Wednesday, July 24, 2013

The Morning Call--A positive earnings season, so far


The Morning Call

7/24/13

The Market
           
    Technical

            The indices (DJIA 15567, S&P 1692) took something of a breather yesterday.  The S&P was off fractionally; but remained within its newly re-set short term uptrend (1594-1750).  The Dow was up enough to finish above the upper boundary of its short term trading range (14190-15550).  Under our time and distance discipline, if it remains above 15550 through the close Thursday, the break of its trading range will be confirmed.  However, for the moment, the Averages are out of sync---meaning that there is no direction on a short term basis.

            Both of the indices remain within their intermediate term (14421-19421, 1531-2119) and long term uptrends (4918-17000, 715-1800).

            Volume fell; breadth was mixed.  The VIX was up, after bouncing off the lower boundary of its short term trading range.  It remains within its intermediate term downtrend.

            The long term trend in volume (short):

            The trend in ‘all or nothing’ days (short):

            GLD rose again; this time breaking above its 50 day moving average.  It closed within its short and intermediate term downtrends.
           
Bottom line: the assault on the May highs continues.  The S&P has re-set to a short term uptrend.  Yesterday, the Dow began its effort to challenge the upper boundary of its short term trading range.  A close above 15550 through the end of trading on Thursday will confirm its break.

I know that this comment will smack too much of me talking my book, but I am surprised that the indices’ challenge has been as plodding as it has been.  That doesn’t mean that stocks won’t continue to levitate.  I just find the trading unusually sluggish for an attempt to change trend.  My point being that perhaps it reflects the limited upside due to the proximity of the upper boundaries of the S&P short (1750) and long term (1800) uptrends.

    Fundamental
    
     Headlines

            Yesterday’s economic news was mixed: weekly retail sales were up, while the Richmond Fed’s manufacturing index was much weaker than anticipated.  Both of these stats are secondary indicators, so there is little to read into these numbers.

            There were also a couple of upbeat (?) headlines from overseas: Spain reported second quarter GDP down by the smallest percentage in a couple of years---‘down’ being the operative word; and China announced that it would not allow economic growth to fall below 7% annually---remember that their government stats are of very questionable veracity on top of the fact that they lie....a lot. 

***over night, Eurozone PMI rose into positive territory---the best reading in 1 ½ years; however, Chinese PMI fell to the lowest level in 11 months and employment hit a four year low.

            In sum, very little macro news that could influence stock prices.  Earnings season continues to dominate the news flow and that is largely company specific.  However, results remain well ahead on original (adjusted) forecasts and has given a modest upward bias to equity prices.

            Update on this quarter earnings and revenue ‘beat’ rate (short):

Bottom line:  I remain sanguine on the economy and corporate profits; though as you know, my expectations are for very sluggish growth from both over the next 12 to 24 months.  On the other hand, with those inputs, our Valuation Model can’t get equity prices, in general, anywhere near current values---even if we avoid disruptions in the financial system brought on by sovereign and/or bank defaults in Europe, by a major mistake by the Fed transitioning from easy to tight money or by problems in our own banking system resulting from counterparty risk exposure to the EU banks or new revelations of mismanagement, malfeasance, etc out of our banksters. 

On top of that, the charts don’t suggest an upside of any magnitude.
           
            In the end, I am sticking with our discipline, focusing on lightening up on those stocks that hit their Sell Half Range.  

            What if the secular bear market isn’t over? (short):

            The Fed’s problem; pay close attention to the last chart (short):


      Subscriber Alert

            In the annual review of Sanofi (SNY), the company failed to meet the minimum financial strength requirements of the High Yield Universe.  Accordingly, the High Yield Portfolio will Sell its position at the Market open.



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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