Wednesday, August 21, 2013

The Morning Call---Watch bond prices and the carry trade

The Morning Call

The Market

            The DJIA (15002) closed down last night, confirming the break of its short term uptrend.  It will now re-set to its former trading range (14190-15550).  In addition, it is now out of sync with the S&P, altering the Market direction from up to indecisive.

            The S&P (1652) was up and remains within its short term uptrend, though it is below the upper boundary of its former short term trading range (1687).

            Both of the Averages are within their intermediate term (14603-19603, 1553-2141) and long term uptrends (4918-17000, 715-1800).

            Volume fell; breadth improved though (1) the flow of funds indicators continued to decline and (2) both indices remained below their 50 day moving averages.  The VIX rose slightly, finishing within its short term trading range and its intermediate term downtrend---this indicator is not providing much help on Market direction.

            GLD increased fractionally, remaining above a developing very short term uptrend but well within its short term and intermediate term downtrends.

            Bottom line:  given the substantially oversold condition of the Market, a mixed trading day as we had yesterday was a pretty pathetic attempt at a rebound.  The Dow actually closed down and below 15117 (lower boundary of its short term uptrend), putting the Market back in neutral (DJIA in a trading range, S&P in an uptrend).  With the Averages now out of sync, our investment strategy shifts into ‘Park’---our Portfolios take no action until the indices are trading in unison.

            The mother of all divergences (medium):

            A guide to stock market corrections (medium):


            On the US economic front, the Chicago Fed’s national activity index was negative though less so than anticipated and weekly retail sales were mixed though several retailers announced some unexpectedly positive results which helped put the S&P in the black.

            Overseas, turmoil continued in many foreign markets especially those of the emerging growth countries.  Much of this distress is tied to the weak US bond market, as investors who had used cheap Fed money to buy higher yielding and/or speculative securities (carry trade) began unwinding their positions. And those two factors (higher interest rates and unwinding the carry trade) in a nutshell will likely determine Market direction at least in the short term.

            Bottom line: as you know, one of our recurring economic themes is that (1) the Fed, historically, has proven inept at transitioning from easy to tight money and (2) the extremes of QEInfinity will only make that transition more difficult.  It appears that we are nearing the point that this thesis will be put to the test; whether it is the Fed who initiates the tightening process or the bond markets which may have reached the point that they will no longer give the Fed the benefit of the doubt and force its hand.

            The operative word above is ‘appears’ because I have consistently underestimated the Fed’s willingness to plow into uncharted territory and investors willingness to ignore the risks associated with Bernanke’s massive injections of reserves into the banking system with no clear exit strategy.  There is no reason why that still isn’t the case.  But as I noted yesterday, somewhere out there is the end of QE; and when that happens, a lot of lessons will be learned

            More on current equity valuation (short and a must read):

            A couple of varying opinions on the current confusion in the bond markets:

            And (medium):

            And (medium):

            Net worth as a percentage of disposable income (short):

            ***over night, Asian markets are off big, again.

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.

No comments:

Post a Comment