The Morning Call--Who blinks first

The Morning Call

10/3/13

The Market

           

    Technical

            After initial weakness, the indices (DJIA 15133, S&P 1693) rallied back closing down fractionally.  The Averages remained out of sync short term with the Dow closing within its short term trading range (14190-15550) and below its 50 day moving average while the S&P finished within its short term uptrend (1677-1831) and above its 50 day moving average.  It is important to note that in early trading the S&P challenged both the lower boundary of its short term uptrend and its 50 day moving average and then bounced strongly---which is a positive.

Both of the Averages are well within their intermediate term (14954-19954, 1591-2177) and long term uptrends (4918-17000, 715-1800).

            Volume rose slightly; breadth declined.  The VIX jumped 7%---a lot more than I would have thought (remember Monday’s trading was just the opposite).  It is within its short term trading range and an intermediate term downtrend.

            http://advisorperspectives.com/dshort/guest/Chris-Kimble-131002-NYSE-Update.php

            The long Treasury was up a little, remaining within a short term trading range and an intermediate term downtrend.

            GLD lifted in price, but is trading in very short term, short term and intermediate term downtrends.  As much as I would like to own GLD long term, its chart is simply too ugly to even consider it.

Bottom line:   I know that the lack of change in the technical outlook makes for  monotonous recaps and analysis; but that is the hand we are being dealt.  With the exception of the S&P, the macro indicators I monitor are all in short term trading ranges of downtrends.  Traders love these long well defined trading ranges because of the firm boundaries to trade against.  For longer term investors like me, there is little to do.

The exception in the current circumstance is that if one of our stocks trades into its Sell Half Range, our Portfolios will act accordingly.

            The Smart Money index is headed lower (short):

            http://www.businessinsider.com/smart-money-flow-index-headed-lower-2013-10   

    Fundamental

    

     Headlines

            US economic data yesterday did not make for great reading: mortgage and purchase applications were down and the ADP private payroll report was short of expectations.  Those numbers probably impacted investor sentiment early on, which would account for the early price declines.  Adding to that was a statement from Obama that He would veto any and all of the piecemeal budget measures passed by the house.

            Then later in the day, Obama met with the banksters who, at least in the follow up press conference, impressed up on Him the damage that could be done if the US defaults on its debts.  That seemed to lift Market psychology; and it was followed by the announcement that Obama would meet with congressional members in the late afternoon (He did and told them that He wouldn’t negotiate anything).  

            Bankers warn Obama about gambling with the debt ceiling (short):

            http://www.zerohedge.com/news/2013-10-02/bankers-warn-obama-dont-mess-debt-ceiling-again

            In the end, I continue to believe that the government shutdown will have little impact on the economy.  A default is clearly more worrisome; but that is two weeks away---giving plenty of time for the GOP to come to its senses.  As I noted yesterday, I sympathize with their objective; but their current tactics will likely ultimately prove ineffective and could do serious damage to the 2014 election hopes which provides the constitutional road (repeal via legislation) to ridding us of Obamacare.

Bottom line: if history is any guide, the odds are that after all the politicians who want air time, get it, they will come up with a solution to the budget/debt ceiling disagreement---though it may be another week or so away.  At some point in time whichever party is taking it on the chin in the polls (and right now it is the republicans) will be faced with a decision: yield and save as much face as possible or put the government is a position to default and suffer the consequences in 2014.  That is not a great choice and is why I think this situation ends benignly.

Of course, there is always the chance that there are enough willing martyrs that the worst case scenario unfolds.  If that occurs, it seems highly likely that Markets not only mean revert to Fair Value but probably overshoot to the downside.  But to be clear, I think that highly unlikely.

On the other hand, given the extent to which stocks are overvalued, there is, in my opinion, some reasonable chance that this whole budget/debt ceiling/Obamacare episode could prick the current euphoria bubble pushing stocks back to Fair Value.  Not a prediction, I am just saying...........

   

            .......in my opinion, stocks are way over valuing the likely earnings that can be produced from an economy on the current trajectory of the US’.

            The fiscal dilemma in 8 easy charts (medium):

            http://www.zerohedge.com/news/2013-10-02/guest-post-have-we-reached-peak-government

            Mean regression and value (medium):

            http://turnkeyanalyst.com/2013/10/02/mean-regression-and-the-value-anomaly/

            Well, said (short):

            http://thefelderreport.com/2013/09/30/why-im-bearish/

            Washington takes over Wall Street (medium):

            http://www.minyanville.com/special-features/random-thoughts/articles/Random-Thoughts253A-Washington-Takes-Over-Wall/10/2/2013/id/52023

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.