Wednesday, March 19, 2014

The Morning Call---Euphoria notwithstanding, stocks are in nosebleed territory

The Morning Call

3/19/14
The Market
           
    Technical

            The indices (DJIA 16335, S&P 1872) continued to rally yesterday.  The S&P remained within uptrends across all timeframes: short (1777-1954), intermediate (1734-2534) and long (739-1910).  The Dow finished within short (15330-16601) and intermediate (14696-16601) term trading ranges and a long term uptrend (5050-17400).  So they continue out of sync in their short and intermediate term trends---which leaves the Market trendless.

            Volume declined; breadth was mixed.  The VIX fell, finishing within its short term trading range and intermediate term downtrend but still over its 50 day moving average.
           
            The long Treasury rose, leaving it within a short term trading range and an intermediate term downtrend.  While the potential of a triple top is a worry, breadth continues very strong and it remains above its 50 day moving average.

            GLD fell, closing within a very short term uptrend and within a short term downtrend, having failed at its first challenge of the upper boundary of that trend.  It is also in an intermediate term downtrend.

Bottom line:  my skepticism regarding Monday’s rally proved meaningless, as prices continued to advance.  However, volume remains anemic, breadth is mixed and a number of other divergences continue to flash yellow.  Clearly, the buyers are still out there, though now there is some evidence that they might be weak holders:

Nevertheless, all signs point to their ability to push the Averages to the upper boundaries of their long term uptrends; however, if they are weak buyers as the above article suggests, it would confirm my thought that they will not be able to push prices beyond those levels.

My intent is to use any price strength (1) that pushes one of our stocks into its Sell Half Range, to act accordingly or (2) as a gift allowing us to eliminate a stock that fails to meet its quality criteria.

            ‘Sell in May and go away’ in midterm years (short):

    Fundamental

     Headlines

            Another day of mixed US economic data: February CPI and CPI ex food and energy were on target; but weekly retail sales were mixed; February housing starts were a disappointment, but building permits were up.  That is nothing to jump up and down about but it is on par with the flow of the last two weeks---meaning that it also wasn’t terrible.

            Overseas:

(1)   the German high court cleared the EU bailout fund---which is great news if you love the thought of potentially more banksters being bailed out of horrendous business decisions by the EU taxpayer.   It is not so great if you are depending on Europe doing anything other than ‘muddling through’.

(2)   the Chinese yuan fell in the wake of the widening of its trading ban.  This is not a good sign for the ‘carry trade’ crowd.

***overnight:

(3)   Putin announced that Russia had no additional territorial ambitions beyond re-uniting with Crimea [which was the main headline of the day].  He must have forgotten [a] to send a memo to the troops on the ground as a live fire fight broke out and one Ukrainian soldier was killed {I never heard one mention of this incident all day on CNBC} and [b] his signature statement that the dissolution of the Soviet Union was the greatest tragedy of the twentieth century.

Yesterday’s pin action suggests that investors believe that the Ukrainian crisis is behind us---and it maybe [operative word].
           
 Bottom line: Putin calming statement yesterday notwithstanding (1) I have my doubts that Ukraine will just fade into the sunset as an issue and (2) I was and still am more concerned about the Chinese financial system than about any repercussions from a US/EU/Russian standoff.  In addition, neither the Japanese, nor the US nor the EU economies are out of danger of slipping into a recession---certainly that is one possible message being delivered by the bond markets.  Finally, Fed tapering is on schedule---a least until 2PM this afternoon.  As you know, I am much less concerned about its impact on the economy than I am about that of the Markets; and when coupled with the squeeze being put on by the Chinese central bank, the potential for investor heartburn remains.

In my opinion, the overriding metric right now is the nosebleed level of stock prices.  Even assuming Ukraine were to fade into the sunset, the major global economies continue to grow and the US and Chinese central banks pull off a perfect dual easing combo, those scenarios are implicit in our Valuation Model.  That is, the upper boundaries of Sell Half Ranges in our Valuation Model are all premised on a perfect environment.  Yet our Portfolios have been pushed to a 40-45% cash position by stocks hitting that ‘perfect environment’ price range.  True, not all the stocks in our Universe are at such lofty levels.  But most are close enough that it would be nuts to be Buying them.

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.

            The latest from Jeremy Grantham (in brief):

            Cheap and simple beats expensive and complex (short):







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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