Wednesday, August 28, 2013

The Morning Call--The Market weighs its worries

The Morning Call


A reminder that I am taking off today for the Labor Day Holiday and will be back Tuesday  9/3.  If action is needed, I will send a Subscriber Alert.

The Market

            The indices (DJIA 14776, S&P 1630) had a rough day.  The most important technical item was the S&P breaking below the lower boundary of its short term uptrend (1635-1790).  Under our time and distance discipline, it must stay below its lower boundary through the close Thursday to confirm the break.  If that occurs then it will re-set to its former short term trading range (1576-1687)---but that is getting a bit ahead of ourselves.  The Dow remained within its short term trading range (14190-15550).

            Both of the Averages finished within their intermediate term (14657-19657, 1562-2148) and long term uptrends (4918-17000, 715-1800); and both closed not only below their 50 day moving averages but also below their 100 day moving averages---though the S&P did just so.  Not a good sign.

            Volume rose; breadth was terrible.  The VIX rose 12% but remains well within its short term trading range and its intermediate term downtrend.

            The long Treasury bond broke above the upper boundary of its short term downtrend.  If it remains above that boundary through the close Thursday, then it will re-set to a short term trading range.  In addition, it closed just slightly below its 50 day moving average which should act as resistance.  This move is likely a flight to safety in front of a potential war in the Middle East and is trumping any moves related to ‘tapering’.

            GLD rose, continuing to build that very short term uptrend.  Despite the fact that it remains within its short and intermediate term downtrend, this advance has progressed sufficiently that if GLD challenges the lower boundary of the very short term uptrend and fails, our Portfolios will likely begin re-establishing their positions.

            Bottom line: the S&P could potentially be moving back in to unison with the DJIA, which is not a positive.  We have to wait till the close Thursday to get confirmation, but clearly a follow through to yesterday’s pin action would be negative for stocks.  In addition, the indices taking out their 50 and 100 moving averages only points to more weakness.  That said, the situation in Syria has raised the emotion quotient in pricing considerably.  So if the US lobs a couple of cruise missiles into Syria so Obama can save face and the Russians and Iranians don’t retaliate, then this crisis could be over quickly---which would likely be accompanied by a rebound in stocks.  How much is the big question.  In any case, this is a Market to be avoided unless you are a trader.


            Yesterday’s US economic news was uplifting: weekly retail sales were positive for the first time in a couple of weeks, the June Case Shiller home price index was up again, August consumer confidence was much better than anticipated as was the August Richmond Fed manufacturing index.  Overseas, the data was just as good: German business confidence was up and so was Chinese industrial profits.  All the makings of a positive day in the Market, right?

No, the global markets were concerned about war in Syria and what that might do to oil prices/availability.  In addition, investors may still be in a ‘good (economic) news is bad (‘tapering’) news’ frame of mind.  Whackage ensued.

Three comments:

(1)                             while the whole ‘tapering’ issue has been shoved off center stage, at least temporarily, it is not going away as a Market moving factor,  particularly among equity investors---meaning they are still conflicted about whether or not we get ‘tapering’, whether it is sooner or later and, hence they are still uncertain about what to do about stocks.  Complicating the issue are rumors that Larry Summers is in the lead as heir apparent to Bernanke; and he has two things going against him [in many investors’ minds]: [a] he is more hawkish than Bernanke and [b] he is more of a divider than a uniter--- not a great character trait going into what will likely be a difficult {failed} transition process.  In other words, expect this to re-emerge as a key determinant of Market direction.

The Fed’s final game (medium and a must read):

And this from Stephan Roach on the global QE exit (medium and another must read):

(2)                             September is but days away and with it comes [a] the need for a continuing {budget} resolution by 9/30.  With Obama wanting more spending {and the GOP not} and the FY2014 sequestration kicking in, the negotiations prior to the end of the fiscal year are apt to get a bit testy, [b] especially when the debt ceiling is projected to be hit in mid October and Jack Lew stating on TV yesterday that the administration didn’t intend to negotiate on this issue.  Well good luck with that, Jack.  The point here is that the fiscal news is likely to be a negative for stocks.

(3)                             Chuck Hagel made it clear that any US bombing of Syrian assets was not intended to promote ‘regime change’. Well, we are all relieved by that one.  So does that mean that we are just going to bomb some Syrian missile delivery sites and then we will call it even and Obama gets to pretend that He is a hard ass?  [I score that scenario Assad 1, Obama 0, with the additional negative that He once again proves to Iran, North Korea and all those who would do us harm that He is a pussy.]  I hope that the Russians and Iranians will decide to go along with this charade; because if they don’t [and Iran said yesterday that it would bomb Israel if the US bombs Syria], things could get a lot messier.

                              Questions for Obama (short):

Foreign Policy magazine just released an article that stated that the US  knew of and did nothing to stop the Iraqi’s use of nerve gas against Iran.  (must read):
                            More behind the scenes intrigue in Syria (medium):

And the big Kahuna---what this all means for the price of oil      (medium):

Bottom line: I think my conclusion yesterday remains spot on:  ‘stocks are overvalued at least as calculated by our Valuation Model.  Often, such periods of high prices can go on for an extended period of time until some exogenous event occurs that slaps some sense into overly optimistic investors.  The recent realization that the transition from easy to tight money was upon us has the Markets on edge.  All that it would take is for some hedge fund with a big exposure to the ‘carry trade’ to blow up to create that exogenous event (and with the emerging markets cratering, the odds of this occurring have to be going up).  And now we have another potential flash point---the US stepping on its own d**k in Syria.’

I would add that an extended period of political acrimony over spending and taxes could also serve as the trigger/exogenous event.

To further repeat myself, I am not suggesting that any of these will occur.   I am suggesting that risk of any or all of them happening has risen.  Caution.

            One of the best articles penned by Mohamed El Erian in a long time (today’s must read):

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 Investing For Survival is to help other investors build wealth and benefit from the investing lessons he learned the hard way.

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