Thursday, March 26, 2015

The Morning Call--Follow through is important

The Morning Call


The Market

The indices (DJIA 17718, S&P 2061) continued their downtrend, though they remained well within their uptrends across all timeframes: short term (16838-19615, 1966-2947), intermediate term (16933-22084, 1781-2539 and long term (5369-18860, 797-2116).  However, on a very short term basis, there was a lot turmoil:

(1)    both closed below their 50 day  moving averages; however, the S&P ended above its 100 day moving average while the Dow finished below [the chart below is the S&P with its 100 day moving average.  I printed this chart before to illustrate the strength of resistance its 100 day moving average.  I will be watching how both of the Averages perform around this moving average],

(2)    the Dow ended above the lower boundary of a very short term uptrend, while the S&P closed below its similar trend line.  Here again, I will be watching how the indices handle this trend line.

(3)    the current three day downtrend has set last Friday’s high as a lower high versus the late February high for both the Averages.  It will be important whether or they can move above last Friday’s level; that is will the next rebound move higher than last Friday’s high or form a second lower high?

None of the above suggests that prices are moving lower.  Indeed, until the short term uptrends are successfully challenged, it is foolish to assume that the Market is in for a major correction.  That said, all corrections start somewhere; so follow through below the 100 day moving average and the lower boundary of the very short term uptrends and the strength of any rebound will important signs of the odds of a larger sell off.

Pay attention to warning signs (medium):

Volume was up; breadth was negative. The VIX was up, remaining within its short term trading range, its intermediate term downtrend, its long term trading range, below its 50 day moving average and within a developing pennant formation. 

The long Treasury sold off, finishing right on the lower boundary of a developing very short term uptrend, within its short term trading range, intermediate and long term uptrends and above its 50 day moving average.   
GLD’s price rose again, closing within its short and intermediate term trading ranges, its long term downtrend and below its 50 day moving average. 

Bottom line: the Averages reversed the recent uptrend, setting a lower high versus February’s high.  More important, the very short term technical picture is a confusing mix of challenges to several support levels.  We really need several more days of pin action before anything firm can be said about near term direction.  Most important, until the short term uptrends have been successfully challenged, the assumption has to be that stocks will continue to move higher.


            It looks like Tuesday’s datapoints were indeed outliers.  Yesterday, February durable goods orders fell versus expectations of an increase.  True, weekly mortgage and purchase applications were up---but these are secondary stats and of much less importance than the durable goods number.

In addition, the Atlanta Fed lowered its first quarter GDP estimate again---now +0.2%.

            No overseas economic data, the Greeks were quiet seemingly working on a new improved reform plan (yeah, right), while the saber rattling in Ukraine continues and Yemen seems to be turning into another proxy war (Saudi Arabia and Iran).


            Ukraine and Russia at loggerheads over debt repayment (medium):

Bottom line: sorry, Charlie, Tuesday’s better economic stats at now yesterday’s story; and to make matters worse, the Atlanta Fed basically confirmed that all the recent rotten data in fact reflect a serious slowdown and S&P lowered its first quarter earnings estimate to near flat.  None of this is likely to generate investor enthusiasm; and indeed, recession and declining corporate profits have historically anticipated Market declines. 

The question is, if the above comes to pass, what will the Fed do (more QE) and how will Markets react?  Given recent history, the odds would have to be on QEIV and a wildly enthusiastic Market.  Although I will repeat that I believe that sooner or later QE and its handmaiden, misallocation of capital/mispricing of assets will come to a rough end.

All this taking place as equity prices toy with all-time high absolute prices and valuations. 

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.

            Stockman on Fed policy (medium):

            The biggest mistake investors are making today (medium):

     Investing for Survival

            Have an investment approach and stick with it (4 minute video):

       Company Highlight
Occidental Petroleum produces and markets crude oil and natural gas, manufactures industrial chemicals, plastics and fertilizer and transports natural gas through pipelines. The company has grown profits and dividends at a 16% over the last ten years. OXY’s return on equity has been in the 11-20% range. The company should continue to grow dividends and earnings as a result of:

(1) rising production from new properties,

(2) divesting non-core assets,

(3) acquisitions,

            (4) stock buyback program.


(1) OXY earnings are very levered to the price of crude oil,

(2) political instability remains a major threat to earnings,

(3) highly competitive industry,

(4) cost overruns due to delays in drilling.

OXY is rated A++ by Value Line, has a 14% debt to equity ratio and its stock yields 3.3%.

  Statistical Summary

                 Stock      Dividend       Payout      # Increases  
                Yield      Growth Rate     Ratio       Since 2005

OXY           3.3%         9%              42%              10
Ind Ave       3.0           10                 35                 NA

                Debt/                        EPS Down       Net        Value Line
                Equity         ROE      Since 2005      Margin       Rating

OXY          14%          12%            4                22%           A++
Ind Ave      23             12              NA               6              NA


            Note: OXY stock made initial good progress off its September 2008 low, quickly surpassing the downtrend off its May 2008 high (straight red line) and the November 2008 trading high (green line).  Long term, it is in a trading range (blue lines).  Intermediate term, it is in a downtrend (purple lines).  The wiggly red line is the 50 day moving average.  The Dividend Growth Portfolio owns a 75% position in OXY.  The upper boundary of its Buy Value Range is $66; the lower boundary of its Sell Half Range is $128.


    News on Stocks in Our Portfolios
·         Accenture (NYSE:ACN): FQ2 EPS of $1.08 beats by $0.01.
·         Revenue of $7.5B (+5.2% Y/Y) beats by $120M.
·         Paychex (NASDAQ:PAYX): FQ3 EPS of $0.46 in-line.
·         Revenue of $704.3M (+8.3% Y/Y) beats by $3.14M.


   This Week’s Data

            Weekly jobless claims fell 9,000 versus expectations of a 2,000 rise.


            Update on big four economic indicators (medium):


The make up of income inequality (short):



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