The Morning Call
The Market
Technical
The
indices (DJIA 14659, S&P 1573) had another very volatile day. The most important development was that
despite a nice afternoon intraday rally, the S&P still broke the 2007 high
(1576) support level. As you know, I
speculated that 1576 could provide strong support. While it ultimately could (if we get a bounce
near term), yesterday’s pin action was not impressive. This leaves the S&P still in search of a
lower boundary to a new short term trading range (1576 [?]-1687).
The
Dow remained above its 2007 high (14190), leaving open the possibility that
14190 could become the lower boundary of a short term trading range (14190
[?]-15550).
The
Averages closed within both their intermediate term (14227-19227, 1508-2096)
and long term uptrends (4783-17500, 688-1750).
Volume
fell; breadth was poor. The VIX
rose. It is now searching for an upper
boundary of a short term trading range; but remains within its intermediate
term downtrend. Finally, last week’s
S&P trading formed an ‘outside down week’ (the high of last week was higher
than the high of the prior week and the week’s close was a low lower than the
prior week’s low). Remember how negative
the May 22 ‘outside down day’ proved; now the Market must contend technically
with an ‘outside down week’---an even bigger negative.
GLD
declined again and is now searching for a lower boundary of a new long term
trading range. No candidates are
apparent.
Bottom line: the
S&P has broken its short term uptrend and is now challenging the 1576
(former all time high) support level. I
don’t know whether it will establish a trading range or continue to fall. Until we know, I think it too risky to be
making any portfolio changes unless you are fully invested. If we get an oversold bounce near term (which
seems likely), it would provide the opportunity to lighten up.
The
S&P and historical post election year performance (short):
Is
a global slowdown at hand (short):
Fundamental
Headlines
Yesterday’s
economic data was mixed: the Chicago National Activity Index came in slightly
below expectations while the Dallas Fed manufacturing index was much stronger
than anticipated---nothing to disturb our forecast.
However,
the rapidly changing Market psychology continued to dominate the
headlines. Our trading day started
facing another major decline in the Chinese markets as investors worry over the
end game of the current Bank of China managed squeeze of its credit markets.
The securities markets opened down big and sank further.
Then several (3)
regional Fed bank chiefs tried to come to the rescue. In speeches they attempted to walk back
Bernanke’s ‘tapering’ comments last week.
Their effort was initially successful as stocks rallied. Unfortunately, prices rolled over again.
Two
observations:
(1)
the Bank of China is taking the necessary steps to
quell speculative lending in their ‘shadow banking’ system. That said, the data out of China is so
suspect, we don’t know the extent of the credit problem; so we don’t know how
much damage will ultimately be done before this problem is fixed. As a result, the risk is that the unintended
consequences of the current tightening could measure a 10.0 on the Richter
scale,
(2)
I speculated last week that the Fed would not be able
to put the QEInfinity genie back in the bottle.
Given what seems to be a new full court press to tone down Bernanke’s
‘tapering’ comments, we are likely to know pretty quickly whether or not I was
correct in that assessment. The Fed’s
initial try was unsuccessful but I imagine that there is more to come.
Bottom line: I
continue to believe that Bernanke’s ‘tapering’ comments and (hopefully)
subsequent action are the right course for the economy on a long term
basis. (I also believe that it was about
time that he did something right.) To be
sure, it will not likely be positive for the Markets in the short term. However, the main beneficiary of QEInfinity
has been the Market which is now grossly over valued while the economy, which
QE was supposed to benefit, limps along partly as a result of the distortions it
has caused.
Further, I
believe that Bernanke’s comments were a ‘emperor’s new clothes’ moment for
investors, suggesting that any and all attempts to walk back his policy statement
will be greeted with skepticism. If I am
correct, we will probably get the opportunity to Buy stocks at or near Fair
Value.
Buy
cash (medium):
And
(medium):
Money
can’t buy you love or a better economy (medium):
Morgan
Stanley: bad news is no longer good news (medium):
The
latest from John Hussman (medium):
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