Thursday, July 25, 2013

The Morning Call--There is good news and bad news


The Morning Call

7/25/13

The Market
           
    Technical

            The indices (DJIA 15542, S&P 1685) stumbled a bit yesterday.  The Dow traded back below the upper boundary of its short term trading range (14190-15550), which invalidates Tuesday’s break.  The S&P remained within its short term uptrend (1600-1756); however, it did close below the former upper boundary (1687) of a short term trading range---which should be acting as support.

            While the pin action wasn’t terribly negative, nonetheless, the fact that the Dow break out of its short term trading range was negated and the S&P traded below that 1687 level does raise the possibility that the S&P break out was a false one and the short term trading range remains in tact.  I noted in yesterday’s Morning Call that Tuesday’s trading seemed a bit sickly for the Averages having broken out of their short term trading ranges.  That said, this Market has had such a strong bid since last November, I wouldn’t be making any bets that this is all part of a topping process---at least not just yet.  The good news is that stock performance over the next couple of days will likely bring clarity.

            Volume was flat; breadth was down.  The VIX surged and closed within its short term trading range and intermediate term downtrend.

            GLD price declined but held above the upper boundary of that former very short term downtrend and remained within its short and intermediate term downtrends.

Bottom line: the challenge process of the Averages short term trading ranges hit a snag yesterday.  The Dow break was negated and questions were raised about the validity of the S&P’s break---although I am not changing my call on that break.  This following what I thought under the circumstance was very weak pin action on Tuesday.  So, the technical picture has been clouded a bit.  So we just need to be patient as the Market works things out. 

    Fundamental
    
      Headlines

            The US economic stats yesterday tilted to the plus side: weekly mortgage and purchase applications were weak; however, new home sales were well ahead of expectations and the Markit flash US PMI came in ahead of estimates.

            Overseas, we got some surprisingly positive news as the Eurozone reported its flash PMI up and into positive territory for the first time in 18 months.  On the other hand, China’s flash PMI came in at an 11 month low and employment was at a four year low.

            Overall, I don’t think that cumulatively this data moves the needle on our forecast.  Although if there is follow through on the positive EU PMI numbers, it could portend some lessen of pressure on the southern European economies/sovereigns/banks.

            There was one political event.  Obama kicked off His new economic campaign. It sounded a lot like the same old ‘tax and spend’ policies that both parties have pursued for the last three decades.  So I am not rating it as a positive event; more likely it will turn out to be an irrelevant event.       

            Earnings reports continue to garner much of investor attention.  As you know, to date this season has been something of a pleasant surprise; although not so much so to warrant raising our 2013 corporate profits outlook.  Nevertheless, this has to be viewed as a modest positive.

            The other item which apparently weighed heavily on stock prices yesterday was rising interest rates---which, of course, brings us back to the Fed.  Since the start of this latest rally, the bullish pundits (who clearly have the upper hand) have been divided over the correct interpretation of Bernanke’s walk back of his ‘tapering’ comments.  One school took him literally and believe that QEInfinity will last forever (i.e. the economy will remain sluggish thereby necessitating QE---bad news is good news); the other assumes that he meant it and will in fact ‘taper’ but investors are now acclimated to the thought of ‘tapering’ because ‘tapering’ means are improving economy and an improving economy is good for stocks even though it means higher interest rates (i.e., we don’t need no stinkin’ QE, we got growth---good news is good news).  Either way, they seemed to  stop worrying about the Fed.

            However, with rising interest rates in the last couple of days, stock investors are getting a bit jittery, again.  Without belaboring the point, (1) if the rates do continue to levitate, investors should be nervous because every asset in the world is now priced off of interest rates and (2) big money has been bet on stocks via the carry trade [borrow very low interest cost money and invest in higher yielding securities]; if interest rate increases severely impact the carry trade, a lot of stock is going to be sold, I don’t care how improved the economy may be. 

Bottom line:  yesterday’s EU PMI number was the first positive stat out of Europe in some time.  Of course, one datapoint doesn’t make a trend.  In addition, the blogs were full of skeptics; so the number was not without controversy.  I am agnostic about its veracity.  Much more important will be whether new data backs up the PMI or turns it into an outlier.  The better than expected US profit reports is also a plus.  So the evidence continues to accumulate that the US and global economy are slowly healing.   But that is our forecast so it just makes it more likely that our Models have the economy and valuations correct.

***over night, German business confidence improved, Spanish unemployment and the UK second quarter GDP was stronger than expected; while the ECB credit creation fell and private credit creation hit a record low.

That said, the rise in interest rates could very well be an indication that my original thesis, i.e. the Market had an ‘emperor’s new clothes’ experience, and hence forth it will be less confident of the Fed and began to price the transition from easy to tight money into the Market (i.e. higher interest rates).  Again, I know that I am talking my book.  Rates could go down and stocks rebound tomorrow.  Time will tell.

            In the end, I am sticking with our discipline, focusing on lightening up on those stocks that hit their Sell Half Range.  

            The latest from Van Hoisington (medium):

            Chart of the day---Fed balance sheet, S&P and S&P revenues (short):
            http://www.zerohedge.com/node/476807



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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