The Morning Call
7/30/14
The Market
Technical
The
indices (DJIA 16912, S&P 1969) drifted lower yesterday, but closed above their
50 day moving averages (the Dow ended near its average) and within uptrends
across all time frames: short (16232-17711, 1919-2085), intermediate (16624-20922,
1862-2662) and long (5101-18464, 762-1999).
Volume
rose slightly; breadth deteriorated---pushing stocks into an extended oversold
position. The VIX jumped 6%, finishing
below, though very close to, its 50 day moving average and within short and intermediate
term downtrends.
The
long Treasury rose, likely on the increased tensions over sanctions on
Russia. It is over its 50 day moving
average and within its short term uptrend and intermediate term trading range.
Surprisingly,
GLD sold off. It closed above, though
very close to, its 50 day moving average and within a short term trading range
and intermediate term downtrend.
Bottom line: nervousness
over a confrontation with Russia seemed to guide the pin action in the Markets
yesterday---stocks down, bonds up on a flight to safety trade. GLD’s performance continues to mystify me. It bothers me that its trading remains so
schizophrenic, because it raises doubts on what could be going on economically/geopolitically.
This fallout
from geopolitical events also masks the bond guys’ sentiment on the economy;
that is, if bond prices were rising, ex sanctions, then it would make sense
that investors are worried about an economic slowdown. But is they are up on sanctions, it is tough
to know their attitude on the economy.
All that said, equity
investors’ psychology remains relatively stable in the face of disconcerting
news---something it has done consistently for the last two years. Until
that optimism fades, momentum by definition is to the upside.
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.
Since
the late 1980’s, August is the worse month of the year for stocks.
http://blog.stocktradersalmanac.com/post/August-Is-Worst-Performing-DIA-SPY-QQQ-IWM-Month-Since-1988
Fundamental
Headlines
Yesterday,
the weekly retail sales report was upbeat while the latest reading on consumer
confidence was a blowout number. However,
both are secondary indicators and as such are not earth shaking. The Case Shiller May home price index was disappointing. One could argue that this is stale (May) data.
On the other hand, it fits with other recent
subpar stats on the housing market; and while that may increase its value
somewhat, I am not altering a forecast on 60 day old data.
The
news that held everyone’s attention was the announcement of sanctions against Russia. The EU elected to participate; though not
surprisingly, they seemed designed to insure that they didn’t anger Putin
sufficiently to impose painful retaliations.
Obama
moralized over the unacceptable Russian response to a problem the US brought on
itself (sponsoring a coup disposing of a duly elected pro Russian Ukrainian
president) with His usual holier than thou attitude and warned of more action
to come if Russia doesn’t shape up and do what He wants. Good luck with that Mr. President. I have opined in the past that the real
danger in this situation was Obama taking a too confrontational position that (1)
the universe knows that He won’t back up and (2) Putin decides to bitch slap in
front of the world. That would likely
weigh heavy on investors.
And:
And,
this from David Stockman (medium and a must read):
The
other gem out of Washington was a move by the senate to penalize any company leaving
the US to avoid dealing with the one million page, highly convoluted, overly
oppressive tax code---the blame for which lies not with the company but with
the congress. It is symptom of our calcified
fiscal policy that when it creates a regulatory environment designed to
accomplish some ‘noble’ purpose and it fails, the solution is to impose more
regulations not reform those that didn’t work in the first place. I haven’t addressed in much detail this
headwind to our economy in sometime; happily as result of gridlock. Hopefully, that condition will continue to prevail. Whether it does or not, the precondition
(clowns to the left of me, jokers to the right) remains.
Bottom line: the
meat of the week starts today---the first read on second quarter GDP (it was
pleasantly surprising) and the completion of the latest FOMC meeting. As I noted yesterday, I doubt that we will
get anything new out of Yellen and crew; but the additional data on the economy
will hopefully provide of some clarity on the pace of growth or lack thereof.
This Ukrainian
situation is getting more worrisome. It
is like a bad case of the herpes---it is not going away. And the more the US and Russia keep poking
each other in the eye, the greater the chance that something untoward
occurs. I am not talking war, I am
talking about public humiliation---ours.
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.
World’s
largest systematic risk at the moment (medium):
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