The Morning Call--S&P challenging its short term uptrend

The Morning Call

10/4/13

The Market

           

    Technical

            The indices (DJIA 14996, S&P 1678) were down again yesterday.  The Dow remained within its short term trading range (14190-15550) and below its 50 day moving average.  The S&P finished below the lower boundary of its short term uptrend (1679-1833) and its 50 day moving average.  Our time and distance discipline now kicks in; if the S&P continues to close below the lower boundary of its short term up trend through next Monday, the break will be confirmed.  Clearly, this would bring the Averages back into sync on the short term---but we are not there yet.

Both of the Averages are well within their intermediate term (14971-19971, 1591-2177) and long term uptrends (4918-17000, 715-1800).

Volume rose slightly; breadth was lousy.  The VIX was up 6% but continues to trade within a short term trading range and an intermediate term downtrend.  I ran a check of our internal indicator as compared to the last three progressively higher highs in the S&P (late May, early August and mid September).  In a universe of 150 stocks, 74 had chart patterns that formed a head and shoulders, a triple top or worse.  In other words, 50% of our stocks have not confirmed the current S&P short term uptrend.

The long Treasury declined but remained within its short term trading range and intermediate term downtrend.

GLD was up but is not close to challenging the upper boundaries of its very short term, short term and intermediate term downtrends.

Bottom line:   the S&P has begun a challenge of its short term uptrend.  Whether that will prove successful has not yet been determined.  Almost certainly, the speed as well as the shape of any debt ceiling agreement will play a key role.  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 could break its short term uptrend.  Indeed, I wouldn’t be worried if both of the Averages blew away their intermediate term uptrends.  On the other hand, if the present euphoria continues and if one of our stocks trades into its Sell Half Range, our Portfolios will act accordingly.

            We are now in the weakest part of the presidential cycle (short):

            http://www.ritholtz.com/blog/2013/10/weakest-part-of-presidential-cycle/

            Market performance during and after a shutdown (short):

            http://blog.stocktradersalmanac.com/post/Below-Average-Returns-Following-Shutdown-DIA-SPY

            Sentiment update (short):

            http://www.bespokeinvest.com/thinkbig/2013/10/3/bullish-sentiment-increases-slightly.html

    Fundamental

    

     Headlines

            Yesterday’s US economic data was mixed: weekly jobless claims were better than expected while the ISM nonmanufacturing index fell short.  Overseas, the stats were positive:  EU manufacturing PMI as well Chinese nonmanufacturing PMI were better than estimates.  The UK nonmanufacturing PMI was flat but at a high level (60.3).  So there was nothing in the numbers to account for Market weakness.

            The negative sentiment flowed from declining confidence that Washington will find a path to approving an FY2014 budget and raising the debt ceiling.  Listening to the apocalyptic rhetoric from our elected representative, it is small wonder that investors were getting skittish. 

            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 judgment will be incorrect which would likely do considerable damage to the Markets, (5) there is a larger probability that the whole process, even if it ends well, 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 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

            Lance Roberts discusses three risks to the Market (medium):

            http://www.zerohedge.com/news/2013-10-03/guest-post-3-rising-risks-markets

            A record number of companies are looking at poor third quarter earnings (short):

            http://qz.com/130968/a-record-number-of-us-companies-say-theyre-looking-at-a-bad-third-quarter/

            Asset prices during and after a shutdown (short):

            http://www.thereformedbroker.com/2013/10/03/scott-minerd-asset-prices-after-the-shutdown/

            More on valuation (short):

            http://www.crossingwallstreet.com/archives/2013/10/dividends-rose-14-64-in-q3.html

            A pictorial of Fed policy (short):

            http://www.thereformedbroker.com/2013/10/02/fairly-obvious-manipulation-committee/

            The latest from Bill Gross (medium(:

            http://advisorperspectives.com/commentaries/pimco_100313.php

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.