mistakes (medium):

            The latest from Bill Gross (medium):

            Lance Roberts on the sustainability of profit growth (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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