The Morning Call
The Market
Technical
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):
Fundamental
Headlines
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.
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