The Morning Call
10/8/14
The Market
Technical
Well,
we got some follow through yesterday.
The indices (DJIA 16719, S&P 1935) got pounded. The Dow finished within its short (16332-17158)
and intermediate (15132-17158) term trading ranges and a long term uptrend
(5148-18484). It finished well below the
upper boundary of a very short term downtrend and its 50 day moving average.
The S&P
finished within a short term trading range (1904-2019. It also closed below the lower boundary of
its intermediate term uptrend (1939-2730).
This starts the clock on our time and distance discipline; if it remains
below 1939 through the close on Friday, the intermediate term trend will re-set
to a trading range. The S&P remained
within a very short term downtrend, a long term uptrend (771-2020) and below
its 50 day moving average.
Volume
rose; breadth was weak. The VIX jumped,
finishing within its very short term uptrend and above its 50 day moving
average. It closed above the upper
boundary of its short term downtrend.
That starts the clock on our time and distance discipline. If the VIX trades above the downtrend line
through the close on Thursday, then the short term trend will re-set to a
trading range. It remained within its
intermediate term downtrend.
The
long Treasury advanced nicely (another sign that the economy is weakening),
closing above the upper boundary of its short term trading range. Our time and distance discipline now kicks in. If it trades above this level through the
close on Thursday, the short term trend will re-set to up. It is also within its very short term
uptrend, above its 50 day moving average and within its intermediate term
trading range.
GLD
rose, but still ended within very short term, short term and intermediate term
downtrends and below its 50 day moving average.
Bottom line: the
S&P had the follow through that confirmed the re-set of its short term
trend from up to flat. Further, its
intermediate term uptrend as well as trend lines in bonds and the VIX were
penetrated. While our time and distance
discipline must confirm these breaks, clearly multiple trend violations are not
a promising sign. It could be that
yesterday represented some sort of emotional climax---that is one of the
reasons I developed our time and distance discipline. If so, we will know the odds of that
alternative quickly.
Our strategy
remains: ‘it is not too late to Sell stocks that are
near or at their Sell Half Range or whose underlying company’s fundamentals
have deteriorated.’
Fundamental
Headlines
We
received a couple of secondary economic datapoints yesterday: weekly retail
sales were up; but as a counterpoint consumer credit dropped dramatically.
There
was also several disappointing earnings releases. While earnings season hasn’t
officially started yet, much concern was expressed by the pundits that those
reports could be a sign of things to come.
That didn’t help investor sentiment.
The
other news was from overseas:
(1) German
industrial production fell 4%, the biggest decline since 2009. That was concerning enough; but it was followed
by comments from Deutschebank and Bundesbank which were highly critical of
Draghi’s monetary policy plans,
Deutschebank’s outlook for the EU (medium):
Meanwhile,
the Bundesbank blasts Draghi (medium):
(2) the
Bank of Japan reiterated its QEInfinity policy while simultaneously [and
amazingly I might add] lowering its expectations for economic growth. Such policy blindness by men who should know
better is stunning. How does this not
end badly?
(3) worried
mounted on the Chinese economy:
The
IMF lowers global growth outlook and most markets reflect that (short):
Bottom line: my number
one risk to our forecast got lots of support yesterday as the German economy
(Europe’s strongest) reported some very disappointing production numbers, the Japanese
admitted that QEInfinity isn’t working and some pre-earnings season reports raised
the fear that the economic slowdown in the rest of the world is starting to
show up in US corporate profits. I am
still holding out for more data before changing our outlook; but the question
is, are the Markets now out ahead of me?
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.
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