The Morning Call
The Market
Technical
Cue
the marching band and confetti. The
indices (DJIA 14253, S&P 1539) smoked to the upside yesterday. The Dow busted through not only the old
intraday high (14190) but also the upper boundary of its short term uptrend
(13565-14228). That starts our time and
distance discipline for confirmation of both breaks. It also begins a period in which the Dow and
S&P are out of sync since the S&P did not follow suit and remains below
its old intraday high (1576) and within the boundaries of its short term
uptrend (1478-1547).
Both
of the Averages finished within their intermediate term uptrends (13422-18422,
1423-2017).
I
checked our internal indicator measuring each stock against its former all time
high (comparable to 14140, 1576) with the following results: in a 148 stock
Universe, 101 are above their former highs, 35 are not and 12 are too close to
call. In other words, if our Universe
were an index it would have long since broken to new highs. Hence, I see no reason to believe that the
DJIA won’t confirm a break out or that the S&P won’t eventually break out.
So looking strictly at the charts, what kind of upside could we be talking about? Below is a very long term chart of the S&P. You can see that the 2000 high (circa 1576) was well above the upper boundary of a 68 year uptrend; the 2007 high (circa 1576) was just a little above that same upper boundary. This time around 1576 is below that upper boundary but still near the top end (circa 1750 or about 10% up from where the S&P is today) of the now 80 year uptrend.
Can the S&P touch that upper boundary? Clearly. But try this as a thought experiment: I noted above that the preponderance of the stocks in our Universe were already trading above the comparable 1576 level. That would suggest that they are therefore closer to their comparable 1750 level---which if this is a valid comparison, means there is less upside left in our holdings than there is in the index.
A second point I
will make is if our reward is 1750 (or 10-11%) on the upside, what is the
downside? A retreat to Fair Value is
about the same (10-11%). But that is
Fair Value. How about the lower boundary
of the long term uptrend (circa 673 or 56% downside)? Assuming stocks go to 1750, with that kind of
risk/reward, I wouldn’t alter our Portfolios’ asset mix that much---although
clearly I am guilty of having been too early to sell. That said, the issue is, what does Mr. Cook
do today?
I know that I am
arguing my book here; but the point is still that technically stocks are near
the upper boundaries on their long term uptrends as well as being fundamentally
overvalued. Certainly, they can go
higher.
My problem is
that higher technically doesn’t seem to be all that much higher. As to the fundamentals---forget about
it. However one wants to dance around
the current economic progress and the hope of a more fiscally responsible
government, (1) those are well reflected at current price levels and (2) it
doesn’t change the facts that [a] the Fed is out of control; and if you listen
to even the big bulls, they agree that when it starts to tighten, look out
below and [b] Europe is nowhere near solving its problems. Both factors carry a
huge tail risk. Were they to occur all
those aforementioned bulls who insist that you have to own stocks will never
get out of the door.
Is the eurozone
near a breaking point? (medium):
And (medium):
Here courtesy of
Bespoke is the best technical argument as to why my analysis is wrong:
Via Bespoke Invest blog, here is some data on the
DJIA new highs.
At 14,253.77,
the DJIA closed today at an all-time high for the first time since 10/9/07 . That stretch of 1,973 days is the
sixth longest stretch the DJIA has ever gone without closing at a new all-time
high. It is also the second time in the last decade that the index has gone
more than two years without closing at a new all-time high.
Even though we have now seen two
periods in the last decade where the DJIA has gone two or more years
without closing at an all-time high, these periods of drought are very rare.
Going back to 1900, there have now only been ten periods where the DJIA went
two or more years without a new high. The longest of these droughts
occurred from 1929 through 1954 when the index went 9,211 days without a new
high.
The table below highlights each of
the prior periods where the DJIA went two or more years without closing at a
new all-time high (charts of each period are included on pages two and three).
For each period, we also show how the index performed over the following one,
three, six, and twelve months. We also show what the maximum drawdown and gain
was over each of those periods.
Looking at the average returns,
there is also not much credence to the argument that you should not be buying
equities when the DJIA is trading at all-time highs. Over the following one,
six and twelve months, the DJIA has seen better average returns. Furthermore,
while the average maximum drawdown is a decline of 8.5% over the next twelve
months, the magnitude of the average maximum gain is more than twice that at
20.34%. In fact, there were only three periods where the maximum drawdown over
the next twelve months exceeded the maximum gain. All in all, the returns
summarized below are not significantly above average, but they are more
positive than negative nonetheless.
In my defense, what
this technical analysis ignores is the heavy influence that an unprecedented,
massively easy Fed has had on this Market; and I would argue as a result, we
are in uncharted waters on that score.
So there is no chart, graph or set of data that can even suggest what
future price movement will be.
Volume was
flat---not particularly encouraging; breadth was positive. The VIX fell but is trading inconsistently
with the Dow making an all time high.
Gold rose but is
trading near the lower boundary of its short term downtrend.
Bottom
line: stocks are overvalued and many are technically overextended. There is no way that I am chasing stocks
up. Our Portfolios are better sellers.
The
last time the Dow was here (short):
Fundamental
Headlines
Good
news all around yesterday: weekly retail sales were positive, the ISM
nonmanufacturing index was better than expected, economic news out of China
was upbeat. While I am pleased with
these numbers, they were not enough to spark the rocket shot we witnessed.
Indeed,
the Market was the news yesterday and that will likely roll over into
today. I covered that subject in the
Technical section; so my bottom line here is the same as above.
A
hopeful sign: FBI to investigate high frequency trading (medium):
http://www.zerohedge.com/news/2013-03-05/fbi-and-sec-team-take-down-hft
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