The Morning Call
The Market
Technical
The
indices (DJIA 14936, S&P 1676) were down yesterday, though they have been
gyrating within a fairly tight price range for the past week. The Dow closed within its short term trading
range (14190-15550) and below its 50 day moving average. It penetrated the lower boundary of its
intermediate term uptrend (14971-19171).
Our time and distance disciplines become operative; if the DJIA remains
below the lower boundary of its intermediate term uptrend though the close
Thursday, the break will be confirmed.
The
S&P again finished below the lower boundary of its short term uptrend and
its 50 day moving average. You will
recall that last Thursday it broke this boundary but recovered on Friday. Under our discipline, yesterday’s close
re-starts the clock on our time and distance discipline. If the S&P trades below the lower
boundary of its short term uptrend through the close on Wednesday, the break
will be validated.
Volume
was up but still meager; breadth was poor.
The VIX jumped 15% but remains within a short term trading range and an
intermediate term downtrend.
The
long Treasury was up slightly. It
finished within its short term trading range and its intermediate term
downtrend. The bond guys appear much
less concerned about a default than the stock boys.
GLD
was up, but remains within a very short term, short term and intermediate term
downtrend. In addition, it is now
forming the right shoulder of a head and shoulders formation---not good news
for the gold bugs.
Bottom
line: the S&P is challenging its
short term uptrend, the Dow is challenging its intermediate term uptrend and
both are below their 50 day moving averages.
While this may be presaging a major Market retreat, in the last three
years, every time stocks have been in a similar position, the bulls take over
and they sprint higher.
Whatever the
outcome, given the magnitude of the current level of overvaluation (at least
according to our Model), there are a lot more support levels that will have to
be violated before equities become attractive for purchase. In other words, I am not concerned that the
S&P and/or the DJIA may be breaking the aforementioned support levels.
On the other
hand, if the pin action improves and one of our stocks trades into its Sell
Half Range
Why
markets trend (short):
Fundamental
Headlines
There
was not much news to digest yesterday.
The only US
datapoint was a big increase in consumer credit; unfortunately, a breakdown of
the internal stats showed a decline in credit card debt (lower consumer spending)
and a large rise in student debt (further inflating this bubble).
However,
investor attention remains on the shutdown/debt ceiling negotiations (or lack
thereof)---and there was little progress on that front. The institutional media spent the day
reviewing the weekend talk shows and wondering if investors are being overly
confident about the odds of resolutions to the two problems. Here are some of the best thoughts that I
found on the subject:
More
thoughts on the shutdown/debt ceiling crisis and how it gets resolved (medium):
A
rough schedule of maturing debt after October 17th (short):
Goldman
looks a potential Treasury strategies to handle a debt ceiling crisis (medium):
The
damage being done to the US
standing in the world (medium):
Obama:
on the record (short):
Bottom
line: I have beaten this horse to death, but in short: (1) the shutdown is not
a significant economic risk, (2) a government default on its debt following a
stalemate on the debt ceiling could cause problems [higher interest rates,
declining dollar], (3) the rhetoric notwithstanding, a stalemate is a no win
strategy for the party that the electorate faults; they will read the polls and
salvage what they can, (4) there is some small probability that this judgment
is far too optimistic, that the shutdown/debt ceiling can’t be resolved which
would likely do considerable damage to the Markets, (5) there is a larger
probability that the whole process, even if it ends well, [a] will cause
investors to rethink their current overly optimistic view of the Market and
stocks could trade down to Fair Value {S&P 1440} and [b] will reinforce
businesses and consumers unwillingness to invest and spend; and hence, doing
nothing to lessen the economic headwind of a highly unreliable fiscal policy,
and finally (6) given our Portfolios large cash position, neither (4) nor (5)
above represent a calamity; indeed, that is the point of our Price
Disciplines---sell high, but low
More
on valuation (short):
Corporate
profits and the budget deficit (short):
Update
on earnings expectations (short):
http://www.zerohedge.com/news/2013-10-07/will-we-ever-learn-36-years-over-optimistic-earnings-growth
The
latest from Barry Ritholtz (4 minute video):
The
latest from John Hussman (medium):
The
latest from Paul Singer (medium):
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