The Morning Call
7/1/14
The Market
Technical
The
indices (DJIA 16826, S&P 1960) had a ho hum (slightly down) end-of-the-quarter
day, though they closed up above their 50 day moving averages and within
uptrends across all time frames: short (16145-17624, 1895-2062), intermediate
(16379-20744, 1835-2635) and long (5081-18193, 757-1974).
Volume
fell; breadth weakened. The VIX rose but
remained within very short term, short term and intermediate term downtrends
and below its 50 day moving average. Its
performance reflects investors continued complacency with respect to the
Market.
The
long Treasury advanced remaining above the lower boundary of its short term
uptrend---part of a strong bounce beginning the day after the confirmation of a
break of that trend. Despite the fact
that the break was technically confirmed, because of the sharp rebound, I am
leaving the short term trend in effect with the caveat that the TLT chart
remains somewhat confusing. As I noted
yesterday, a move above the 115 level would do a lot to establish the validity
of the uptrend. However, that hasn’t
happened as yet. The uncertainty generated
by a cloudy chart pattern aside, the disconcerting part is trying to figure out
what the bond market is trying to tell us fundamentally, to wit, if bond prices
are suggesting economic weakness and disinflation then that directly
contradicts the opinion of the preponderance of the mainstream economists as
well as the current pin action in GLD.
Speaking
of which, GLD had a good day and appears to have pushed above last week’s trading
range. That provides some assurance that
the short term trend has indeed re-set from a downtrend and suggests that more
inflation is in the cards.
As I noted
Monday, for the sake of continued confidence in (1) our economic scenario and
(2) our current or potential investments in bonds and gold, I would really like
for them either to be in sync or for a scenario to advance that would explain
why they aren’t. For the moment, I
remain uncertain.
Bottom line: the
Averages continue to perform splendidly though the same can’t be said for the
rest of the Market, plagued as it is by miserable volume and multiple
divergences. Whether or not stocks in
general can re-sync with the indices is the $64,000 question right now. That said, the momentum in the Averages seems
to be sufficient to push them to the upper boundaries of their long term
uptrends if not the next set of ‘round numbers’ (Dow 17,000/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.
Update
on sentiment (medium):
Fundamental
Headlines
On
the economic news front, we got three secondary US stats yesterday: (1) June
Chicago PMI fell short of expectations and (2-3) May pending home sales and the
Dallas June manufacturing index both of which were better than
anticipated. There is not a lot of news
value in this information; certainly nothing to make us question our outlook.
The
only other economic news was a $9 billion (no misprint) fine imposed on and a
guilty plea entered by BNP Paribas for financial dealings with sanctioned
nations (Sudan, Syria, Iran). In other
words, yet another example of bankster malfeasance. Incidentally and not to state the obvious, $9
billion is a substantial chunk of change.
BNP has only reserved $1 billion for this settlement; so this fine will
do some damage to its balance sheet---again providing an example of why I am
concerned about the real financial strength of the ‘too big to fail’ banks.
***overnight,
Chinese PMI was in line but housing prices are falling and Japanese PMI missed
estimates.
Bottom line: while
the indices continue sanguine about the economic outlook, the bond and gold
markets appear to be a bit more circumspect.
Not that the Fed won’t extricate itself and the economy sans pain from
the greatest monetary experiment (gamble) in modern times; not that fiscal,
regulatory policies will remain headwinds to growth; not that Japan and China
won’t get their economies under control or the ECB won’t be successful in pursuing
a policy already proven wrong; and not that our feckless foreign policy won’t
end with a military or economic/energy problem that harm our own growth.
None of this may
occur; but given the current generous valuation of equities, I am in the camp
of the bond and gold investors who appear to taking a more cautious
approach.
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.
Henry
Blodget on ‘it’s different this time’ (medium):
The
latest from John Hussman (medium):
Fed
executes record reverse repos on quarter close (short):
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