The Morning Call
The Market
Technical
The
indices’ (DJIA 15413, S&P 1746) rally took a rest yesterday. The Dow closed within its short term trading
range (14190-15550) while the S&P finished within a short term uptrend
(1691-1845). Hence, they remain out of
sync on a short term basis.
Both of the
Averages are within their intermediate term uptrends (15129-20129, 1609-2191)
and long term uptrends (4918-17000, 715-1800).
Volume fell;
breadth deteriorated. The VIX rose,
leaving it within a short term trading range and intermediate term downtrend.
The long
Treasury was up but stayed within its short term trading range and intermediate
term downtrend.
GLD declined but
remained above the upper boundary of its very short term downtrend; it closed
within a short term and intermediate term downtrend.
Bottom
line: while prices were down yesterday,
there is no reason to believe that this is any different from prior
respites. Nevertheless, the Averages are
out of sync on a short term basis---a condition that encourages remaining on
the sidelines. The positives are that we are
entering the best six months of the year performance-wise and the Fed continues
to pump ever more liquidity into the system.
The bad news is that we have round two of budget/debt ceiling
negotiations coming in 70 days and the Market right now is very overbought.
If equities move
up in price and any of our stocks trade into their Sell
Half Range
Fundamental
Headlines
Only
one minor US
datapoint yesterday: weekly mortgage applications fell although the more
important purchase applications increased.
The
real news came from overseas:
(1)
the Chinese central bank made a tightening move
[***which it repeated overnight].
Unfortunately, we don’t know if this is a technical move or the sign of
a major change in policy. If the latter,
global markets could be in for a rough ride.
Back in September, we witnessed the impact that just talking about Fed
tapering could have on markets. If the
Chinese central bankers are actually starting to do it, it could have investors
everywhere reevaluating their bets on QEInfinity. To be clear, I am in no way attempting to
state the intent of Chinese. I am saying
that this something we have to watch; because the consequences, if true, will
likely be quite painful.
(2)
Draghi spoke about the outcome of the ongoing stress
tests of EU banks, suggesting that for the stress test to really be a stress
test, some banks by definition have to fail.
Given the leverage in the EU financial system and the fact that we don’t
have a clue about the real quality of their assets, this attitude, if truly
reflective of ECB intents, could aggravate their solvency problem. Again, this is new news; so we don’t know
where it is going, though we do know that eurocrats are worse than our own at
kicking problems down the road. So this
could all have a typical eurocratic story book ending in which [a] most banks
are declared solvent, [b] as a show of ECB regulatory toughness, a few banks
are declared capital short, and [c] new steps are taken to bail them out. Nonetheless,
the announcement itself is a cautionary flag that the situation should not be
ignored.
Bottom line:
dreams of QEInfinity sugar plums continue to dance in investors’ heads. I have no idea how long this Fed call will
drive the Markets higher. But I do have
an idea about valuation and in my opinion, it is stretched.
I am hearing
bull arguments now that historically stocks go up when the economic outlook is
cloudy, that the economic outlook now is cloudy, ergo the Market will continue
up. However, the corollary to this
argument stipulates that what causes stocks roll over is when the economy is
operating or is anticipated to operate at perfection (which I will define as
roughly full capacity) because counter cyclical forces (high interest rates,
rising labor and commodity costs, shortage of capacity) ultimately slow the
economy down. The problem with that is, in my opinion, that the fiscal,
monetary, regulatory headwinds about which I rant endlessly, are with us for as
far as I can see---which means this economy is never going to operate at or
near perfection (at least as defined above).
So taking the
above bull case to its logical extreme, then because the economy will not
return to perfection for the foreseeable future, then by definition, stocks
will continue to rise in the foreseeable future. That makes no sense. It especially makes no sense when you consider
that stocks are currently hitting historically valuation highs on multiple
metrics (forward P/E, trailing 12 month P/E, price to sales, price to book
value).
In short, for
the bull argument cited above to be correct, it would mean that the fiscal, monetary,
regulatory headwinds preventing it from returning to or near perfection must be
reversed. To be sure, they might. But that would require a dramatic change in
personnel in Washington ; and at this
point in time, I think that a non optimal bet.
Technically, the Market could be setting
up for a trade to the upside (assuming the Dow can break out of its trading
range); but that strategy works only for the strong of heart and fleet of foot.
The most important information on which I
wait are the signs of how the last three weeks have impacted business and
consumer confidence.
The
latest from Doug Kass (medium/long):
Math
is working against the bulls (medium):
Distorted
markets (short):
http://www.zerohedge.com/news/2013-10-23/mark-spitznagel-warns-todays-distorted-market-set-major-crash
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