The Morning Call
The Market
Technical
Too
much happened yesterday to not comment.
Perhaps the biggest thing was the technical picture. The indices (DJIA 14802, S&P 1587) had
another great day. The Dow once again closed above the upper boundary of its
short term uptrend (13986-14681) though the S&P did not (1528-1602). However, given the powerful surge that
distinction is a minor detail. Both
finished within both their intermediate term uptrends ( 13703-18703, 1449-2043)
and their long term uptrends (4783-17500, 688-1750).
Most
important, the S&P blew through its former all time high (1576)---and not
in a minor way---joining the DJIA. Our
time and distance discipline kicks in at this point, which means that to
confirm the break the S&P must either (1) on a time basis, remain above
1576 until the close next Tuesday or (2) on a distance basis, close above 1599.
If
the break is confirmed, then the next most important level to watch is the
upper boundaries of the Averages long term uptrends (17500, 1750).
Fundamental
The
least important item was Obama’s submission of His budget. It was pretty much as expected---more taxes
but no tax reform, a reduction in the rate of spending increase but no
reduction in the deficit (why is that no surprise) and no attempt at a grand
bargain. To be fair, it does have some
cuts in entitlement spending---though not much.
That said, I noted yesterday that the senate and house have already
passed their own budget; so I am not that sure that Obama’s version is of much
consequence beyond its PR value. And as
I recall the budget process is the constitutional responsibility of congress
anyway. Hence, the real budget news will
occur when the joint committee starts the resolution process.
The
Fed released the minutes of the latest FOMC meeting. They remained dovish in tone; and that
provided the fuel for yesterday’s rocket shot.
Nonetheless, there were still some members that indicated that some sort
of end game to QEinfinity was appropriate.
This is line with the comments of some Board members over the last two
weeks (which I reviewed this issue in yesterday’s Morning Call). However, judging from latest statement, I
would say that (unfortunately) these individual comments were just that---individual
comments; and not a sign that monetary restraint is within sight. That leaves me with my oft stated
conclusion. QEinfinity is not going to
end pretty; and the longer it takes, the uglier that end will be.
The
EU finance ministers are debating including interbank deposits in the Cyprus
non-template. If passed this clearly
won’t help depositor confidence. (medium):
***and
this overnight:
Cypriot
parliamentary committee investigating who got money out of the country before
the bail in/capital controls were imposed has suspended said
investigation. Also unlikely to enhance
citizen/depositor confidence (medium):
Bottom
line: clearly I am a short hair from being wrong regarding another leg up in
stock prices. That said, no matter which
bull gets quoted, he/she always ends their argument for higher stock prices with
the ‘you can’t fight the Fed’. That is
certainly the case today. However,
things have a way of never being quite that simple; otherwise, we would all be
billionaires. The risks in this tidy
little adage are two fold; (1) it will work until it doesn’t, then all hell
breaks loose or (2) it does work until the Fed starts to tighten; in which
case, if you are not the first out the door, you are f**ked---and there is only
one first out the door.
The majority of
the rest of their bull cases rest on (1) valuation based on forward looking
earnings, which I have shown is not the best valuation method, (2) an improving
economy, which I have no fight with; but that improvement is not that
spectacular, (3) the US is the prettiest girl at a convention of fat, ugly
women; I am sorry but you wouldn’t marry the prettiest girl from a convention
of fat ugly women, so why would you buy the least bad Market?
For traders, I
can see buying in to the ‘don’t fight the Fed’ notion and riding the bull till
it is exhausted. I am just not a trader;
so I stay with the risk/reward argument I have made in the past---from current
price levels to the upper boundary of its long term uptrend, the S&P has
10% upside (1588 to 1750) but from current levels to our Fair Value, it has 11%
to the downside (1587 to 1412)---an OK but not great bet. However, from current levels to the lower
boundary of the long term uptrend, the downside is 56%. That is not a great risk/reward equation; so
I will grit my teeth and suffer through any additional move to the upside.
However, if I
were a trader and if the Market break is confirmed, I would buy a Market ETF (e.g.
VIG) and keep a very tight stop.
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