Tuesday, August 20, 2013

The Morning Call & Subscriber Alert--Watching the bond market

The Morning Call


The Market

            The DJIA (15010) has traded below the lower boundary of its short term uptrend (15117-16023).  A close below 15117 today will confirm the break.  It will then re-set to its former trading range ( 14190-15550).  In addition, it will put the Averages out of sync and alter the Market direction from up to indecisive.

The S&P (1646) remains within its short term uptrend (1625-1781), though it was unable to hold above the upper boundary of the former short term trading range (1687).

Both of the indices are within their intermediate term (14601-19601, 1553-2141) and long term uptrends (4918-17000, 715-1800).

Volume fell; breadth was weak: (1) the flow of funds indicator is particularly negative, (2) both of the Averages have traded below their 50 day moving averages.  As ugly as this is, the Market is now significantly oversold; so expect a rally.  The VIX rose 5% but is well within its short term trading range and its intermediate term downtrend.  

GLD was down fractionally, remaining within a very short term uptrend but also within its short and intermediate term downtrends.

            Bottom line:  stocks continue to trade to the upside---but just barely.  A close in the Dow below 15117 today will put the Market back in neutral.  That doesn’t necessarily forebode a major reversal---in this major up Market, we have witnessed a series of very short term dips followed by a big bounce back to the upside.  As you know, I have been skeptical of them all since this time last year when the S&P was in the mid 1400’s---and we know how that has worked out.  Nonetheless, somewhere out there is a turning point.  If this is it, we will know in time.

            Foreign investors leaving the US markets (short):

            ***over night, Asian markets were in turmoil (i.e. down big) and Europe followed suit.


            No US economic data yesterday, though we did get some upbeat trade data out of Japan and some sorry news on Spanish banks. 

            None of that mattered because all eyes are now on the Fed (bond market) as the realization seems to have grown that ‘tapering’ is upon us.  When last I commented (8/2), it seemed that investors were anticipating the best of all worlds, i.e. continued economic improvement but no ‘tapering’.  So the psychology has clearly changed driven primarily by a bond market that seems to have concluded that either ‘tapering’ is coming in September or if ‘tapering' doesn’t occur, it should have and therefore will put enough pressure on the Fed that it will be forced to act soon after.

            A history of bond bear markets (short):

            The calendar leading up to the Fed’s September meeting (medium):

            Of course, investor psychology could turn on a dime and push prices back to new highs---although I would observe that the kind of skittish behavior we have seen of late is somewhat indicative of an overextended market (talking my book again).

            Bottom line: stocks are overvalued and two of the principal reasons for that appear to be about to fade (low rates and ‘free money’).  To reiterate, I remain sanguine on the economy and have been encouraged by the recent upbeat trend in data from Europe.  However, that is largely built into our Valuation Model.  My problem is that equities are valuing a passable economic scenario far too generously.  If we get another run up in prices, our Portfolio will continue to lighten up on those stocks trading into their Sell Half Range.  If we finally do get a correction, they have plenty of fire power.

            The latest from John Hussman (medium):

            More optimism from Scott Grannis (short):

            Is the bond market discounting tapering (short):

            Are bonds driving the stock market? (medium):

      Subscriber Alert

            The stock prices of ITC Holdings (ITC-$86) and Target (TGT-$68) have traded into their respective Buy Value Ranges.  Accordingly, they are being Added to the Dividend Growth Buy List.  The Dividend Growth Portfolio owns a full position in TGT so no action will be taken.  Given my concern about the current level of stock prices in general, it will refrain from Buying a new position in ITC at this time.


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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