The Morning Call
9/24/14
The Market
Technical
The
indices (DJIA 17055, S&P 1982) had another weak day. The Dow fell back below the 17158 (upper boundaries
of short and intermediate term trading ranges).
Under our time and distance discipline that negates the break of the
intermediate term trend---hence, it remains in a trading range (15132-17158).
The short term
trend is a bit trickier because the time element was met yesterday; and I re-set
the trend to up. That said, it was negated
after only one day. In addition, it shared the same upper boundary
with the intermediate term. In
circumstances like this, I usually find a compromise. In this case, if the Dow closes below 17158
today, I will return the short term trend to up (16608-19000); if not, then it
remains in a trading range (16332-17158).
The Dow is still in its long term uptrend (5148-18484) and above its 50
day moving average.
The
S&P remained in uptrends across all time frames: short term (1955-2146),
intermediate term (1922-2722) and long term (771-20200.
Volume
was up slightly; breadth was mixed. The
VIX jumped again; this time by 9%.
However, it remained within short and intermediate term downtrends and above
its 50 day moving average.
And
(short):
The
long Treasury was up for a third day in a row, finishing within short and
intermediate term trading ranges; and it closed back above its 50 day moving
average. However, it is developing a
head and shoulders formation---which would be negative for TLT if the pattern
is completed.
Fears
of a broken bond market (medium):
GLD
inched higher but remained within very short term, short term and intermediate
term downtrends and below its 50 day moving average.
Bottom line: the
Dow fell back below the 17158 level, failing to confirm the break of its
intermediate term trading range and calling into question the successful challenge
of its short term trading range. I am
going to let the Market tell me if that break was real or a false flag. However
this price pattern works itself out, I think it makes clear how difficult the
going to the upside has become. There is,
of course, some small probability that we have just witnessed the top---the
operative word being ‘small’. More
realistically, the indices will likely continue to struggle to the upside;
though the longer they try and fail, the more likely that a top is being
formed.
The long bond
continues to shrug off its initial hawkish reaction to the FOMC/Yellen monetary
policy statement. One explanation is a stronger
dollar which itself is a function of weakening in the EU, Japanese and Chinese
economies. Another is that the FOMC will
in fact tighten monetary policy sooner than expected. Yet another is some combination of both of
the above. So you can see why I remain
confused. The good news is that we will
know the answer soon enough. Until then
our forecast remains unchanged.
Our strategy
remains to Sell stocks that are near or at their Sell Half Range or whose
underlying company’s fundamentals have deteriorated.
Fundamental
Headlines
Yesterday’s
US economic data flow was neutral: the US September Markit PMI came in below
estimates, weekly retail sales were mixed and the September Richmond Fed
manufacturing index was better than anticipated. Let’s hope for more improvement.
Overseas,
the September EU PMI declined while the Chinese PMI was above forecasts. Ditto on more improvement.
***overnight,
the September German business conditions index declined for the fifth month in
a row.
On
the political front, two things happened:
(1) the
US started bombing Syria. Military
conflicts often give investors the willies; and this one is particularly risky,
because (1) we are not bombing the Syrian regime [even though it crossed one of
Obama’s red lines and He wants it replaced]; we are bombing ISIS, (2) the
principal reason for not bombing the Syrian regime is that it has some major
supporters [Iran, Russian, China] that may already be involved and could become
even more so, if the US gets too aggressive, and (3) the chaos of war; which is
to say that war plans always look great on paper; but once the first shot is
fired, circumstances change usually in a most unexpected way. That is why there are always so many friendly
fire casualties. No one meant to
kill/injure them; but it happens because there are a lot of guys running/driving/sailing/flying
around with deadly weapons and imperfect knowledge. My point here is, what do you think the odds
are of an attack that accidentally kills Syrian regime personnel or even worse,
Russian/Chinese/Iranian friendlies? Hint,
it is not zero. Hence, the willies.
Syria becomes the seventh country to be bombed by a Nobel Peace Prize winner (short):
(2) the
US government announced that it would revise the tax laws as they apply to
inversions. As I understand those
changes, they will subject the inverting US company’s earnings to US tax law for
slightly longer than it otherwise would have been. In other words, nothing onerous or likely to
stop or prevent future transactions.
However, it did have the desired psychological effect on investors as
stocks in inversion-related transactions took it in the snoot.
Bottom line: the
economic news was a bit friendlier yesterday, but politics got in the
way---giving investors all that they needed to keep the selling momentum
alive. That said, I don’t think that the
changes in taxing inversions are much more than rhetoric, so I see little
fallout. On the other hand, gosh only
knows what the consequences of our new Middle East policy will be. While I don’t see how they can be anything
but worse than they were before the bombing started, I don’t know enough about
ISIS true capabilities to be making doomsday predictions.
Whatever occurs,
both represent a potential added burden on our economy which is already having
enough trouble dealing with the issues associated with declining economic
activity in three of our major trading partners. I don’t see how the US economy can continue
to stand tall in the face of weakening global economic activity and unfriendly
government monetary/fiscal/regulatory policy.
Sooner or later, I believe that some number, some incident is going to
pop the balloon of overvaluation. I am
clueless as to which one it will be. But
the yellow light is flashing.
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):
How
he Fed is killing emerging market’s (medium):
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