The Morning Call---Probably more upside; but be careful

The Morning Call

10/31/13

The Market

           

    Technical

            The indices (DJIA 15618, S&P 1763) took a rest yesterday---which is not surprising given its dramatically overbought condition.  Both of the Averages are within their short term uptrends (15174-20174, 1698-1852), their intermediate term uptrends (15174-20174, 1615-2197) and long term uptrends (5015-17000, 728-1850).

            Volume was anemic, breadth weak.  In a very volatile session, the VIX finished up fractionally, remaining within its short term trading range and intermediate term downtrend.

            The long Treasury traded off but closed within its short term trading range and intermediate term downtrend and continues to build a reverse head and shoulders pattern.

            GLD declined, but stayed within its very short term uptrend.  However, it is also within a short and intermediate term downtrends. 

Bottom line:  the Averages had  a rough day, though it was on pathetic volume;  plus they are quite overbought.  So the pin action was not that concerning.  However, I repeat my caveat that the Dow has reversed quickly following the prior two penetrations of 15550. 

Barring a dramatic reversal in the very short term, I view the upper boundaries of the indices long term uptrends (17000/1850) as the most likely upside objectives.  My technical conclusion is that the equities could be Bought for a short term trade, but only by the most skilled of traders and not without the use of tight stops.    

That said, my focus is on our Sell Discipline: if one of our stocks trades into its Sell Half Range, our Portfolios will act accordingly.

            Market performance following FOMC meetings (short):

            http://blog.stocktradersalmanac.com/post/More-Gains-To-Come-After-Tepid-Fed-Day-SPY

            Three facts about the current Market (medium):

            http://www.marketwatch.com/story/3-amazing-facts-about-the-stock-market-2013-10-29?link=MW_popular   

            More on Market sentiment (short):

            http://pragcap.com/the-party-conversation-indicator

            Citi warn of Market disconnects (medium):

            http://www.zerohedge.com/news/2013-10-30/citi-warns-disconcerting-disconnects-us-markets

            More on Puerto Rican debt (medium):

            http://www.ritholtz.com/blog/2013/10/puerto-rico-update/

            Slowdown in the emerging markets? (medium):

            http://www.minyanville.com/sectors/global-markets/articles/Emerging-Markets-Profits-Banking-Point-to/10/29/2013/id/52445

            Update on sentiment (short):

            http://www.bespokeinvest.com/thinkbig/2013/10/31/bullish-sentiment-declines-for-first-time-in-five-weeks.html

            Most over extended stocks (short):

            http://www.bespokeinvest.com/thinkbig/2013/10/30/most-extended-sp-500-stocks.html

    Fundamental

    

     Headlines

            Yesterday’s US economic news was mixed: the ADP private payroll report was very negative, the September CPI came in as anticipated and mortgage and purchase applications were up.  Investors reacted principally to the ADP number and sold off slowly in early trading.

            In the early afternoon, the FOMC released the policy description statement following the close of its meeting.  It wasn’t all that different from its predecessor: economy continues to improve, inflation is under control, no change in the Fed Funds rate, no tapering.  Although a prior comment on tightening financial conditions (the September pre-tapering sell off) was absent---which investors interpreted as mildly bearish (i.e. less need to ease).  Hence, a more intense round of selling began in the afternoon.

            Nevertheless, as I noted above, the decline was pretty calm and came from an overbought condition.  So I wouldn’t read too much into the pin action.  On the other hand, as I discussed in last week’s Closing Bell, one way the transition from easy to tight money can began is from the Market’s loss of faith that the Fed can manage it smoothly; so it takes rates up on its own.  But we have no idea what would prompt that loss of faith.  I speculated that it could be the tightening from another central bank (our discussion focused on China).  But it could just as easily be investor exhaustion with the whole process---which is sort of reflective of the Market’s behavior yesterday.

            Or maybe it comes from the only country printing money faster than the US (medium):

            http://www.zerohedge.com/news/2013-10-30/meanwhile-japan-boj-swallowing-everything

            I am not trying to make a prediction here.  I am just saying that with monetary policy in Never Never Land, you just don’t know what will drive the reversal (I’m also clearly talking my book).

            The latest from Paul Singer (medium and today’s must read):

            http://www.zerohedge.com/news/2013-10-30/elliotts-paul-singer-warns-something-wrong-and-dangerous

Bottom line:  I remain confident in the Fair Values generated by our Valuation Model---meaning that stocks are overvalued.  And I think that the end of the current up Market will most likely come from an unraveling of the Fed’s unsuccessful, dangerously experimental monetary policy.

            Hence, I believe that the equities uptrend is living on borrowed time.  The technicals suggest that there could be one more last blow off; and some traders may want to play it.  As a trader, I would keep my stops very tight.  But I would prefer to sell calls against my positions or buy puts on stocks that I wanted to own rather than taking an outright position. 

As an investor, I would be sure that (1) I had cash reserves, (2) I took advantage of the gift being given me [i.e. high prices] to sell anything that gives me pause and (3) our Portfolios continued to follow their Sell Discipline.  

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.