Friday, May 29, 2015

The Morning Call---Lack of confidence

The Morning Call


The Market

The indices (DJIA 18126, S&P 2120) drifted lower yesterday.  Both closed above their 100 day moving average.  However, the Dow finished below its former all-time highs, while the S&P closed right on that level. 

Longer term, the Averages remained well within their uptrends across all timeframes: short term (17266-20071, 2028-3007), intermediate term (17425-22553, 1828-2595 and long term (5369-19175, 797-2138).  

Volume fell as did breadth.  The VIX was slightly higher, but ended below its 100 day moving average and the upper boundary of its very short term downtrend. It remains a plus for stocks. 

The long Treasury declined fractionally, finishing below its 100 day moving average and within a short term downtrend. 
GLD was up slightly, ending below its 100 day moving average and the neck line of the head and shoulders pattern. 

Oil rose but remained within a short term trading range.  The dollar was down fractionally, finishing well above the lower boundary of that short term uptrend which had been technically negated.  It is near the upper boundary of a developing very short term downtrend.  If it pushes through that level, I will re-instate the short term uptrend.

Bottom line: neither the bulls nor bears seem to be able to generate any follow through.  That suggests to me that neither side feels terribly confident in its position which probably means that stocks are going nowhere in the absence of defining news event.  I remain of the opinion that the Averages will almost surely challenge the upper boundaries of their long term uptrends but that any further advance will be limited to the rate of ascent of those boundaries.

The current bull market in length and magnitude versus prior bull markets (short):

            ***overnight, Chinese stocks are crashing for a second day.


            Yesterday’s US economic data included a disappointing weekly jobless claims number but strong pending home sales data, the latter carrying a bit more weight than the former---‘a bit’ more being the operative words.

            Overseas, April Japanese retail sales were up after three down months in a row.  This is that country’s third upbeat datapoint in two weeks.  Promising but not definitive.  However, were it to continue and the EU shows more economic improvement, it would do wonders for our ‘muddle through’ scenario.

            ***overnight, the series of better Japanese stats ended abruptly as household spending fell 1.3% (the thirteenth decline in as many months) and inflation came in at 0.00%; first quarter Swiss GDP declined 2.0% while Greece dropped 0.2%.

            Another day older and closer (T minus 8) to default for the Greeks.  Most observers seem to believe that there will be some resolution however inadequate it is in long term.  I am not sure what odds they are placing on that assumption; but every day that goes by, the probability of a misstep by one or more of the involved parties rises.  It won’t be long now.

            The latest on the Greek bail out end game (medium):

            ***overnight, IMF says a Grexit is a ‘possibility
Bottom line: absent today’s economic data releases, this week’s US numbers will end up in a wash.  The Japanese retail sales stat along with recent EU data offers hope that the global economy may have stopped retreating; although the economic news out of China, its stock market notwithstanding, is not comforting.  That said, there is a ‘muddle through’ assumption in our Models; and if the above is the definition of ‘muddling through’ then the problem is that, with that assumption, the S&P is now priced roughly 40% over our Valuation Model’s current Fair Value (1499).   In short, we need all the good news we can get. 

So you can see my concern with declining forward guidance in earnings, the prospect for financial crisis in Europe resulting from a Greek default/exit or an interest rate spike that alters the valuation bogey for equities.

 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.

            Understanding why the ten year returns in equities looks so abysmal (medium):

            Chasing the tape (medium):

            The excesses currently visible in the stock market (medium and today’s must read):


   This Week’s Data

            April pending home sales rose 3.4% versus expectations of being flat.

                Revised first quarter GDP came in at -0.7% versus estimates of -0.8%; the price deflator was -0.1%, in line; corporate profits were -5.9%.




More on Obama’s immigration reform executive action (medium):

  International War Against Radical Islam

            Ukraine’s response to the latest buildup of Russian weapons on its border (medium):

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