Wednesday, June 18, 2014

The Morning Call--Is it good to be impervious to bad news?

The Morning Call

6/18/14

The Market
           
    Technical

            The indices (DJIA 16808, S&P 1941) remain impervious to the news flow, closing up, above their 50 day moving averages and within uptrends across all time frames: short (16045-17524, 1874-2041), intermediate (16263-20624, 1821-2621) and long (5081-18193, 757-1974). 

            Volume was down; breadth improved.  The VIX fell, finishing within very short, short and intermediate term downtrends and below its 50 day moving average.

            The long Treasury dropped, responding, as would be expected, to the hotter than anticipated CPI numbers.  As a result it is close to reversing its recent uptrend.  It is back below the upper boundary of its former intermediate term downtrend (not good), below the lower boundary of its short term uptrend (really not good; though our time and distance discipline must confirm the break) and very near to its 50 day moving average (also not good).

So the questions before us are (1) will the time and distance discipline confirm the break of the short term uptrend [which will occur at the close Thursday], (2) will TLT break below its 50 day moving average and (3) on a very short term basis, will TLT make a new lower low thereby establishing a new very short term downtrend.  If the long Treasury does turn down, it would remove the recent divergent stock/bond trading conundrum.

GLD fell, remaining within very short term, short term and intermediate term downtrends and below its 50 day moving average.  However, it is trading right on the upper boundary of its very short term downtrend.  A move up would then signal that the stock, bond and gold markets were all discounting continuing growth, higher inflation or both.

Bottom line:  the Averages continue to amaze, fighting an overbought condition and a stream of adverse news---higher CPI (which could equal tighter money), poor housing starts and an explosion at a major Ukrainian pipeline---by inching higher.  Further, the bond and gold markets are close to confirming the potentially brighter economic/higher inflation/easy Fed outlook apparently being embraced by equity investors. So they remain on track to challenge the upper boundaries of their long term uptrends, if not the next set of ‘round numbers’ (Dow 18,000/S&P 2000). 
 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.

    Fundamental
    
     Headlines

            All the economic news yesterday was from the US and it wasn’t so terrific: CPI was hotter than anticipated and housing starts were worse.  Weekly retail sales were the bright spot though this is a secondary indicator.

            Overseas, a major energy pipeline transiting Ukraine was blown up.  This on top of the breakdown in the Russia/Ukraine talks about Gazprom sales to Ukraine

            And:

            On the other hand, it appears that the (Sunni) Iraqi insurgents’ offensive may be stalling as it moves toward Shia dominated areas (Baghdad) and the Iranians (Shias) get involved militarily.  Hopefully, this turn will serve to ease concerns about higher oil prices.

            On the other hand:

            The above notwithstanding, most of yesterday’s media discussion was focused on today’s FOMC meeting and the accompanying statement/Yellen news conference.

Bottom line: I think that the CPI and housing news, while disappointing, were little more than a reminder that the US economy is not going to shoot the moon but will continue to struggle forward. 

The big questions: (1) is inflation really starting to pick up, (2) what will the Fed’s response be: [a] point to the lousy housing numbers and continue mewing to investors about remaining accommodative while insisting tapering ain’t tightening, [b] voice concern about inflation and start sounding a bit less dovish.  I think that the universe expects the former and given past performance, I am inclined to agree.  Which in turn will likely mean that ‘goldilocks’ will remain the consensus forecast and stocks will continue to advance. 

That said, I will note that with yesterday’s CPI report, year over year inflation is now at the Fed target of 2%.  Since unemployment has already reached its target, today’s FOMC policy decision should serve as a good test of whether the Fed has a chance of (will even attempt) successfully transitioning to normalized monetary policy
The bad news is that equities are priced for perfection; meaning there is little room for a negative exogenous event or, for that matter, the hint of a doubt about the economy or the positive unwinding of global QE.

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.

            The latest from John Hussman (medium):

            The latest from David Rosenberg (medium):

            The case for owning emerging markets (short):

            The latest on the Chinese commodity re-hypothecation scandal (medium):

      Investing for Survival

            Revising old financial rules:

No comments:

Post a Comment