Thursday, August 1, 2013

The Morning Call--The Market was unresponsive to new data

The Morning Call


The Market

            The indices (DJIA 15499, S&P 1685) had something of a roller coaster day.  The Dow remains within its short term trading range (14190-15550). 

While the S&P is still in a short term uptrend (1604-1760), it also closed below the former upper boundary of its short term trading range (1687).  You will remember that I noted that 1687 should be acting as support; however, the last couple of days it has acted as resistance---definitely not a positive sign for equities.  I am not reversing the short term re-set call; but I am getting close.  In the meantime, the Averages remain out of sync.

Volume rose; breadth deteriorated.  The VIX was up, remaining within its short term trading range and its intermediate term downtrend.

            GLD fell, finishing below the very short term uptrend for the second day.  A close below that trend tonight would negate this only hopeful sign in the GLD chart.  It remains within its short term and intermediate term downtrends.

Bottom line: the challenge of the 15550/1687 level remains stalled in an out of sync position (S&P re-setting to an uptrend; the Dow not).  I had thought that the release of second quarter GDP and the FOMC statement would do something to jar stocks out their current directionlessness.  Wrong.  We still have the ISM manufacturing index today and nonfarm payrolls tomorrow to provide that expected spark.  Meanwhile, the indices are out of sync and without direction.

            Secular bull and bear markets (medium):

            Are we at an inflection point (short):

            The latest sentiment numbers (short):


            Yesterday was busy data-wise: weekly mortgage and purchase applications were off again; the ADP private payroll report was up but less than anticipated; second quarter GDP was up more than estimates, but first quarter GDP was revised down by an equal amount---so the numbers were a wash; Chicago PMI was disappointing; and the FOMC minutes read a tad less positive but at the same time more vague (no mention of ‘tapering’.

            In total, I would rate the economic data as negative (suggesting a possible deferment in ‘tapering’).  Add to that the slightly more ‘dovish’ tone to the FOMC minutes and I would have thought that stocks would be off to the races.  Of course, they were initially, but then backed off by the close. 

            However, bond prices fell (rates up).  So with stocks losing momentum in the face of data pointing to an accommodative Fed, it suggests (the operative word) that perhaps my admonition was correct that we should forget all the yakking about ‘tapering’, ‘tightening’, the Fed policy direction and how investors will interrupt it all and just focus on interest rates as an indicator of Market direction.  I am not pounding the table at this point; but yesterday’s pin action was supportive of that point of view.

            A counterpoint from PIMCO.  Note the author fails to mention the influence and power of bond investors if they lose faith and trust in the Fed.

Goldman forecasts that the Fed will have to lower its second half GDP forecast (short):

            Meanwhile, foreigners get out of Dodge (short):

            What history tells us about a rising interest rate environment (medium):

Bottom line: the economic data remains sluggish and the Fed continues to instill confusion in the Markets (no mention of ‘tapering’ in the FOMC statement).  In other words, situation normal.  Hence, I have no cause to alter our economic forecast or our Valuation Model---meaning, stocks, as calculated by our Valuation Model, are overvalued and our Portfolios will continue to use any price strength (i.e. stocks trading into their Sell Half Range) to lighten their equity exposure.

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

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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