The Morning Call
The Market
Technical
The
DJIA (14550) retreated once again below the upper boundary of its short term
uptrend (13907-14582), although it remains above its all time high
(14190). The S&P (1553) also fell
back. However, as you know, it has never
seriously challenged either its all time high (1576) or the upper boundary of
its short term uptrend (1520-1594). Both
of the indices continue to trade within their intermediate term uptrends (13644-18644)
and their long term uptrends (4783-17500, 688-1750).
There
was a lot of speculation after the close yesterday that the pin action may be
signaling that the Market was rolling over.
While this has been my scenario for longer than I would like to admit,
one day’s performance seldom can be pointed at as a turning point. So I have no intention of declaring
victory. Indeed, technically speaking
the Averages are solidly within every major uptrend. So by definition, prices are going up until
those trends start getting broken.
That said, the
Market internals continue to deteriorate.
I mentioned advance/declines and the Russell 2000 yesterday. Today, I would add the transports, the
financials and the rising number of stocks penetrating or seriously challenging
their 50 day moving averages. Clearly, I
can re-emphasize caution.
One final point,
after the damage done yesterday, stocks are oversold; so a bounce is to be
expected. The strength and magnitude of
that rebound will give us a hint as to whether the Market is topping.
Volume
rose; breadth was lousy. The VIX rose
but finished well within its short and intermediate term downtrends.
GLD
suffered some serious whackage, closing near the lower boundary of its short
term downtrend but breaking through that developing support level. Barring a significant turnaround today,
expect GLD to challenge the lower boundary of its intermediate term trading
range.
Bottom line: Market
internals weakened more yesterday. If
the S&P closes below 1546 on Friday, this will be an ‘outside’ week
(meaning it traded above the previous week’s high but closed below the previous
week’s low) which is indicative of an even more vulnerable market.
That said, it is
way too soon to assume that the Market is rolling over. Best to sit on our hands. We have a great cash position; and it is much
too early to be buying.
‘Sell
in May and go away’ comes early (short):
Fundamental
Headlines
Yesterday
started out with some rough economic numbers: weekly mortgage applications, the
ADP private payroll report and the ISM
nonmanufacturing index were all disappointing.
That got investors’ day off on the wrong foot; although I would add that
one day’s poor stats is meaningless in a long term economic sense.
Then
sentiment got whacked even harder when the US
announced that it was sending missile defense units to Guam
in response the North Korean saber rattling.
That is probably not a bad idea; but it is most likely that the Korean
bluster is more about their own internal problems than anything beyond their
borders. The only leverage they have
with the Chinese or the US
is the threat of a nuclear launch. Once
they do it, (1) all that leverage is gone, not to mention that (2) retaliation
will take them from the Dark Ages to the Stone Age. On the other hand, we know so little about
these clowns that their willingness to self destroy can’t be assumed to be
zero. Nevertheless, my guess is that any
influence this situation is having on stock prices is short lived.
The
other surprising headline was the statement from the head of the San Francisco
Fed that the Fed may reduce its monthly mortgage purchases by year end. I don’t know if the guy was testing Market
reaction at the behest of Bernanke, doing his best impression of Kim Jung Un,
having a senior moment or just yakking because he likes to hear himself
talk. Consensus seems to be that it was
not choice number one, which I tend to agree with; though I hope
otherwise. However, if somewhere in the
bowels of the Fed, the gremlins are planning to switch the money machine to
‘slow’ or ‘stop’, Mr. Market is probably not going to like it (though I would
cheer).
Bottom line: I
wouldn’t read too much into any of yesterday’s headlines: unsatisfactory
economic data, Korean threats or the musings from the San Francisco Fed. Furthermore, as I have noted previously, we
are in uncharted waters of the notion of ‘don’t fight the Fed’---we simply
don’t know how this new version of the game will end.
My real worries,
as you know, are that (1) the Fed keeps pumping and creates an even big bubble
to burst than we have now or that investors do decide to fight the Fed and (2)
the EU economy implodes from too much sovereign debt and an overleveraged
financial system. In the end, stocks are
overvalued and you never know what the catalyst will be that brings investors
to their collective senses.
I
remain quite happy with our cash position.
An
overview of Europe ’s current economic situation
(medium):
The
CEO of Saxo Bank on Cyprus
(medium):
Contagion
starts small (medium and today’s must read):
More
from David Stockman (medium):
Portfolio
cash allocations are at 16 month high (short):
Subscriber Alert
Yesterday,
several stocks traded below the upper boundary of the Buy
Value Range
In
the Dividend Growth Portfolio: Nucor (NUE -$43). The Portfolio owns a full position in NUE
and will not be Buying additional shares.
In
the High Yield Portfolio: Western Energy Ptrs (WES -$56). The Portfolio owns a full position in WES
and will not be Buying additional shares.
In
the Aggressive Growth Portfolio: Oracle (ORCL -$32). The Portfolio owns a full position in ORCL
and will not be Buying additional shares.
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