Tuesday, July 30, 2013

The Morning Call--If you are confused, join the crowd

The Morning Call

7/30/13

The Market
           
    Technical

            The indices (DJIA 15521, S&P 1685) drifted lower yesterday.  The Dow closed back below the upper boundary of its short term trading range (14190-15550).  The move negates the recent break above 15550 and validates (again) the short term trading range. 

The S&P finished within its short term uptrend (1601-1757).  However, it once again ended the day below the upper boundary of the former short term trading range (1687).  I am leaving our call on the re-set to a short term uptrend.  However, as I noted last week, 1687 should be acting as support.  So further downside will cause me to re-examine that call.

In the meantime, the Averages remain out of sync on their short term trends and hence, the Market is directionless.  They finished within their intermediate term (14476-19476, 1536-2124) and long term uptrends (4918-17000, 715-1800)

Volume fell; breadth was weak.  The VIX rose, staying within the short and intermediate term downtrends.

            GLD declined but closed above that developing very short term uptrend but within its short and intermediate term downtrends.

Bottom line: the challenge of the 15550/1687 level is developing all the characteristics of a Chinese water torture test.  The Dow has tried twice to bust through 15550 and couldn’t confirm the break.  While the S&P did manage to confirm its break over 1687, it stayed above that level for only one day more than required by our time element and since then has see sawed above and below 1687. 

Clearly, this back and forth can go on for as long as it takes for either the bulls or the bears to gain the upper hand.   Whenever that occurs, if it is to the upside, my focus will shift to the upper boundaries of the three major trends (S&P short term---1757, intermediate term---2124, long term ---1800). 

If stocks release to the downside, I will likely invalidate the S&P’s re-set to a short term uptrend---primarily because it succeeded in confirming by only a single trading day, then couldn’t hold 1687, making it a false break out.  That will leave both of the indices in trading range and back in sync.

    Fundamental
    
      Headlines

            Yesterday’s economic news was a bit mixed: June pending home sales were down, but not as much as expected; while the July Dallas Fed manufacturing index was up but not as much as anticipated.  Both numbers are secondary indicators; so I don’t see this information adding a lot to the discussion on the economy.

            Most investor focus was on what is occurring later in the week: the FOMC meeting which ends of Wednesday, plus second quarter GDP is reported, the ISM manufacturing index on Thursday and nonfarm payrolls on Friday.  Of course, the item generating most of the discussion was the Fed meeting and what may or may not be said about ‘tapering’.  I continue to believe that Bernanke is as confused as everyone else about what should be done at this point; and as long as that is the case, we should stay focused on interest rates.

            Bottom line: equities are overvalued, as calculated by our Model.  That doesn’t mean that the economy is about to roll over, that earnings are going to drop precipitously, that a major sovereign/bank default will occur in Europe or that interest rates are about to soar.  It simply means that stock prices are discounting an economic/political scenario far too optimistic for the facts on the ground.

            Our Portfolios will continue to use any price strength (i.e. stocks trading into their Sell Half Range) to lighten their equity exposure.

            The new game: beat and lower (short):

            More on the margin debt problem (medium):

            The inevitable ‘taper’ (medium):

            The latest from John Hussman (medium):

            Morgan Stanley on faith, hope and multiple expansion (medium and a must read):

            The latest from Jim Rogers (5 minute video):

      Investing for Survival

            Nine insights from George Soros:




Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973. His 40 years of investment experience includes institutional portfolio management at Scudder, Stevens and Clark and Bear Stearns. Steve's goal at

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