The Morning Call
The Market
Technical
The
indices (DJIA 14897, S&P 1642) remain out of sync on their short term
trend. The Dow is in a trading range
(14190-15550) while the S&P is still within its short term uptrend
(1628-1783). Both finished within their
intermediate term (14603-19603, 1553-2141) and long term uptrends (4918-17000,
715-1800).
Volume
was anemic, breadth terrible and both of the Averages remain below their 50 day
moving averages. The VIX was up 7% but is still trading within its short term
trading range and its intermediate term downtrend. I am a bit surprised that the VIX hasn’t
advanced more aggressively given the current pin action; whatever the reason,
it is a plus for stocks.
http://blog.stocktradersalmanac.com/post/SPX-SPY-Technicals-and-Seasonals-Suggest-Late-August-Bounce
GLD
fell but remained above the developing very short term uptrend. However, it also closed well within its short
and intermediate term downtrends.
Bottom line: the Averages are not only out of sync but
also their pin action is lousy. Not a
technical scenario that encourages me to spend cash reserves. One of the rules in our Buy Discipline is to take
no action when the indices are not trading in unison.
What
the credit markets are telling us (medium):
Fundamental
Headlines
Yesterday’s
US economic data included weekly mortgage claims (down), weekly purchase
applications (up) and July existing home sales (much stronger than anticipated).
That should have
been enough to put a positive spin in early trading. However, overseas markets were again in
turmoil plus investors likely didn’t want to place any bets ahead of the
release of the FOMC minutes in the afternoon.
Once they were out, volatility kicked in with stocks trading down on the
news, recovering dramatically and then rolling over.
Judging by the
price action in the equity markets, there was clearly some confusion among
stock investors. While I have no claim
to any special insight on what is happening, I do have an opinion; and it is this:
(1)
the stock guys might be confused but the bond guys
aren’t. Bonds were down, period. I think that this means that the fixed income
markets have decided that there will be ‘tapering’ and it doesn’t matter
exactly when. What matters is the transition
process from easy to tight money; and until bond investors have certainty as to
how the Fed intends to manage that process and that it has a reasonable chance
of being successful, then doubt and lack of confidence stemming from the Fed’s
prior inept record of bungling the transition process is now being priced into
bonds---and it is not likely to stop until there is certainty regarding about
the outcome of the process.
I am not
arguing here that the Fed will again botch the transition process [though I think
that they will]; I am arguing that investors don’t know whether or not it will,
that they have every reason to be skeptical and until they do know, the bond
market is not apt to be a source of strength for the stock market.
(2)
investors in foreign stocks also don’t seem to be
confused. Witness the whackage in
overseas markets. As I noted yesterday,
a lot of money that has been invested in foreign and lower quality stocks and
bonds has been a function of speculators using cheap Fed money to chase high returns
elsewhere.
In most cases,
what is driving these investments is the spread between the cost on money and
the yield on investments.
Fundamentals---fugitabotit. Since
this is all being done on leverage, when the cost of money is rising and/or the
price (return) on the investment is dropping, the investors start losing money
fast. This is the carry trade; and while we know that the trade is now going
against the speculators, what we don’t know is how large that trade is, i.e.
how much more will have to be unwound.
Given the massive source of funds [bank reserves], the number could be
big---meaning this could get ugly.
http://www.zerohedge.com/news/2013-08-21/canada-not-friend-qe-may-throw-bernanke-under-bus-next-g-20
Is
the junk bond bubble breaking (short):
Bottom line: I
speculated yesterday that we were nearing the point where our thesis that the
Fed’s incompetence when it comes to a transition from easy to tight money was
close to being put to the test. The
price action of most markets yesterday supports that view. To be sure, it is only one day’s performance
and conditions could turn on a dime.
However,
if I am correct, given the extent of equity overvaluation (as calculated by
Valuation Model), the resolution of the validity of our thesis could be a
painful process even if the Fed is overwhelmingly successful in the end.
Not to belabor a
point, but notice that all my comments have been on the transition’s impact on
the Markets not on the economy.
QEInfinity did little the help the economy; so its unwinding may do
little to hurt the economy. On the other
hand, QEInfinity has driven the prices of many assets into nose bleed
territory; so as I noted, the come down could be ugly.
Our Portfolios
remain cautious and better sellers.
More on
valuation (medium):
Counterpoint
(medium):
Subscriber Alert
The
stock price of Phillip Morris Int’l (PM-$84) has fallen below the lower
boundary of its Buy Value
Range
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