The Morning Call
The Market
Technical
The
indices (DJIA 14455, S&P 1548) turned in a mixed day (Dow up, S&P
down), emphasizing their current inconsistent technical picture: the DJIA
selling above both its former all time high (14190) and the upper boundary of
its short term uptrend (13762-14423); and the S&P failing to challenge
either of its comparable levels (1576) and (1501-1575) respectively.
Both
remain within their intermediate term uptrends (13517-18517, 1433-2017) and
their long term uptrends (4783-17500, 688-1750).
Volume
was flat; breadth improved slightly. The
VIX was up again (7.7%) but finished within its short and intermediate term
downtrends.
GLD
improved again, rising to roughly the midpoint of its short term downtrend. That support level continues to look good; in
addition, a very short term uptrend is developing.
Bottom line:
despite the continuing uncertainty surrounding the situation in Cyprus ,
the pin action once again did much better than I would have expected. As I noted yesterday, this performance likely
means that either the bulls remain alive and well and continue to ignore bad
news or I am unrealistically pessimistic about the downside risk of the EU
sovereign/bank solvency problems.
We are only in
the second Act of this play, so it is too soon to know which is occurring;
though as you know, I tend toward the former.
And even if I am wrong on that score, I am not impressed with the upside
from current levels.
Fifth
year rally precedents (short):
More
warning signs (short):
Fundamental
Headlines
Yesterday’s
economic data was positive---weekly retail sales were good, February housing
starts were so so but building permits were quite strong. So this remains the bright spot in our
outlook.
European
economic data was more mixed---German economic sentiment increased but EU
construction spending declined big time.
No improvement here.
Of
course, once again none of the aforementioned mattered as Cyprus
remained center stage---though as I noted above, I continue to be surprised by
the Market’s subdued response.
Events
transpired quickly during the day:
First, the Cypriot
parliament rejected the proposed ECB depositor ‘tax’ bail in (short):
ECB then responded
that it will provide liquidity ‘within established rules’. Unfortunately, no one seems to know what that
means (short):
Finally, the
Finance Minister hopped a plane to Moscow
to try to appease the Russians. What is
happening here is that both Cyprus
and the EU are gambling that the Russians will be willing to share the pain in
this deal (i.e. help with the bail out)---which may be the second stupid action
in as many days (short):
British
MP weighs in (5 minute video):
A review of the
potential alternative outcomes from this situation (medium and must read):
Will capital
controls be next? (medium):
Is Spain
preparing its own levy? (medium):
Pimco on Europe
(medium):
Finally, whatever
happens, investor beware (medium):
Bottom
line: while the Market seems to have
concluded that the Cyprus
situation is more interesting than threatening, it may be a bit too soon to
assume a return to normal. I do think
that when this is over and if little to no damage is done to the EU financial
system or to EU citizens’ confidence in their banking institutions, then I will
have to reconsider the downside risks of EU sovereign/bank insolvencies.
If I conclude
that I have been too pessimistic, that wouldn’t change our Valuation Model but
it would argue that our Portfolios’ larger than normal cash position (for the
magnitude of overvaluation) should be pared back on any sell off to Fair Value.
10
market negatives (medium):
http://www.marketwatch.com/story/10-signs-your-stocks-are-about-to-tumble-2013-03-18
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