The Morning Call--We are having fun now

The Morning Call

10/30/13

The Market

           

    Technical

            The indices (DJIA 15680, S&P 1771) had another great day.  The Dow confirmed the break through the upper boundary of its short term trading range.  It now re-sets to a short term uptrend which corresponds to its intermediate term uptrend (15163-20163) and has come back into harmony with the S&P.  The S&P remains within its short term uptrend (1696-1850).

            Both of the Averages are well within their intermediate term (15163-20163, 1614-2196) and long term uptrends (5015-17000, 728-1850).

            Volume was down; breadth was up only slightly.  The VIX rose, finishing within its short term trading range and intermediate term downtrend.

            The long Treasury increased, closing within its short term trading range and intermediate term downtrend.  It continues to build a reverse head and shoulders pattern.

            GLD declined but finished within its very short term uptrend.  It remains within short and intermediate term downtrends.

Bottom line:  the DJIA confirmed the break out of its short term trading range, the re-set to an uptrend and the re-syncing with the S&P.  That suggests another leg up in the Market is in the offing---though I mention one very short term caveat: the last two times the Dow penetrated 15550, it reversed itself within two to three days. So if traders want to get jiggy be careful for the next day or two.

I mentioned two potential purchase candidates if traders want to play the next move up: the ishares global multi asset ETF (IYLD) and a more aggressive alternative, the Russell 2000 growth ETF (IWO).  I would place very tight stops on any purchases.

The question is now, what is the technical upside?  The obvious candidates are the upper boundaries of the three uptrends.  My inclination is to look first at the boundaries of the longest term uptrend because that is where the most resistance exists.  So the potential upside for the DJIA is 17000 or 8% and the S&P 1850 or 4.5%.  The S&P 1850 level gets some additional strength in as much as it is also the upper boundary of its short term uptrend.  This limited upside is another reason to be disciplined with stops.

All that said, as far as our Portfolios go, if one of our stocks trades into its Sell Half Range, our Portfolios will act accordingly.

            Breadth by market capitalization (short):

            http://dynamichedge.com/2013/10/29/breadth-participation-by-market-cap/

            The Market’s historical performance in November (short):

            http://blog.stocktradersalmanac.com/post/Best-Six-Months-Begin-in-November-DIA-SPY-QQQ

    Fundamental

    

     Headlines

            We received a number of US datapoints yesterday: September PPI was very tame, the headline September retail sales number was weak, though ex autos and gas, it was ahead of expectations, the August Case Shiller home price index continued to rise, August business inventories and sales were up. 

The only real disappointment was the October consumer confidence reading which was well below estimates.  As you know, I am watching the impact of our recent fiscal policy fiasco on both business and consumer confidence as a tell on future economic activity.  In this light, this number was really bad.  That said, this confidence has to in turn impact the economy for my point to be valid.  So we need to watch the October/November datapoints closely.

In total, ex my personal concern about sentiment, these stats were clearly upbeat and that helped investor psychology yesterday.  Prices also got a helping hand from an announcement by IBM that is was starting a major stock buy back.

Other than that, investors were still mainly focused on the current FOMC meeting which will end today.  Euphoria continues as expectations are for QEInfinity to last at least through the first quarter 2014.  (***overnight, the Chinese bank rates are streaking higher)

http://www.zerohedge.com/news/2013-10-30/noctaper-or-shocktaper-deutsche-banks-five-reasons-why-fed-may-stun-everyone-once-ag

Bottom line:  I remain confident in the Fair Values generated by our Valuation Model---meaning that stocks are overvalued.  So our Portfolios maintain their above average cash position.  Any move to higher levels would encourage more trimming of their equity positions.

            However, as I noted above, technically the Market has re-set to an uptrend.  So the odds of another leg up are sufficiently high, that I wouldn’t argue with a trader increasing his/her Market exposure; although I would urge very tight stops on any new positions.  Other strategies worth considering is (1) selling any losers or disappointments in your portfolio, (2) writing call options against holdings that are near or making all time highs and (3) for those far more sanguine, selling put options on companies that you would love to own.

           

All that said, I am not a trader, I love my cash and won’t be chasing stocks up; though I will be checking call option pricing on those stocks that are near their Sell Half Range.

            Update on this earning season (short):

            http://pragcap.com/q3-earnings-bleh

            The latest from Kyle Bass (medium):

            http://www.zerohedge.com/news/2013-10-29/kyle-bass-warns-fed-has-made-stocks-only-game-town-so-rich-will-get-richer

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.