Wednesday, May 28, 2014

The Morning Call--Nirvana?

The Morning Call

5/28/14

The Market
           
    Technical

            The indices (DJIA 16675, S&P 1911) smoked again yesterday.  Both hit all-time highs; both are above their 50 day moving averages.  The Dow closed above the upper boundaries of its short (15330-16601) and intermediate (14696-16601) trading ranges.  A close above 16601 on Thursday will re-set the short term trend to up; ditto the intermediate term trend on Friday.  Its long term uptrend is now defined by 5081-18193.

            The S&P remains within uptrends across all trends: short (1850-2017), intermediate (1797-2597) and long (748-1960).

            Volume rose slightly; breadth was mixed.  The VIX finished below the lower boundary of its short term trading range for the fourth day.  If it remains there at the close today, the short term trend will be re-set to down---a plus for stocks.

            The long Treasury was up, ending above the upper boundary of its intermediate term downtrend.  That re-starts the clock on our time and distance discipline.  If it remains above that upper boundary through the close on Friday, that trend will re-set to a trading range.
           
            GLD fell 2%, clearly breaking to the downside from the tip of that pennant formation that I have been following.  That suggests a larger move lower.  Support exists at the lower boundary of its intermediate term downtrend (115.5) and the lower boundary of its long term trading range (114.4).

Bottom line: the bulls appear to be taking control of this Market.  However, that won’t be confirmed by our time and distance discipline until the close Friday; and, of course, it will take a much longer time for the numerous divergences, including our internal indicator, to provide any support.  That doesn’t mean that it won’t happen; but, at the moment, it lends credence to my assumption that the indices will most likely fail in any assault the upper boundaries of the Averages long term uptrends.  Our strategy remains to do nothing save taking advantage of the current momentum to lighten up on stocks whose prices are pushed into their Sell Half Range or whose underlying company’s fundamentals have deteriorated.

            Who is buying (medium)?

            And:

            Stock performance in June of midterm year (short):

            For the bulls (medium):

    Fundamental
    
     Headlines

            There was a lot of US economic and a long weekend of foreign political news to digest yesterday.  In the US, the March Case Shiller home price index, April durable goods orders and the May Markit flash service PMI came in better than anticipated; May consumer confidence was in line; and both the Richmond and Dallas Fed manufacturing indices were disappointing.  This kind of mixed economic news flow has been the standard for the last month or so.  Our forecast incorporates this performance; so no need to reconsider our outlook.

            Overseas, the pro-Western politicians won the elections in Ukraine although violence continues; the anti EU parties won the elections in Europe which seems to have prompted more talk of further monetary easing; meanwhile, Japan is apparently considering tightening monetary policy; and China is taking a move from Putin’s playbook, pressing military action against both Japan and Vietnam.  I linked to news analysis of all these developments in yesterday’s Morning Call. 

The point here is that there continues to be economic and political instability among our major trading partners.  Not that anything tragic will come of it---our forecast is that the world will ‘muddle through’.  However, it is a source of risk to our outlook and therefore needs to be monitored.

            Latest from Ukraine:

            Interview with new head of the Bank of Japan (medium):

            Chinese nonperforming loans hit new high (short):

Bottom line: the data continues to support our sanguine outlook for the economy, the Fed continues to mask its uncertainty about how to navigate the transition process to a normalized monetary policy, to the extent that the US was ever in control of foreign policy, it is now adrift and stocks continue to discount Nirvana.  It seems clear that equity prices will continue to advance until acted upon by an outside force.  Whether that force is technical or fundamental and when it might occur, I haven’t a clue.  I do know our Valuation Model, which hasn’t failed me (except that it is usually too early) for almost 50 years, is pointing to equity valuations in nose bleed territory. 

My bottom line is that for current prices to hold, it requires a perfect outcome to the numerous problems facing the US and global economies AND investor willingness to accept the compression of future potential returns into current 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.
                

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