The Morning Call
The Market
Technical
The
indices (DJIA 13880, S&P 1495) suffered the most serious whackage in some
time. They both traded back below the
upper boundaries of their short term uptrends (13249-13904, 1441-1510) but
stayed within their intermediate term uptrends (13268-18268, 1403-1998).
This
is the Averages second round trip from breaking above those short term uptrend
upper boundaries, then retreating back below them. Those boundaries have clearly been acting as
something of a magnet. We will see if
they keep their attraction. At the same
time, the key technically for the short term is the level at which stocks
rebound.
Volume
was flat; breadth got crushed. The VIX
spiked 14% but remained well within its intermediate term
downtrend---continuing to be a plus for stocks.
GLD
rose, keeping above the lower boundary of a very short term uptrend but within
a short term downtrend. It is also
within an intermediate term trading range.
Bottom
line: I am not reading too much into yesterday’s poor pin action. While the sentiment indicators are hinting
that a correction is coming, that doesn’t mean that it starts immediately. I still think that 14140/1576 is a likely
price objective before contemplating a meaningful decline in stocks. If I am right, then our Portfolios will
continue to lighten up at higher levels.
On
the other hand, I have never been smart enough to know when a Market is
turning. So given our Valuation Model,
I would certainly not be surprised if we have seen the top.
Fundamental
Headlines
Investors
got a slew of disappointing news yesterday---any one item or a combination of
all could have explained the lousy performance.
(1)
the only economic number was December factory orders
which were up but below expectations---though this is hardly worrisome after
the outstanding numbers we got last week,
(2)
the Spanish and Italian stock markets took a
shellacking as the scandals that I have been documenting lately seem to have
finally impeded on investor consciousness.
Short term it appears that this news will only get worse. As you know, an EU financial crisis has been
at the top of my risk list for some time.
Is this the moment when investors wake up from a euphoria induced stupor
and start punishing government and bank debt?
I am not smart enough to answer that except to say that it wouldn’t surprise
me,
More on the mounting problems in Spain Italy
And this bit of comedy from Rajoy
(short/medium):
And Greece
(3)
Obama missed a deadline to submit His 2013 budget. I don’t think that particularly shocking; but
it is yet another signal on the likelihood of our political class making
meaningful reductions in government spending,
(4)
the Department of Justice is suing S&P over its
bond ratings on mortgage backed securities prior to the financial crisis---which
begs the question, what took you so long?
To be sure, S&P has already been sued by every other harmed entity;
but one has to wonder why it took the government five years to do so---the
usual level of bureaucratic sclerosis and incompetence or the need for leverage
if the outcome of the debt ceiling/sequestration/continuing resolution
negotiations might threaten the financial strength of the government?
Bottom line: I have no idea whether yesterday’s pin action
was a one day phenomena or a sign that investors have finally realized that bad
news is bad news. I do believe that (1)
stocks are overvalued based even assuming our positive outlook of continuing
growth in the US and ‘muddling through’ in Europe and (2) the ‘tail risks’
associated with a financial crisis in Europe and/or the sudden unwillingness of
bond investors to further indulge irresponsible global monetary policy while
not quantifiable [at least by me] are much larger than current consensus seems
prepared to acknowledge. Therefore, it seems reasonable to me that stocks, at a
very minimum, will return to Fair Value [1406].
The
latest from Mohamed El Erian (medium):
The
latest from John Hussman (medium):
Market
capitalization as a percent of GDP (short):
Update on valuation measures:
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