The Morning Call
The Market
Technical
The
indices (DJIA 13311, S&P 1433) resumed their uptrend. The S&P remains in its newly re-set short
term uptrend (1423-1475), while the DJIA traded back above the upper boundary
of its short term trading range. This
will re-start the time element of our time and distance discipline for the
confirmation of break out of its short term trading range. In the meantime (three more trading days),
the Averages will be out of sync. Both
are well within their intermediate term uptrends (12997-17997, 1372-1967).
Volume
decline; breadth improved. The VIX was
actually up (typically it is down on an up Market day). It is above its 50 day moving average and
within shouting distance of the upper boundary of its short term
downtrend. A break above this trend line
would be a negative for stocks. This
unusual pin action on the VIX suggests that there could be some serious hedging
going on.
GLD
(160) got whacked again. As a result,
the break of the lower boundary of its short term uptrend is confirmed. With much of drop early in day, our
Portfolios sold half of their investment position in GLD---that leaves them
with roughly a 5% holding in GLD.
I
know, I know. If our economic forecast
is correct, then history says GLD is going higher. So why are our Portfolios Selling? The immediate answer is that I could be
wrong; and, as you know, one of my most important investment principles is to
never take a loss because the pin action doesn’t agree with my outlook.
To
be sure, there could be a number of reasons why the GLD price is declining even
though long term the forces are in place to move it higher, e.g. gold is not a
deep liquid market; so if a large fund is in forced liquidation, the volatility
to the downside will be big (it is rumored that John Paulson’s hedge fund---a
big GLD holder---is getting redemption notices and the rest of the hedgies are
front running his sales).
There
could also be more fundamental reasons: (1) it was rumored that China
Clearly, if this
crowd is correct, then I will have been wrong owning too much GLD. I don’t think that this is necessarily the
case but it is certainly a challenge to our current investment strategy and it
tells me that I need to redouble my normal effort to test the assumptions in
our Models. Until that examination is
over, the most practical, least risky steps that I can take is to Sell GLD to
stop the erosion of profits in this holding.
If this latest
collapse in the price of gold turns out to be some sort of trading/liquidity anomaly,
then I may be getting ‘whip sawed’.
However, I am willing to accept
the cost of trading out and then back into a position to insure that our
Portfolios preserve a profit.
Meanwhile,
some reading from those who agree with me about the long term outlook for GLD
(all are short):
And
(short):
And
(short):
Bottom line: the
Holiday party resumed yesterday. While I don’t believe it, our thesis on gold
is being challenged. So I have some work
ahead of me. In the meantime, loss
avoidance is the first order of business; hence our Portfolios sale of one half
of their GLD investment position.
I note that
there are now 18 stocks out of our 157 stock Universe that are on the cusp of
challenging the upper boundary of multi year trading ranges. Whether or not they break through these
barriers should tell me a lot about Market direction.
Bullish
sentiment near highs (short):
Most bear
markets start near year end (short):
And
this from Chris Kimble (short):
Fundamental
Headlines
Lots
of economic data to digest yesterday: weekly jobless claims rose (negative),
third quarter GDP was revised up but that
was a function of inventory building (mixed at best), the leading economic
indicators were down but that was expected (neutral), existing homes sales and
the Philly Fed manufacturing index were both much better than forecasts. Soooo.............a mixed to positive day;
though following a couple days of disappointing stats, I have to rate it a plus
for the simple reason that this pattern fits our Model.
The
rest of the day---well, you know. More
drama on the fiscal cliff. It was
anticipated that the House would vote on Boehner’s Plan B last night. Pelosi, Reid and Obama spent the day
pronouncing it DOA. Then the unthinkable
happened---Boehner couldn’t get enough GOP votes to get passed. Now all bets are off.
Bottom line: I spent
yesterday contemplating whether I am just not getting with the program or are
my fellow stock jocks are drinking too much egg nog. In the midst of that process, Plan B blew up
and I was rescued.
Now the issue
is, has the market-crash-forcing-the-politicians-to-reach-a-compromise scenario
suddenly become operative.
While we await
the answer, our outlook remains: (1) we get a compromise on the fiscal cliff
which will solve nothing, (2) the Fed keeps inching further out of a limb,
printing dollars at hyper speed and (3) the EU’s survival is balanced on the
edge of a knife and if it falls, look out below.
So
far, the primary (Treasury) dealers are not betting on higher rates (short):
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