Friday, August 23, 2013

The Morning Call--More on the FOMC minutes

The Morning Call


The Market

            Yesterday, the indices (DJIA 14973, S&P 1656) finally got the much anticipated bounce off of a very oversold condition.  However, the Dow remained within its new trading range (14190-15550).  That leaves it out of sync on a short term basis with the S&P which closed within its short term uptrend (1628-1783).  Both finished within their intermediate term (14629-19629, 1553-2141) and long term uptrends (4918-17000, 715-1800).

            Volume rose measurably; breadth improved, though the flow of funds indicator remains quite negative.  Further, both of the Averages closed below their 50 day moving averages.  In the case of the S&P, it finished right below this indicator.  A move above that would be a plus for stocks, while a bounce off it to lower levels would be negative.  The VIX fell 7% but remained within its short term trading range and its intermediate term downtrend.

            GLD rose, closing above the developing very short term uptrend but will within its short and intermediate term downtrends.

            Bottom line:  the Averages remain out of sync which means the Market trend is indecisive and that patience is at a premium.  As I noted above, the S&P closed very near its 50 day moving average; how it handles this resistance point  should give us a hint as to near term Market direction.

            Technical chart book from Fusion Analytics (medium):

            The historical performance of the Market in September (short):

                Sentiment update (short):


            US economic news was mixed to positive: weekly jobless claims rose more than expected, the leading economic indicators were up, in line and the Kansas City Fed’s manufacturing index came in better than anticipated.  Overseas, the news was even better with EU and Chinese PMI’s reported ahead of forecasts.

            So there was plenty of good news to lift investor spirits and provide the fuel for an oversold price bounce.  Indeed, it did, with stocks up all day.

            One exogenous event that bears comment: mid day, the NASDAQ shut down for three hours due to a technical glitch (which is yet to be explained); that commanded media attention for the rest of the day.  My take is that (1) on a short term basis, this is not a big deal except for the short term traders that had trades unfilled or cancelled as a result, (2) longer term, [a] it is a signal that our complex trading systems are not infallible and, in this case, the NASDAQ has a problem to solve and [b] it potentially could negatively affect the individual investor’s confidence in our financial system. 

As you know, this latter point has been a recurring theme in our list of risks to the economy.  I am not suggesting that investors will throw up their hands and desert the equity markets; but I will suggest that if this had happened in 2008, it would not have been received as nonchalantly as it was.  The point here is that a huge part of stock valuation is based on confidence and anything that gives investors a reason to not have confidence can potentially be a negative for pricing.

As a result of the above, ‘tapering’ got shoved off center stage, at least temporarily---despite the fact that the ten year Treasury broke above 2.9% (a much watched level by the bond guys).  However, opinions on the FOMC minutes and ‘tapering’ kept coming fast and furiously.

            The clueless Fed (medium):

            A survey of the primary dealers shows that they believe ‘tapering’ will start in September (short):


            BofA’s take on the FOMC minutes (short):

            Another optimistic take (medium):

Bottom line: the US economy continues to track our outlook for slow economic growth, while the data out of the EU is suggesting a nascent recovery.  So far, so good.  But (1) stocks are valuing the above scenario far too generously, plus (2) the transition from easy to tight money seems likely to begin somewhere in the near future [‘tapering’], (3) while I am uncertain of the exact date, I think it near enough that Markets are starting to worry about [a] the historical ineptness of the Fed in executing past transitions and [b] the unprecedented extreme level from which this transition must commence. 

To be sure, the Fed could come out tomorrow and state that QEInfinity will be in place for as far as the eye can see AND investors could believe it.  If that happens, I will be wrong.   But until that occurs, our Portfolios remain cautious and better sellers.

            Barry Ritholtz on Jeremy Grantham’s expected returns (must see 3 minute video):

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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