Tuesday, November 29, 2016

The Morning Call---Stocks take a breather

The Morning Call


The Market

The indices (DJIA 19097, S&P 2201) experienced their first rough day in the last three weeks, though they managed to hold above the magical ‘round’ numbers of 19000/2200.  Volume was up noticeably; breadth weakened but that is from very overbought levels.  The VIX was up 6 ½%; however, it remains solidly below its 100 and 200 day moving averages, within a short term downtrend and below the lower boundary of its former very short term uptrend.

The Dow ended [a] above on its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] in a short term uptrend {18054-20114}, [c] in an intermediate term uptrend {11568-24418} and [d] in a long term uptrend {5541-20148}.

The S&P finished [a] above its 100 day moving average , now support, [b] above its 200 day moving average, now support, [c] within a short term uptrend {2106-2450}, [d] in an intermediate uptrend {1991-2593} and [e] in a long term uptrend {881-2419}. 

The long Treasury lifted for a second day, but still finished below its 100 day moving average (now resistance), below its 200 day moving average (now resistance), below a key Fibonacci level, in a very short term downtrend, in a short term trading range and in an intermediate term trading range.  

GLD was up 1%, ending below its 100 day moving average (now resistance), below its 200 day moving average (now resistance) and below the lower boundary of its short term downtrend.  

The dollar fell, but still reset to a short term uptrend.

Bottom line: yesterday was an adjustment day as stocks and the dollar (which have been strong) retreated and bonds and gold (which have been weak) recovered.  However, they all had reached technically stretched extremes, so I don’t think that this one day’s performance is a sign of some kind of reversal.  Most likely it just began the process of consolidation.  With the Averages having convincingly reset their short term trends to up, I am assuming that they will eventually challenge the upper boundaries of their long term uptrends.


            Not much data released yesterday.  In the US, the November Dallas Fed manufacturing index was up.  No stats from overseas.

            ***overnight, France’s third quarter GDP was in line while October consumer income and spending were ahead of estimates; November EU economic and industrial confidence were below consensus while consumer confidence was in line.

            Still there was other economically related news:

(1)   OECD upped its global growth forecast (medium):

(2)   Bank of China is starting to tighten monetary policy ahead of the Fed’s probable rate hike (medium):

(3)   the Italian referendum is drawing close and investors are getting nervous about its impact on that country’s banks (medium):

                  As a result, Italian bonds are getting whacked (medium):

                  But the ECB is always there to come to the rescue (medium):

(4)   and OPEC still can’t get its act together (medium):

            Bottom line: despite a more optimistic view of the US economy’s growth prospects, stocks remain overvalued.  That said, current investor euphoria suggests that equity prices are likely going higher.  So my recommendation to take some profits and sell losers is going to be wrong, at least for a while.  However, it makes no sense to me to reverse my prior actions simply because overvalued securities are going to get even more overvalued.  But it will be uncomfortable.  If I were a trader (which I am not), I might buy an equity Market ETF, using a very tight stop.  But I would under no circumstances buy stocks on the thesis that ‘this time is different’ and stocks are going to sustain some new higher level valuation.  I am much better off being wrong in the short term than being wrong in the long term.  
            The bull giveth, the bear taketh away (medium):

            My thought for the day: there is no arbitrary limit to how high a stock can go so long as the ‘thesis’ for owning it remains intact.   The problem is that I am never going to know when that the ‘thesis’ has changed until it is too late.  In addition, even if the ‘thesis’ does remain intact, valuations don’t.  That is why I developed the Valuation Model to force me to take some money off the table when a stock hits its historical valuation high.  By only Selling Half, I am still getting to ride the trend.  And when stocks, in general, get caught in mean reversal process, it creates the opportunity to buy back the half that I originally sold at much lower prices.

       Investing for Survival
            Avoiding group think.
    News on Stocks in Our Portfolios
                 Tiffany (NYSE:TIF): Q3 EPS of $0.76 beats by $0.09.
·         Revenue of $949.3M (+1.2% Y/Y) beats by $22.66M
·         Bank of Nova Scotia (NYSE:BNS): FQ4 EPS of C$1.57 beats by C$0.06.
·         Revenue of C$6.75B (+10.3% Y/Y) beats by C$1.83B.


   This Week’s Data

            The November Dallas Fed manufacturing index came in at 8.8 versus the October reading of 6.7.

                        The second estimate of third quarter GDP was reported at up 3.2% versus expectations of up 3.1%; corporate profits rose 5.2% versus the prior reading of down 1.7%.





For the optimists (medium):

  International War Against Radical Islam

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