The Morning Call
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:
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