The Morning Call
The Market
Technical
Finally,
the challenge is occurring. The indices
(DJIA 15548, S&P 1689) traded up strongly yesterday. The S&P finished slightly above the upper
boundary of its short term trading range (1576-1687) while the Dow closed a bit
below its comparable boundary (14190-15550).
This starts our time and distance discipline on the break of the S&P
while leaving the Averages out of sync on the short term trend.
As
you know, I thought 15550/1687 would likely be challenged. Now we have it; so the next step is to
resolve it, i.e. it is either successful or not.
In
the meantime, both of the indices remain within their intermediate term
(14364-19364, 1527-2115) and long term uptrends (4918-17000, 715-1800).
Volume
was up slightly; breadth was mixed. The
VIX fell but remains above the lower boundary of the former very short term
uptrend.
GLD
inched higher, closing right on the lower boundary of its short term downtrend
but well below the upper boundary of a very short term downtrend.
Bottom line: the
assault on 15550/1687 (the May highs) has begun. Given the momentum off the June lows, it
should surprise no one if this challenge is successful. Nevertheless, our time and distance
discipline is in place for a reason: to insure against a false breakout. So anyone considering putting cash to work might
want to be patient until a break is either confirmed or not, in particular in
light of the Google and Microsoft earnings misses yesterday after hours.
Sell
this rally?
Fundamental
Headlines
Yesterday’s
economic news was mixed though weighed to the plus side: weekly jobless claims
fell much more than expected; the July Philly Fed manufacturing index was up
over double estimates; while the June leading economic indicators came in flat
versus forecasts of an advance. All in
all, nice numbers and quite supportive of our economic outlook.
Nevertheless,
Bernanke remained in the spot light as he rendered his second day of
testimony---this time before the senate.
Not that he said anything different; but investor relief from knowing
that ‘tapering’ won’t automatically start in September seems to be driving the lift
in stock prices.
An open letter
to Ben (medium and today’s must read):
Bernanke
then and now (medium):
Here
is the optimist case on Fed policy (medium):
That,
of course, is not what I expected to happen---my thesis being that with
Bernanke’s original comments on ‘tapering’,
investors suddenly came to grips with QEInfinity ending and became more risk averse after
the global securities market sold off.. Whether the start of ‘tapering’ is in
September or whenever ‘the data supports it’ became less important.
The
argument against this thesis is that after endless clarification, investors now
understand that ‘tapering’ is ‘data dependent’ not time dependent and that
‘tapering’ (stopping bond purchases) is not the same thing as ‘tightening’
(raising the Fed Funds rate). I think
that this is all poppycock because:
(1) investors
may be emotional but they are not stupid.
Once warned of a negative event, they are going to build that risk into
their valuation models,
(2) some pundits
are suggesting that ‘tapering’ will be effected by the simply letting the bonds
that they own mature---which makes no sense.
There is no difference in selling bonds out right or letting them
mature---there still has to be either a buyer or one who refinances the ‘rolled
over’ debt. And if at a given interest
rate, there is more debt needing to be financed/refinanced than willing buyers,
rates are going up,
(3) if the
market takes rates up, it doesn’t matter what the Fed funds rate is. Car loans, mortgages, credit cards,
commercial paper, etc are going carry higher interest rates---and by the Feds’
definition that is ‘tightening’.
Having said all
that, it doesn’t matter what I think.
What matters is what the Market in its collective wisdom thinks---and it
is on the verge of ‘thinking’ that there are no worries until the ‘data’
suggest the need for ‘tapering’ (and apparently that is far enough in the
future to not matter) and that ‘tapering’ isn’t ‘tightening’ in any case.
Bottom line: I don’t know why I bother arguing with the
Market; because as you know, it is not the Market that pushes our Portfolios
out of stocks into cash, it is the individual equities’ valuation that does
that. At the moment, collectively, our
Universe of stocks are generously valued---some to extremes, which is why so
many Sell Half sales have been made. But
that is what our Sell Half
Range
In only makes
sense that when numerous stocks hit that Range, it has been a precursor to a
Market decline, though the timing varies.
However, the Model was never built to predict Market tops, it was built
to force us to take profits when stocks became overvalued.
So while I may
be wrong about investor acceptance of the Fed’s story line and the Market may
break out technically to the upside, until our Model valuation mechanism is
proven unworkable or inefficient in pricing equities through a Market cycle, I
will accept the risk of being too early to avoid the danger being too late.
I see few reasons to be Buying stocks
at current levels. A move higher will likely
prompt a continuation of Selling as our stocks move into their Sell
Half Ranges
Have
bonds bottomed (short):
Update
on this quarter earnings and revenue ‘beat’ rate (short):
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