Thursday, April 2, 2015

The Morning Call--Back to the 100 day moving averages

The Morning Call


The Market

The indices (DJIA 17698, S&P 2059) were down again yesterday.  Both fell back below the lower boundaries of their very short term uptrends---those challenges will be confirmed if the Averages close below them today.  That would also have the effect of breaking to the downside from the pennant formation which I mentioned in yesterday’s Morning Call---suggesting more still more downside. 

Also the Dow finished below its 100 day moving average while the S&P ended right on its moving average.  As you know, these moving averages have provided plenty of support when they have been challenged for the last couple of years.  So I will be paying a lot of attention to the pin action around them.

Longer term, the indices remained well within their uptrends across all timeframes: short term (16889-19666, 1971-2952), intermediate term (16977-22138, 1785-2543 and long term (5369-18860, 797-2122).   

Volume declined; breadth was mixed.  Oddly, the VIX was down on a down Market day, finishing 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.  I continue to think that it remains a reasonably priced hedge. 

The long Treasury had another great day, ending within its short term trading range, intermediate and long term uptrends and above its 50 day moving average.  This chart keeps improving as have our ETF Portfolio’s muni bond positions.

GLD’s price rallied, closing within its short and intermediate term trading ranges, its long term downtrend and below its 50 day moving average.  GLD still has a number of tough resistance levels yet to overcome before we can assume that the worst is over.

Bottom line: given many technicians positive comments on the first two trading days in April, I was a little surprised by the poor pin action.  Further, it was weak enough that both of the Averages traded through the lower boundaries of their very short term uptrends which would bust the pennant formations I pointed to yesterday.  Generally, if those breaks are confirmed (which would occur today) the follow through is in the direction of the break.  Arguing against that is the fact that the indices are at or through their 100 day moving averages which have provided major support for the last couple of years.  How this standoff gets resolved could be instructive of a longer term trend.

            Yesterday was another active day for US data and were mixed by volume but negative by order of magnitude: March light vehicle sales were upbeat, mortgage and purchase applications were up and the March manufacturing index was slightly better than expected.  On the other hand, the March ADP private payrolls report, the March ISM manufacturing index and February construction spending were all well below expectations. Tipping the scale even further to the negative, the Atlanta Fed for lowered its first quarter GDP growth estimate for the third time; this round to zero.   

            Five signs that there is trouble ahead (medium):       

Just how impactful was this winter’s snow storms? (medium):

            And (short):

Overseas, Europe again provided promising stats, i.e. the March EU manufacturing PMI came in better than expected (52.2 versus 51.9).  Unfortunately, two other major world economies produced some dismal reports with the March Chinese manufacturing PMI falling below the February reading; and Japanese manufacturing data were abysmal. 

            ***overnight, Greece submitted a more detailed economic program but again it was well short of the Troika’s standards.

Bottom line: while it had its bright spots, US economic data returned to its negative tilt.  Further, the global economic news was not good, though the Europe turned in another upbeat number.  It is possible that the EU could be rebounding.  If so, then the questions will be, (1) is the improvement strong enough to sustain itself when the economies of its major trading partners [the US, China and Japan] are losing steam? (2) can it weather adverse developments in Greece and Ukraine? (3) can it possibility make enough of a difference to make currently overvalued equities appear reasonable? 

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 Doug Kass (medium):

            Update on valuation:

        Investing for Survival

            The best thing to do is nothing (medium):

         Company Highlight

Cummins Inc. designs, manufactures, distributes and services diesel engines for heavy, medium and light duty trucks, autos, buses as well as industrial, electric power generation and engine related components markets.  The company has grown profits and dividends at a 20% rate over the last ten years earning a 13-20% return on equity.  Like most heavy industrial firms, CMI earnings can be somewhat volatile.  However, it should continue to grow at an above average pace as a result of:

(1)    it is positioned to benefit from trends in emission standards, fuel economy, increased demand for electricity and infrastructure investments,

(2)    introduction of new products,

(3)    growing usage by OEM manufacturers

(4)    an aggressive stock buyback program,

(5)    acquisitions.


(1)    economic weakness has a major impact on sales,

(2)    it is in a highly competitive industry,

(3)    declining revenues in power generation market.

CMI is rated A+ by Value Line, has a 18% debt to equity ratio and its stock yields 2.1%

   Statistical Summary

                 Stock      Dividend         Payout      # Increases  
                 Yield      Growth Rate     Ratio       Since 2005

CMI           2.1%          11%              28%            10
Ind Ave      1.6               4                 22               NA

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

CMI         18%           22%           3                    9%           A+
Ind Ave    37              15            NA                   7             NA


            Note: CMI stock made great initial progress off its November 2008 low, quickly surpassing the downtrend off its  July 2008 high (straight red line) and the November 2008 trading high (green line).  It recently broke both its long term and intermediate term uptrends and have re-set, at least temporarily to trading ranges (purple lines).  The wiggly red line is the 50 day moving average.  The Aggressive Growth Portfolio owns a 75% position in CMI.  The stock is on the Aggressive Growth Buy List; the lower boundary of its Sell Half Range is $228.



      News on Stocks in Our Portfolios

   This Week’s Data

            The March PMI manufacturing index was reported at 55.7 versus consensus of 55.3.

            The March ISM manufacturing index came in at 51.5 versus expectations of 53.5.

            February construction spending fell 0.1% versus estimates of a rise of 0.2%.

                Light vehicle sales in March were better than February and above forecasts.

                The February trade balance was -$35.4 billion versus consensus of -$41.5 billion.

            Weekly jobless claims fell 20,000 versus expectations of a 3,000 increase.


            The Atlanta Fed downgrades its 2015 forecast---again (short):

            Three reasons the Fed should wait on a rate increase (short):



  International War Against Radical Islam

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