Thursday, July 10, 2014

The Morning Call---Business as usual at the Fed but a shit storm in Europe

The Morning Call

7/10/14

The Market
           
    Technical

On the back of more Fed equivocation, the indices (DJIA 16985, S&P 1972), not surprisingly, bounced yesterday---finishing above their 50 day moving averages and within uptrends across all time frames: short (16168-17647, 1901-2068), intermediate (16422-20781, 1843-2643) and long (5083-18464, 762-1999). 

Volume fell; breadth improved.  The VIX fell back below the upper boundary of its very short term downtrend, thereby negating Tuesday’s break.  It remains below its 50 day moving average and within short and intermediate term downtrends.

            The only net buyer left (short):

            The signs of market exuberance (medium):

            The long Treasury was up again.  It is still within short and intermediate term trading ranges and is trading between the upper boundary of a very short term downtrend (on the upside) and its 50 day moving average on the downside.  A violation of one of these resistance/support levels could provide a clue on direction.  It remains a confusing chart and, at the moment, is muddying the economic scenario (growth, easy Fed, rising inflation) of the stock crowd.

            GLD rose.  It is once again outside the trading range from two weeks ago and is nearing its prior high.  A move above this level would be a big plus.  It remains above its 50 day moving average and within a short term trading range and an intermediate term downtrend.

            The seasonal trading pattern for gold (medium):

Bottom line: the old pattern (buy the dips) remains in force, notwithstanding a growing number of divergences and the uncertainty resulting from bond and gold investors more equivocal posture. 

My most likely scenario for the Averages continues to be a challenge of the upper boundaries of their long term uptrends---and then failure to hold.   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.

At the moment, GLD seems to want to go higher but can’t commit; while bonds continue their recent schizophrenic behavior.   Until I can make sense of what these Market are discounting, I am holding off buying gold.

    Fundamental
 
     Headlines

            The only US economic indicator released yesterday was weekly mortgage and purchase applications which were both up.  Overseas, the Chinese CPI plunged---not a great sign of economic vigor.
           
            Neither seemed to matter a lot as all eyes were on the publication of the latest FOMC minutes; and if the expectations were for pabulum, well, investors weren’t disappointed.

            The highlights of the FOMC minutes:

(1)   tapering would continue and likely end in October,

(2)   investors may be getting to complacent,

(3)   the Fed has no clue what ‘normalization’ means or when it might start.

The bottom line being that the Fed is in no hurry to do anything even if it knew what to do.

Here is a more detailed synopsis:

And Fed mouthpiece Hilsenrath’s take (medium):

***overnight (1) a Portuguese bank announced that it was considering bankruptcy; this was followed by big declines in the stocks of large related bank shareholders and then spread through all EU exchanges, (2) French, Italian and Dutch industrial production came in well below expectations, (3) Japanese machine orders fell 19%.

Bottom line: it certainly appears that the Fed is unwilling to lead the market to tighter money (‘normalization’ another new euphemism in the Fed lexicon).  I assume that means that the bond market is going to have to decide for itself that it will no longer accept US debt obligations at ridiculously low yields.  I have no clue when that happens; and judging by the recent pin action in the bond market, fixed income investors don’t seem rushed to do so.  My guess is that until they are, there will remain a bid under stock prices.  I would note that this is an historical pattern of the Fed (following the market, rather than leading) and explains to a large extent why it has always botched the transition from easy to tight money.  Those who don’t learn from history are doomed to repeat it.

That doesn’t mean that we are in for a moon shot.  It just means that as long as stocks remain a viable yield alternative to bond, there is unlikely to be any ‘reversion to mean’ in equities.

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 reading from the Macro Markets Index (short):

            Ignoring history (medium):

            Does this sound familiar? (short):

            Dealing with hot markets (medium):

            Median LBO multiple at record high (medium):

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