Tuesday, May 19, 2015

The Morning Call--The last act in a Greek tragedy

The Morning Call


The Market

The indices (DJIA 18298, S&P 2129) climbed again yesterday.  Both closed above their 100 day moving average and the S&P remained above its all-time high while the Dow managed to close right on its comparable level. 

Longer term, the indices remained well within their uptrends across all timeframes: short term (17194-19991, 2016-2995), intermediate term (17337-22465, 1823-2593 and long term (5369-19175, 797-2135).  

Volume fell; breadth remained mixed for a second day---which should be troublesome for the bulls.  The VIX actually rose, a bit unusual on a Market up day.  Nevertheless, it is still below its 100 day moving average and the upper boundary of a very short term downtrend---both positives for stocks.  The lift may be, as I have suggested, a sign that at current price levels, it is attractive as portfolio insurance.

Should you be worried about the declining Transports (medium)?

The long Treasury was down over two points on volume, (1) reversing Friday’s move up, (2) keeping it below its 100 day moving average and the upper boundary of a short term downtrend and (3) again highlighting its higher growth/higher inflation implications versus the lower growth/more QE implications of rising stock prices.  I am not going to stop worrying about the seeming underlying differences between stock and bond investors’ economic outlooks.  I have no idea how all these factors resolve themselves.  But till they do, I think patience is needed.

GLD traded back down and settled right on the neck line of the head and shoulders pattern.  That invalidates Friday’s break out.  That doesn’t mean that GLD is rolling over; it does means that GLD’s recent price action has made me cautious of any move by GLD in either direction.

Oil was down slightly yesterday, leaving it right on the upper boundary of its short term trading range and (2) the dollar was up but remained below its 100 day moving average and the lower boundary of its recently broken short term uptrend.

Bottom line: the bulls remain in control, having pushed the Averages above the recent trend line of lower highs and a short hair close to being above their all-time highs (S&P is above, the Dow right on this level).  So they are step closer to assaulting the upper boundaries of their long term uptrends---which I continue to believe they will be unable to   successfully challenge to any meaningful extent.

That does not mean that if they can’t push through those boundaries that they are headed a lot lower.  Longer term, the trends are solidly up and will be so until the short term uptrends, at the very least, are negated.
            The long Treasury’s recent pin action continues to suggest either inflation or a re-evaluation by investors of the sustainability and/or efficacy of QE.  Both clearly run counter to the message to the stock market.  Plus the volatility in gold, oil and the dollar only add their own version of a confused message.  I have no clue what long rates are going to do; but I worry that about the ‘why’ of what they will do.

            A pretty good technical bull argument (short):


            Yesterday was a pretty dull day, economic stat wise.  We did get one US number: the NAHB builders’ confidence index was below expectations.  No data from overseas.

            ***overnight, UK and EU April CPI came in above expectations; and an ECB executive said in a speech that the ECB intends to ‘front load’ its QE---sending another thrill through the legs of the stock boys.

            There were two articles on the domestic economy that I thought worthy of your attention.  The first is from former Fed member Bob McTeer pointing out that it is getting harder to ignore the lousy economic data (medium):

            The second is an almost laughable piece from the San Francisco Fed, pointing out that if first quarter data’s seasonal adjustment factors had been doubled, the economy would have looked stronger (medium):

            The other newsworthy item is what has become a streaming narrative on the Greek bailout endgame, which is not looking positive (medium):

***overnight, Merkel having problems selling a bail out (medium):

Bottom line: the two points above are:

(1) more and more folks are noticing that the US economy is not doing well.  Sooner or later that shows up in the economic and corporate profit growth forecasts which probably won’t help valuations.  How long the Market dreamweavers can ignore the E in P/E is the $64,000 question especially when long Treasury rates (the bogie for the discount factor in valuations) keep rising.

Bank of America urges caution (short):

            More on valuation (medium):

 (2) the final act of the modern Greek tragedy is at hand.  We can’t rule out some convoluted ‘kick the can down the road’ solution.  Gosh only knows that the euros are masters at that.  On the other hand, reading the above link, positions seemed have harden to the point that some economic dislocation will take place.  If so, then the question is, is it is fully discounted in the Market?  Clearly it has been a news item long enough that it should have been.  However, I continue to believe that there will be unanticipated consequences primarily because the exit from a major currency union hasn’t happened before.  That could cause heartburn.

 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.

            Latest from John Hussman (medium):


   This Week’s Data

            The May NAHB builders’ confidence index was reported at 54.0 versus expectations of 56.0.

            April housing starts smoked estimates, riding 20.2% versus estimates of up 11%.


            Don’t be so sure that the economy will return to ‘normal’ (medium):

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