The Morning Call
The Market
Technical
The
indices (DJIA 15040, S&P 1622) bounced nicely yesterday. The S&P traded back above the lower
boundary of its short term uptrend. That
negates Wednesday’s break and re-syncs it with the Dow. So now both are within the major uptrends:
short term (14683-15389, 1613-1692), intermediate term (14081-19081, 1494-2082)
and their long term uptrends (4783-17500, 688-1750).
Volume
declined; breadth improved. The VIX was
down but remains near the upper boundary of its short term downtrend---a
successful challenge of which would be a negative for stocks. Nevertheless, it finished within its short
term and intermediate term downtrends.
GLD
was up again and has sustained itself for a long enough period above the upper
boundary of its shortest term downtrend to suggest that the worse of its
decline may be over. Accordingly, (Subscriber
Alert)our Portfolios will begin re-establishing a holding in GLD (1-2%
position), but with a tighter than normal Stop Loss Price.
Bottom line: yesterday’s
rebound could mean that ‘buy the dips’ still works. On the other hand, given the degree to which
the Market was oversold, I am not sure how much information value there is in this
one day’s pin action.
However, if
stocks experience a strong follow through (which I define as breaking the
current very short term downtrend [circa 1637]), then this thesis may still be
alive and well. It would also tell us
something about the extent of support under the Market.
Also working for
the bulls another Market underpinning: since January 1, stocks have not
declined three days in a row. That
record was upheld with yesterday’s bounce---which also is measure of underlying
Market strength.
That said, since
I have absolutely no intent of Buying stocks at current levels, our Portfolios
remain on the sidelines. However, any
renewed move to the upside that pushes our stocks into their Sell
Half Ranges
Fundamental
Headlines
There
was very little economic news yesterday: in the US, weekly jobless claims were
down slightly more than anticipated and May chain store sales were just on the
plus side of mixed. Overseas, the ECB
left its interest rate unchanged. Really
not much to hang one’s hat on with respect to either their economic forecast or
a tell on Market direction.
In
fact, the Market itself was The headline yesterday starting off weak on the
heels of another drubbing in the Nikkei and then rebounding nicely as the day
progressed. As I noted above, my take is
that the pin action was largely a function of a heavily oversold condition and
provided little informational value.
Bottom line: the
Market action of the last week has done little to ameliorate the overvalued
condition of stocks.. Since ‘overvalued’
is defined by the underlying economic/political factors relative to equity
prices, the two things that will bring stocks to Fair Value is either an
improvement in fundamentals or a decline in prices.
As you know, our
economic forecast is reasonably positive.
Indeed at the moment it is probably as positive if not more so than
Street consensus. The reason is that the
data flow of late has been worrisome and some well known economists are calling
for a recession. The point being that I
don’t know how I can assume an improvement in the numbers in our outlook.
Clearly, that
leaves door number two---lower stock prices; and given the extent of current
overvaluation, much lower stock prices (S&P 1419 = Fair Value). So, as much time as I spend on trying to read
the technical tea leaves, whether the short term uptrend holds or not is
irrelevant to me in an investment strategy sense. Stock prices need to go much lower before I
get jiggy; and if they go higher, our Portfolios will watch for opportunities
to Sell.
Stock
prices versus Citi’s Economic Surprise Index (short):
And
this analysis from SocGen that postulates that a recession has already begun
(medium):
Most
valuation studies I see are based on either future corporate profits or a
moving average of past earnings. This
study is the S&P/current corporate profits (short):
More
updates on Doug short’s valuation studies:
http://advisorperspectives.com/dshort/commentaries/Market-Valuation-Inflation-and-10-Year-Yields.php
Investing for Survival
This
is a great discussion about how Argentines survive in country with high
inflation and a government gone mad (medium):
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