The Morning Call
The Market
Technical
The
indices (DJIA 16256, S&P 1857) rebounded yesterday, though I thought it
rather meek given the extent to which they were oversold. The S&P closed within uptrends across all
timeframes: short (1802-1979), intermediate (1752-2552) and long (739-1920). The Dow remained within short (15330-16601)
and intermediate (14696-16601) term trading ranges and a long term uptrend
(5050-17400). This respite keeps the
technical damage limited; but the Averages continue out of sync in their short
and intermediate term trends---which leaves the Market trendless.
Volume
fell (as it seems to do on up days); breadth improved. The VIX declined, finishing within its short
term trading range and intermediate term downtrend and above its 50 day moving
average.
The
long Treasury was up again, closing for the second day above the upper boundary
of its short term trading range. Under
our discipline, the break will be confirmed at the end of trading today; but as
I said yesterday, given the recent false breakout, I will likely wait till
Thursday or Friday to make the call. I
also reiterate that a big improvement in bond prices probably does not bode
well for stocks. TLT remained within a
very short term uptrend, above its 50 day moving average but within an
intermediate term downtrend.
A
look at the high yield market (medium):
GLD
lifted a bit in trading but is still within short and intermediate term downtrends
and below its 50 day moving average.
Bottom line: yesterday’s price rebound was not that much to
get excited about given current oversold condition of stocks. I think that it likely reflects the growing
level of uncertainty as depicted in the numerous divergences to which I frequently
allude. As a result, trading will
probably stay choppy; though I think that the bulls have enough residual
strength that they can mount a challenge to the upper boundaries of the
Averages long term uptrends.
On the other
hand, the bears are going to have to mount some serious selling to breach the
lower boundaries of the indices’ short and intermediate term trends. Until that happens, the assumption has to be
that stocks are either consolidating or heading higher. That said, given the proximity of the
Averages to the upper boundaries of their long term uptrends and the degree of stock
overvaluation (as calculated by our Model), 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.
A
thought experiment (short and a must read):
Fundamental
Headlines
Yesterday
was another relatively quiet day, news wise:
(1) US
economic news included an upbeat small business optimism index as well as
positive weekly retail sales. These are
both secondary indicators; so by themselves they are not going to challenge ours
outlook. Nonetheless, they do provide
support.
****overnight,
US regulators increased the capital requirements for large banks and February
German exports fell 1.3%.
(2) political
turmoil continues in the Ukraine with both sides accusing the other of
encouraging their followers to instigate violence. However the headlines read when this crisis
is over, I feel reasonably sure that the Russians will be happy with the
outcome,
The latest from Ukraine:
(3) in
the absence of news, the Market itself has become the story/headline as the
universe debates valuations and direction.
This circumstance is likely to last only as long as there is nothing
else for investors to focus on---the most immediate candidate being the just
started earnings season.
Bottom line: the
US economy continues to perform unbelievably well given that the Fed policy is
about as far out on a limb as it could get and the ruling class proves every day
that its sole objective is re-election. In
addition, the rest of the global has been able to handle its collective
problems with little to no extended fallout; though to be clear problems abound
in China, Japan, the EU, the Middle East and Ukraine.
An optimist on
China. He seems to be relying on the
same factor as the Fed optimists, to wit, that the power elite are smart enough
to extricate themselves from tough situations with manageable fallout. I can’t remember; how did that work in 2008?
Another
Chinese bond default (medium):
Draghi’s
‘whatever it takes’ may not be enough (medium and a must read):
EU bank deal appears to
be unraveling (medium):
That the equity
market has thus far been able to handle these difficulties with such equanimity
is positively astounding, given the magnitude of the gap between current prices
and Fair Value (as calculated not just by our Model but numerous others to
which I continually link). That gap,
however created, is in my opinion the overriding risk to stocks.
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.
No
one rings a bell at the top (medium and a must read):
Counterpoint
(short):
Profit
margins and stock market reversions (medium):
More on equity valuations (medium):
Great
thought on being wrong (short):
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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