The Morning Call
9/25/14
The Market
Technical
Yesterday,
the indices (DJIA 17210, S&P 1998) made a nice recovery from an oversold
position (though they remain oversold). The
Dow once again finished above 17158 (upper boundaries of short and intermediate
term trading ranges). That re-sets the
short term trend from a trading range to an uptrend (16608-19000)---on the
condition that the Dow doesn’t turn right back around today and close back
below 17158.
Under our time
and distance discipline, the clock re-starts on the intermediate term trading
range. If it trades above 17158 through
the close on Friday, it will re-set to an uptrend. For now, it is in an intermediate term trading
range (15132-17158), a 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 flat; breadth improved. The VIX fell
11%, finishing within short and intermediate term downtrends and back below its
50 day moving average.
Update
on NYSE margin debt (medium):
The
long Treasury declined, ending within short and intermediate term trading
ranges but back below its 50 day moving average.
More
on the recent dollar strength (medium):
GLD dropped, finishing
within very short term, short term and intermediate term downtrends and below
its 50 day moving average.
Bottom line: the
Dow continued its schizophrenic behavior rallying hard and closing back above
17158---primarily on the rising prospects of QEInfinity/lower interest rates
(see below). That makes the short term
trend up and the intermediate term trend a trading range---but once again
subject to our time and distance discipline in its challenge to re-set to an
uptrend. Meanwhile, the S&P continues up across all time frames.
As if the DJIA
pin action weren’t confusing enough, bonds and gold were off---suggesting higher
interest rates on a day when the news events largely point to lower rates. Plus as I have been noting for some time, the
movement of the dollar is in the mix somewhere.
It was up yesterday. That would
explain the fall in gold prices; but of late a rising dollar has meant rising bond
prices. Go figure.
However these
cross currents get resolved, I think my most prescient thought to date is, that
they likely illustrate how difficult any continued upward movement in stock
prices will be. Not that they won’t
occur; but when they do, it won’t come as easily as it has to date.
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
We
finally got an upbeat primary datapoint yesterday: August new home sales soared
18%. On the other hand, weekly mortgage
and purchase applications fell. Clearly
the former was the more important stat.
Now we need a couple more just like it to take away the sting of the
recent poor numbers.
Overseas,
the only economic datapoint was a poor September German business conditions
index. That reinforces my concern that weak
global economic activity will sooner or later start to impact our own.
That
said, the real news of the day came from the global central bankers. First, in an interview responding to a
question about the lousy EU economy, Draghi gave his ‘any measure necessary’
(to improve the economy) response.
Forget that this comment is getting a little threadbare when in fact (1)
he has done virtually nothing in the face of a deteriorating EU economy, (2)
what he had done has had little to no impact and (3) the Germans continue to
say ‘nein’ to the additional measures that he pretends that he wants to
do.
The rise of the
German anti-euro party threatens QE (medium):
Later,
the QEInfinity trade got another shot in the arm when the Chinese premier made
noises that he was replacing the head of the Bank of China---this being the guy
(noted in last week’s Closing Bell) who recently told the world that what appeared
to be an easing in monetary policy was a technical move and that the Bank of
China was standing firm in its commitment to curb speculation in the Chinese
real estate market. In other words,
monetary policy would remain tight. Apparently, he apparently didn’t pass that
memo through the government hierarchy because in his comments, the premier
voiced concerns about insufficient Chinese economic growth. In short, if the Bank of China guy is getting
fired, it would seem that the Chinese are about to re-join the QEInfinity crowd
(medium and a must read):
Finally,
we got a report from the Bank of Japan updating its own QE effort---a part of
which is the further ramping up of equity purchases (medium):
Why all this
matters (short and a must read):
Bottom line: the
good news is that new home sales were robust and they hopefully will mark the
end of a string of disappointing datapoints on key sectors of the economy---the
operative word being ‘hopefully’. The bad
news is that our major trading partners continue driving to QEInfinity hoop
despite their consistent inability to score a success. Of course, the success that I am referring to
is of the economic variety while unfortunately the success that they are
achieving is of the asset pricing variety.
The easy
conclusion here is that stock prices just got a boost; and indeed, that may be
the case. However, the investment environment
has changed since the FOMC meeting.
QEInfinity is no longer being viewed as a plus for gold, commodities, Treasuries
and real estate (REIT’s). That, of
course, does not necessarily mean that stocks won’t continue their climb. But even there, internal divergences are not
only increasing, they are starting to get noticed by the media and their
pundits.
Again, that may
not stop a further price advance. But as
I said yesterday, 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.
Anecdotal
evidence of continued economic progress (medium):
Investing for Survival
Preserving
capital in a bear market---from Pragmatic Capitalist
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