The Morning Call
The Market
Technical
The indices
(DJIA 16677, S&P 1950) exploded again yesterday. However, the DJIA remained within a short
term downtrend (15724-16792), an intermediate term trading range (15132-17158)
and a long term uptrend (5148-18484).
It ended back above its 200 day moving average but below its 50 day
moving average.
The S&P pushed
through the upper boundary of its short term downtrend (1800-1931), for the second
time this week. If it remains there through
the close Monday, the short term trend will re-set to a trading range. It finished within an intermediate term trading
range (1740-2019) and a long term uptrend (771-2020), above its 200 day moving
average but below its 50 day moving average.
Volume was flat;
breadth improved. The VIX fell, closing
within a short term uptrend and an intermediate term downtrend. It closed back below its 200 day moving
average and above its 50 day moving average.
Update
on sentiment (short):
The long
Treasury got whacked, ending within a very short term trading range, a short
term uptrend, an intermediate term trading range and above its 50 day moving
average.
GLD was also off
big, finishing back below the lower boundary of its newly re-set very short
term uptrend; if it closes there today, it will re-set to a trading range (the
fourth re-set in the last week). It remained
within short and intermediate term downtrends, below its 200 day and 50 day
moving averages.
Bottom line: if
you are like me, you are getting air sick from the extreme ups and downs this
week and are confused as hell. I wish I had
some pearl of wisdom that would explain these extraordinarily schizophrenic swings
in sentiment; but alas I have none.
I developed our
time and distance discipline in an attempt to reduce these kind of emotional
ups and downs during periods of high volatility. But even with that, we witnessed multiple
reversals of trend in the S&P, the long Treasuries and gold in the last
week.
My only decent
observation is that unless you are a very talented day trader, this is a period
for patience and inaction.
That said, if
this volatility pushes stock prices higher, I would use it 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 releases had something for everyone: the October Markit flash
manufacturing PMI was below estimates as was the October Kansas City Fed manufacturing
index; weekly jobless claims rose but less than anticipated; the September
Chicago National Activity Index came in much better than expected as did
October leading economic indicators. I
think that the latter two were by far the most important; so I would rate the
day as a plus for our forecast.
In
addition, on balance, corporate earnings reports for the day continued to surprise
to the upside.
We
also received some decent September Markit flash PMI’s overseas---China, Japan
and Germany were up; and Spanish unemployment was down, though it was slight
and off a horrendous base (23.7% unemployment).
On the other hand, French PMI was down, October Chinese manufacturing
declined to a five month low and September UK retail sales fell. These results are a bit more mixed; but, that
said, mixed is a plus when viewed against the data flow of late.
One
final item, the IMF amazingly opined that Japan’s second tax increase was a
good thing. Given the abysmal state of
the Japanese economy---partly a result of the first tax increase---I can only
shake my head and wonder what these clowns are thinking about.
Bottom line: the
question before us is, are we starting to see real economic improvement domestically
as well as overseas or is the latest dataflow from both just blips up in otherwise
declining trends? Of course, irrespective of the answer, stocks
are still richly valued---just less so if the US economy is able to hold its
current growth rate. More importantly,
if the dangers of a global slowdown that impacts the US are receding, then
global QE will likely soon be on life support.
And that brings me back to the theme that an unwinding of QE will be
primarily be felt in asset pricing---as in lower asset pricing.
The
latest from Van Hoisington (medium and today’s must read):
The
latest from Scotiabank (medium):
My
bottom line is that for current prices to continue 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.
The
latest from Lance Roberts (medium and a must read):
Ten
insane things that Wall Street believes (short):
http://thereformedbroker.com/2014/10/23/ten-insane-things-we-believe-on-wall-street/
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