Wednesday, July 20, 2016

The Morning Call--This isn't over, yet

The Morning Call


The Market

The indices (DJIA 18559, S&P 2163) turned mixed yesterday (Dow up, S&P down).  Volume remains puny, breadth strong.  The VIX (11.9) closed below the lower boundary of its short term trading range for the third day, resetting to a downtrend.  It is nearing the lower boundary of its intermediate term trading range (10.3).

The Dow closed [a] above its rising 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] within a short term uptrend {17282-19032}, [c] within intermediate term uptrend{11238-23968} and [d] in a long term uptrend {5541-19461}.

The S&P finished [a] above its rising 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] within a short term uptrend {2019-2259}, [d] within its intermediate term uptrend {1903-2505} and [e] in a long term uptrend {862-2246}. 

The long Treasury was up slightly, continuing to trade above its 100 day moving average and well within very short term, short term, intermediate term and long term uptrends. 

GLD rose, ending above its 100 day moving average and within short term and intermediate term uptrends and a developing very short term uptrend.

Bottom line:  with stocks in overbought territory, some backing and filling is to be expected.  However, a challenge of the Averages’ upper boundaries of their long term uptrends (19481/2246) seems highly likely, though I believe that it will be unsuccessful.


            Yesterday’s US economic data were mixed: June housing starts and building permits (primary indicator---so really the day was a positive) were strong though month to date retail chain store sales were soft. 

Overseas, the numbers were mixed: the June UK inflation rate was higher than anticipated while the July German and EU indices of economic sentiment fell short of expectations.   

            S&P cut Deutschbank’s credit outlook (medium):

            And finally, the EU highest court ruled in favor of EU bank bailout guidelines which will hamper the current Italian government’s efforts to fix its banking system.

            ***overnight, UK unemployment was the lowest since 2005.

            Bottom line: the US economy may be stabilizing but the global economy isn’t even close.  But none of this matters because investors are interpreting any news as good news.  That keeps stocks moving to ever higher record valuations and seem likely to continue to do so.  My strategy remains to focus on lightening up on stocks trading into their Sell Half Range and eliminating losers.

            My thought for the day: staying with the theme of cognitive mistakes most investors is their proclivity to prefer narrative to data.  Don’t get me wrong, all investment strategies/concepts include a narrative because it makes the strategy/concept more easily understood.  The problem is when the data is ignored/overlooked because the narrative is more appealing.  For example, the narrative to buy General Mills because its business is relatively immune to economic downturns hence it is a less risky investment even if it is selling at an historically unprecedented high valuation.  It is like my story yesterday regarding IBM.  The narrative is that GIS/IBM is a great company, so I will ignore the valuation numbers. 

            The latest from Doug Kass (short):

            The correlation between dividend growth and price performance (short):

            Valuation fallacies (medium and today’s must read):

       Investing for Survival
            You can lie to yourself only so long.
    News on Stocks in Our Portfolios
Genuine Parts (NYSE:GPC): Q2 EPS of $1.28 misses by $0.01.
Revenue of $3.9B (-1.0% Y/Y) misses by $70M

Microsoft (NASDAQ:MSFT): FQ4 EPS of $0.69 beats by $0.11.
Revenue of $22.6B (+1.9% Y/Y) beats by $460M


   This Week’s Data

            Month to date retail chain store sales grew less than in the prior week.

            Weekly mortgage applications fell 1.3% while purchase applications were down 2.0%




If Jamie Dimon was in jail, this wouldn’t be an issue (medium):

  International War Against Radical Islam

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