Tuesday, August 26, 2014

The Morning Call---Draghi has always been 'all talk and no do'

The Morning Call

8/26/14

The Market
           
    Technical

            The indices (DJIA 17076, S&P 1997) just keep on, keepin’ on.  The Dow finished within its short term (16331-17158) and intermediate term (15132-17158) trading ranges, clearly a very short distance away from the upper boundaries of those ranges.  It remains above its 50 day moving average and within a long term uptrend (5101-18464).

            The S&P again traded above its all-time high (1991).  That re-starts the clock on our Time and Distance Discipline.  If it remains above 1991 through the close Wednesday, the break will be confirmed and the short term trading range (1814-1991) will re-set to an uptrend.  It closed within its intermediate term (1887-2687) and long term (762-1999) uptrends and above tis 50 day moving average.  Clearly, the S&P is a mille short hair away from the upper boundary of its long term uptrend.

            Volume remains quite low; breadth improved.  The VIX rose fractionally but finished well within short and intermediate term downtrends and below its 50 day moving average---supporting the move up in stock prices.

            The long Treasury was up, staying within its short term uptrend, its intermediate term trading range and above its 50 day moving average.

            GLD returned to its old ways and declined, ending right on the lower boundary of a building pennant formation---a break below this trend line would be yet another technical negative factor weighing on GLD.   It closed within short and intermediate term downtrends and below its 50 day moving average.

 Bottom line: the Dow moved closer to the upper boundaries of its short and intermediate term trading ranges (and its all-time high); while the S&P broke above the upper boundary of its short term trading range for a second time (and its all-time high).  A close above that level on Wednesday will re-set the short term trend to up.  Further, it is very close to the upper boundary of its long term uptrend.  So it would appear that there is a decent probability that we will witness some trend re-sets this week. 

That said, the Averages are still out of sync, the short term technical indicators are stretched into overbought territory and those oft mentioned divergences persist---not the least of which is our internal indicator. 

My opinion is that the indices are likely to re-set to up across all timeframes but will be unable to confirm a breach above the upper boundaries of their long term uptrends.

Our strategy remains to Sell stocks that are near or at their Sell Half Range or whose underlying company’s fundamentals have deteriorated.
           
            Update on NYSE margin debt (medium):

    Fundamental
 
     Headlines

            It was a busy Monday for US economic data.  The problem was that it was mostly disappointing---the August Markit flash service PMI was well below expectations while July new home sales and the August Dallas Fed manufacturing index were both down right awful.  The one bright spot was the July Chicago Fed national activity index which was strong.  This data causes me a little cognitive dissonance following the last couple weeks’ really good economic numbers.  Of course, it is only one day’s figures; so at this point, it is not going to cause me a lot of heartburn. 

            There were a couple of international news items:

(1)   Draghi made some off the cuff comments suggesting that the ECB would more aggressively pursue monetary easing (QE).  Markets seem to take great heart from that.  Not that the ECB won’t follow through; but let’s not forget that 90% of ECB [easy] monetary policy to date has been lip service versus any action,

The EU and US continue to decouple (short):

(2)   new developments occurred on the geopolitical front:  [a] Russia appears to be sending another relief convoy to Ukraine, [b] the UAE is bombing Libyan insurgent positions and [c] Iran is claiming it shot down an Israeli drone.  None of these seemed to hit investor radar; however, they are reminders that global exogenous risks are not going away.

Bottom line: in the absence of some significant geopolitical event, this pre-holiday week’s focus will likely be on the Market itself, i.e. whether the Averages can break to all-time highs or even challenge the upper boundaries of their long term.  

Certainly, there was nothing in last week’s busy news schedule that would suggest a major follow through.  The economy remains on track; though the situation in Europe and Japan are raising concerns.  Geopolitical events could come into play but they are wild cards.  Monetary/fiscal/regulatory policy is doing nothing to improve that outlook.  Indeed, I believe monetary policy will ultimately prove the unmaking of this Market.  In other words, there is nothing to improve valuations.

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.
 
            First half corporate earnings and the magic of accounting (medium):

            The latest from Lacy Hunt (medium and a must read):

            Cumulative net equity purchases by BofA clients (short):

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