The Morning Call
The Market
Technical
Are
we having fun yet? The indices (DJIA
14578, S&P 1588) suffered some severe whackage yesterday. Both closed below the lower boundary of their
short term uptrends (14841-15574, 1634-1713) as well as their 50 day moving
averages. Further, they both made lower
lows, resetting their very short term trends to down.
With
respect to our time and distance discipline, the S&P’s close yesterday
satisfied both the time and distance elements; meaning that barring a massive
rally today, it has broken its short term uptrend. That leaves the Dow having broken the lower
boundary of its short term uptrend but not fulfilling the distance
element. At the moment, the time element
will confirm a break at the close today.
Under our
technical system, once a break to the downside is confirmed, we then wait for
the Average(s) to bounce enough to break the new very short term downtrend. At that point, the low of the decline marks
the bottom of a newly re-set short term trading range. The upper boundary would be defined by the
recent highs. That is now in process for
the S&P; and barring a big rally today will be so for the Dow on Monday.
In addition to
those new short term trading range boundaries, other levels to watch on the
downside are 14190, 1578 which are the old 2007 highs and the lower boundaries
of the Averages intermediate term uptrends (14177-19177, 1507-2095).
Volume
rose; breadth was abysmal. The VIX
soared 23%, closing above the upper boundary of its short term downtrend. It was a sufficiently large move that the
distance element of our time and distance discipline confirms the
break---though the time element would do so by the close today. Again barring a major plunge, the technical
process for resetting to a trading range described above for the indices would
work in reverse for the VIX. Clearly,
this break confirms the movement in stocks.
GLD
fell 5%, finishing below its double bottom and the lower boundary of its long
term uptrend. Once again, the decline
was of such a magnitude that the
distance element already qualifies yesterday’s GLD down draft as a confirmed
break.
Bottom line:
yesterday’s pin action could be significant---which is a bit of a hedge but I
am doing it because of the extreme volatility of in recent days. As described above, it has all the markings
of a major turning point; but I am holding off for a day or two just to be sure
an equally but opposite reaction doesn’t occur.
Do nothing.
Are
the chickens of record margin debt coming home to roost? (short):
Fundamental
Headlines
Although
you would never know it, we actually got some decent economic numbers
yesterday: May existing home sales were extremely positive as was the Philly
Fed manufacturing index. Granted weekly
jobless claims were up and the leading economic indicators were not as strong
as expected. However, on a normal
trading day, this data would have had investors smiling.
On
the other hand, global credit markets continued to seize up, partly as a
function of deteriorating conditions in specific markets (China, Greece) but
antagonized by what appears to have been an ‘emperor’s new clothes’ moment on
Fed monetary policy. The result was a
vicious sell off in global stock, bond and commodity markets.
As
you know, this doesn’t come as a surprise to me. I have been yakking about irresponsible Fed
policy, structural weakness in some of the major world economies and overvalued
equities for far too long. Not to be
repetitive, but that doesn’t make me a bear on the US economy; it just means
that I thought that stock prices were/are way ahead of themselves based on the
fundamentals as I see them.
The
primary catalyst for that overvaluation was the belief that as long as
liquidity injections lasted, stocks had to go up and that when those injections
stopped, each individual investor believed that he was smart enough to be the
first one out. Notice the total absence
of anything to do with value; it was all about free money being used to push up
security prices until the last ‘greater fool’ allowed the ‘smart money’ out.
As
the Market was cratering yesterday, the bulls were arguing that (1) if the Fed
is correct and the economy is improving, then that will justify current prices,
(2) but if the Fed is wrong, it will continue QEInfinity---assuming that
investors will be just as willing to mainline the heroin in the future as they
have been in the past. To which I reply
(1) the Fed’s forecast is not that much better than our own; so there is no way
that stocks are currently priced Fairly even if the Fed’s estimates were a lock
and (2) if the Fed is wrong, all faith will be lost. Who in his right mind is going to believe
that the Fed will get in right the next time when it is clear that once again
it has botched the transition process---in other words, they learn again that
‘it is never different this time’?
Bottom line: in
my opinion, the Fed has drawn its line in the sand. The best outcome possible is that the economy
continues to plod along, growing at a below average secular rate---in which
case, security prices revert to Fair Value once the heroin high has worn off
(which itself could be a very painful process).
If the economy stumbles and the Fed re-starts (or never stops)
QEInfinity, I don’t believe that investors will return to their prior mindset
because then they will know that the Fed doesn’t know what it is doing, so it
has no clue about its own end game.
More
on the mounting credit crisis in China
(medium and a must read):
More
bad news from China
(short):
Meanwhile
in Europe , the IMF is threatening to pull the plug of Greece
(short):
Subscriber Alert
The
stock price of Phillip Morris Int’l (PM-$87) fell below the lower boundary of
its Buy Value
Range
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