Wednesday, January 7, 2015

The Morning Call---Are there any greater fools left?

The Morning Call

The Market

             The indices (DJIA 17371, S&P 2002) closed down big again but nowhere near their intraday lows.  Hence, they remained below their 50 day moving averages.  However, they are still within uptrends across all timeframes: short term (16344-19144, 1889-2251), intermediate term (16344-21509, 1727-2343) and long term (5369-18860, 783-2083).

            Volume fell; breadth was mixed.  The VIX rose but still finished within its short term trading range (though it is nearing the upper boundary of that trading range) and intermediate term downtrend. 

            The predictive power of the first two trading days of January (short):

            The long Treasury (circa 131) soared again and continues in uptrends across all timeframes.  It is approaching the upper boundary of its long term uptrend (circa 140).  As it nears that boundary, it will face the same technical problem as stocks, especially the S&P, do today.

            GLD was also up, closing within a very short term uptrend, a short term trading range and an intermediate term downtrend.

Bottom line: based on the above link on the first two trading days of January, stocks are off to an ominous start to the year.  However, there remains the first five trading days and the full month indicators to complete before getting too beared up, technically speaking.  Further, the Averages remain firmly within uptrends across all timeframes. On the other hand, both are below their 50 day moving averages and the pin action in both TLT and GLD are not endorsing a strong equity scenario.  Clearly, it is a technically muddled picture and, therefore, a time to be cautious.
            Yesterday’s US economic data was weak on balance: the December Markit service index and November factory orders came in below forecasts, weekly retail sales were mixed while the December ISM nonmanufacturing index was better than anticipated.  Not the kind of numbers that I would like to see but nothing unexpected in the context of a sluggish economic recovery.

            Overseas, December EU composite PMI came in below expectations while December Chinese services PMI was better than estimates.  Though this is not a lot of data, I view a day of mixed international economic results as a relative positive---given the recent flow of stats.

            ***overnight, the December Eurozone CPI fell 0.2%; November Italian unemployment rose to 13.4%, EU to 11.5% while German unemployment declined slightly.

            However, the Greek/EU standoff and declining oil prices remained foremost in investors’ minds:

            An excellent but simple explanation of the Greek dilemma (medium):

            More (medium):

            And (medium):

            German newspaper reports government worried about effects of Greek exit of EU (medium):

            David Stockman on ECB monetary policy (medium and a must read):

            Declining oil prices---too much of a good thing? (medium):

Bottom line: Greece, oil prices and the strong dollar continue to weight on the Market.  It is too soon to know whether or not these just are short term concerns that provide a justifiable reason for some consolidation.   However, I have long argued that sooner or later all the greater fools will own all the stock that they can and then some event will reverse the process that has driven stock prices into nosebleed territory.  That said, I have no clue if one of the aforementioned factors represent such a pivotal event.  What I do know is that the risk of an explosive sell off remains based on current valuations.  All that is needed is a match.

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.

            More from Jeff Gundlach (medium and today’s must read):

            More on valuation from Lance Roberts (medium):

            The latest AAII asset allocation survey (short):

            The latest from Bill Gross (medium):


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