Tuesday, September 16, 2014

The Morning Call--Is the dollar the answer?

The Morning Call

9/16/14

The Market
           
    Technical

            The indices (DJIA 17031, S&P 1984) had another mixed day (Dow up, S&P down; but the Russell and NASDAQ were weak).  The S&P remained in uptrends across all timeframes; short term (1944-2145), intermediate term (1915-2715) and long term (762-2014); it also closed above its 50 day moving average.  The Dow finished within its short term trading range (16331-17158), its intermediate term trading range (15132-17158), its long term uptrend (5101-18464) and above its 50 day moving average. 

            Volume fell; breadth improved slightly.  The VIX rose, closing above its 50 day moving average (a mild negative).  However, it remains within short and intermediate term downtrends.  As long as that is the case, the assumption is that stocks will continue on the upside.

            The long Treasury was up fractionally, finishing within short and intermediate term trading ranges and below its 50 day moving average.  However, TLT positive performance was not reflective of the pin action in other fixed income sectors which continue to get beaten up.

            GLD increased but still closed below the lower boundary of its short term trading range for the second day.  If it remains there thru the close today, the short term trend will re-set to down.  It is already in an intermediate term downtrend and is trading below its 50 day moving average.  Not much good to say about GLD.

Bottom line: the Averages traded quietly yesterday.  I assume largely as a function of investors wanting to stay on the sidelines awaiting the FOMC meeting and the Scottish independence vote.  That said, there was plenty of bad news around (US industrial production along with lousy numbers out of China and the EU over the weekend).  So there was plenty of excuses to go down.  That the Averages closed basically flat suggests that there is still plenty of support for stocks.  That keeps my technical assumption intact: the Dow will ultimately successfully challenge the upper boundaries of its short and intermediate term trading ranges and then along with the S&P attack the upper boundaries of their long term uptrends. 

That said, bonds are acting sick, ditto oil and gold, ditto emerging market stocks; and US small caps seem to be joining this crowd.  With all these markets rolling over, one has to wonder when stocks in general will follow suit.

Our strategy remains to Sell stocks that are near or at their Sell Half Range or whose underlying company’s fundamentals have deteriorated.
           
            For the bulls (short):

            Weekly technical update from Andrew Thrasher (medium):

    Fundamental
 
       Headlines

            US economic news yesterday was mixed: the NY Fed manufacturing index was a gangbusters number; on the other hand, August industrial production was very disappointing.  Given that the latter is a primary indicator and the former a secondary one, the weight of the news was on the negative side.

            Overseas, Chinese industrial production also came in below estimates.

            ***overnight, August Chinese foreign direct investments (i.e. capital inflows) fell 14%.

            That said, investors’ attention was and will remain on the outcome of the FOMC meeting and the Scottish independence vote.  I covered these subjects last week; but in brief, (1) the focus on the FOMC meeting will be on a rumored change in language which would suggest a rise in interest rates earlier than previously expected and (2) investors are concerned that a Scottish secession could lead to problems in both the Scottish and English economies, in the Scottish banks and potentially precipitate similar movements by other independence groups in Europe.
           
Bottom line: while the major indices are performing well, the hiccups in the bond, oil, gold and emerging markets look like warning signs on top of the already growing number of internal divergences within the Averages themselves.  As you know, I think that valuations have been in nose bleed territory for the last year.  On the other hand, there remains a relentless bid under the Averages; and for better or worse, that is the dominating factor pricing stocks.

The strong dollar may explain all of the above (medium and a must read):

As I opined last week, I believe that a major asset re-pricing is coming; our Portfolios are positioned for that occurrence; but I have no idea when it happens.

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.

            How often do stocks and bonds decline at the same time (short)?

            The illusion of permanent liquidity (medium):

       Investing for Survival from Lance Roberts



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