The Morning Call
3/6/14
The Market
Technical
After
Tuesday’s rocket shot, the indices (DJIA 16360, S&P 1873) not surprisingly
rested yesterday, closing down fractionally.
The S&P finished above the upper boundary of its short term trading
range (all time high) (1746-1848) for the second day in our time and distance discipline. It remained within its intermediate term
uptrend (1724-2504) and above its 50 day moving average.
The
Dow traded within its short (15330-16601) and intermediate (14696-16601) trading
ranges and above its 50 day moving average.
Both of the Averages are within long term uptrends (5050-17400,
736-1910).
Volume
shrank even lower; breadth deteriorated.
The VIX closed off fractionally, settling within its short term trading
range and intermediate term downtrend and below its 50 day moving average.
The
long Treasury rebounded, staying within a short term trading range and an
intermediate term downtrend and above its 50 day moving average.
GLD
rose slightly, finishing within a very short term uptrend but within short and intermediate
term downtrends and above its 50 day moving average.
Bottom
line: yesterday’s pin action was
subdued. Following Monday’s big down day
and Tuesday’s even bigger up day, it is not surprising that investors wanted to
rest and gather their thoughts. Given
the magnitude of Tuesday’s price increase, it seems likely that the S&P
will confirm the break of its all-time high.
If that occurs, the Dow needs to follow suit (breaking to the upside) in
order to move the Market trend back to up.
I think that it
is reasonable to assume that ultimately the Averages will get back in sync and
that the trend will be up. If so, the next
resistance level is at the upper boundaries of their long term uptrends. That should be a formidable hurdle to
jump. Indeed, it has held for 85
years.
That doesn’t
mean that it won’t be breached or that prices won’t stick to the upper boundary
and progress at the same rate. It does
mean that the risk/reward offered by stocks at such lofty prices isn’t that
great; and given the proximity of current prices to those more generous valuations,
I think it dangerous to try to trade the interval. However, if I wanted to play with fire, I would
do with a single well traded ETF that could be sold easily with little trading
friction (VTI, IWO).
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.
New
Market highs are not a negative (short):
Latest
bull/bear survey (short):
Update
on margin debt (medium):
From
a long time bull (short):
Fundamental
Headlines
Yesterday’s
US economic data was mixed: the February ADP private payroll report was below
expectations as was the February ISM nonmanufacturing index; on the other hand,
weekly mortgage and purchase applications were up and the latest Fed Beige Book
report was generally upbeat with the caveat that weather was having a negative
impact on some sectors of the economy/sections of the country.
My
take: (1) in the face of recent negative dataflow, mixed stats are better than
lousy stats and (2) as conveyed in the Beige Book, the Fed was much more circumspect
about the economy and the weather’s impact than I would have thought. I think this directly addresses the notion
that [a] the Fed’s tapering is on schedule and is not likely to be delayed,
barring some really terrible data, and [b] while it may take some time for
tapering to have an impact on liquidity in the securities’ market, sooner or
later prices will be affected.
Overseas,
the EU February service PMI came in better than estimates. We could use that.
In
addition, I remind you of the coming bankruptcy set for Friday by a large Chinese
solar company. I linked to a discussion
of the issue in Wednesday’s Morning Call; but in a nutshell (1) to date the Chinese
government has been acted as an implicit guarantor of almost all institutional Chinese
debt. Remember that it bailed out two
investment trusts a couple of weeks ago, (2) investors have been using that
implicit ‘put’ to make high risk bets, assuming that they will be bailed out if
something goes wrong [creating moral hazard], (3) so if the government jerks its
back stop and investors are allowed to lose money, the risk/reward equation
applying to Chinese securities will change dramatically.
Would
this be good long term? To be sure. Some financial authority somewhere has to
start a return to sound money policy.
Could it trigger disruptions in the global financial market? Yes, IF investors decide that the carry
trade game is up and they start pricing securities on underlying fundamentals. But I have no idea if that will happen: maybe
investors will assume that this action is a one-off and remain calm; may be if
a dramatic sell off ensues, the Chinese government will back off; who knows how
investors involved in the yen or dollar carry trade will react; maybe the
bankruptcy has all been discounted and it will be greeted with a yawn. My point here is to be careful ahead of this development.
Bottom line: the
economic news flow continues to improve over what we have been subjected to the
last couple of weeks. That keeps me hopeful
that the recent bevy of poor stats is another of those periodic but temporary
disruptions in the economy’s sluggish growth process. That notion seems to have been echoed in the
latest Fed minutes. Not that I consider
that a great endorsement; but it does imply that tapering will go on as
planned. The Market may be fine with
that right now; but ultimately, it is going to have to deal with concept of
less free money from the Fed.
In the meantime,
the geopolitics of Ukraine is not likely settled; and the Chinese government is
apparently about to do something no central bank has done since 2009, i.e.
inject moral hazard into the investment process. How that plays out I haven’t a clue; but it
could impact the calculation of security valuation going forward. We can only watch events unfold.
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.
Counterpoint
well made (medium):
The
latest from Dallas Fed chief Fisher (medium):
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