Friday, February 20, 2015

The Morning Call--Peak bluffing

The Morning Call


The Market

The indices (DJIA 17985, S&P 2097) continued to rest yesterday, ending within uptrends across all timeframes: short term (16613-19385, 1932-2913), intermediate term (16672-21827, 1757-2471) and long term (5369-18860, 797-2093).  They both closed above their 50 day moving averages.  However, they are out of sync on a couple of points: (1) the Dow is back below its mid-December high while the S&P remains above its high, and (2) the S&P is above the upper boundary of its long term uptrend [though it has not confirmed the break] while the Dow is still 5% below its comparable level.  As you know, under our time and distance discipline, the Averages need to be in sync to validate a trend.

            Volume was flat; breadth poor.  The VIX declined, ending within its short term trading range, its intermediate term downtrend and below its 50 day moving average. 

            The long Treasury resumed its downward move, finishing below its 50 day moving average, back below the lower boundary of its short term uptrend and within a very short term downtrend, an intermediate and long term uptrend.  The clock on our time and distance discipline now re-sets on the short term trend; if TLT remains below the lower boundary of its short term uptrend through the close on Monday, the trend will re-set to a trading range.

            GLD’s also declined, leaving it near but above the lower boundary of its a short term uptrend, below its 50 day moving average and within an intermediate term trading range and a developing a very short term downtrend.  A close below the lower boundary of its short term uptrend will prompt the sale of the remainder of our Portfolios’ positions in GLD.

Bottom line:  the Market’s sluggishness over the last two days hardly seems surprising (1) because the Greek/ECB bailout standoff is changing by the minute; and trying to bet money on every headline is a fool’s game and (2) most investors seem  to be operating under the assumption that all will end well.  So why sweat the small stuff? 

I continue to focus the upper boundaries of the indices long term uptrends as the best source of any ‘tell’ on future Market movement.  Just remember under out time and distance discipline that they have to trade in sync in order to have a read on price direction.


            Yesterday’s economic data contained good (weekly jobless claims) and bad (the Philly Fed index and January leading economic indicators) news.  However, the latter was by far the most important; so not only was the volume of news negative, but also the weight---thus keeping alive a four week trend of disappointing stats.

            Making this sting just a bit more, Goldman released its initial February global leading economic indicator which portrayed a world slipping into recession (short):

            As you know, I had been taking some hope in a slightly more positive tilt to the international economic stats that I can get off the news wires.  However, I clearly don’t have the research heft to cover the global economy as Goldman does.  So I read this new information as both more comprehensive and more symptomatic of the global economy than my more limited representation.

            ***overnight, German and French February manufacturing and services PMI’s were all above estimates while UK retail sales were below expectations.

            The Greek/EU bailout negotiations continued to dominate the headlines though it was difficult to keep up with all the offers and counteroffers and how they addressed either sides’ concerns.  It almost didn’t matter because the minute you had a handle on the latest positions, they changed.  The bottom line seems to be that all this is just negotiating and we have no clue what an ultimate settlement looks like if indeed we get one.  However, the Market is clearly assuming a favorable outcome. 

            The latest as of yesterday afternoon (medium):

            German response to latest Greek proposal (medium):

            Greece’s leverage (medium):
            Greek bank deposit run accelerates (short):

            This morning---peak bluffing (medium):

Bottom line:  there was not much in yesterday’s news flow about which to be upbeat.  The US economic numbers remain disappointing; and while we got nothing specific from overseas, Goldman did release its global leading economic indicator which pointed at global recession---and just as I was starting to get a bit less negative about international economic growth prospects.  Well, needless to say that makes our case for continued economic progress here as well as abroad a wee bit weaker.  It also does nothing to improve stock valuations.

Nor does the Greek/EU standoff.  Our Models assume that the EU ‘muddles through’.  So if there is workable settlement, our forecast remains intact, Fair Value unchanged.  If not, then there is apt to be trouble right here in River City.  Not that the Street agrees with that assessment. I listened to a host of pundits yesterday telling the world that EU banks had little exposure if a Greek default occurs and therefore, there was little risk in stock prices.  I guess they forgot to consider that the sovereign banks don’t have exposure because the ECB/EU arranged to have all the risk laid on the taxpayers.  That surely won’t cause the ruling class any electoral heartburn.  They also seemed to have forgotten that if Greece goes into default, [a] who knows the ramifications of the anti-austerity politics in Spain, Portugal, Italy and Ireland and [b] the impact on their bonds.  And guess who owns all those bonds?  Hint---it’s the banks. 

As I have said before, the final act may see a workable compromise and everyone lives happily ever after.  But I think it a mistake to assume that if Greece defaults, everything will be just hunky dory. 

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.
      Thoughts on Investing from Kid Dynamite

            Newton’s Law of Trading Rules:  Every lousy trading rule has an equal and opposite trading rule.
Subconsciously, as I write my “The Rules” series, I think I’m trying to write “rules” that don’t have an easy contra-rule to them – trading rules that really work*.   In the end, this probably simply means that I put thought and effort into my” rules,” instead of just spouting off cliché talking points.
Josh Brown, last week, wrote a great post skewering just these kinds of clichés, which we hear repeated ad-infinitum in the financial press:
“Always seek out differing opinions and challenge your beliefs. Except when you know you’re right, then that other bullshit just becomes a distraction. Good luck with that.
It is very important to be flexible and open-minded. But invest with set rules and an iron discipline. Good luck with that.
Technical analysis and charts only tell you about what has already happened in the past. It’s much better to use the information from the future that we have when making decisions.  Good luck with that.
Never run with the herd. It’s much better to be all alone on open ground, running in the wrong direction and wholly conspicuous to predators. Good luck with that.
Take your losses quickly. But don’t get scared out of a good position. Good luck with that.
Amateurs trade in the morning, pros trade in the afternoon, junkies trade overnight and lots of guys on TV just trade on paper.  Good luck with that.
Be tactical and stay informed! But don’t try to time the market. Good luck with that.”
Josh’s point, I believe, is that trading and investing is hard.  You can’t just implement a laundry list of cliché talking points and expect to succeed.   What’s interesting is that as I coach high school soccer, I realize that there really are a lot of clichés that we try to implement in order to win:  Train harder than the other team in practice. Work harder than the other team during the game.  Be smart on the field.  Give it 100%.  Play as a team.   Treat this game like any other game.
In the investing world, however, clichés will often be full of hot air.
      News on Stocks in Our Portfolios

   This Week’s Data

            The February Philadelphia Fed manufacturing index came in at 5.2 versus expectations of 8.2.

            January leading economic indicators rose 0.2% versus estimates of up 0.3%.




Apologizing for America (short):

  International War Against Radical Islam

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