The Morning Call--Is tapering now back on the table?

The Morning Call

11/8/13

The Market

           

    Technical

            The indices (DJIA 15593, S&P 1747) got whacked yesterday, though both remained within uptrends across all time frames: short term (15215-20215, 1708-1862), intermediate term (15215-20215, 1622-2204) and long term (5015-17000, 728-1850).

            Volume was flat; breadth abysmal.  Along those lines, the performance of the NASDAQ and Russell 2000 over the last week has been just terrible.  So the divergences continue to increase.  On top of it all, yesterday was an ‘outside’ sell day---typically a precursor to further downside. Not surprisingly, the VIX was up 10% but finished within its short term trading range and its intermediate term downtrend.

            http://www.thereformedbroker.com/2013/11/07/carter-worth-breadth-has-been-deteriorating/

            The long Treasury rose, closing back above the lower boundary of its very short term uptrend.  It continues to trade within a short term trading range and an intermediate term downtrend.

            GLD fell, finishing above the lower boundary of a very short term uptrend but within its short term and intermediate term downtrends.

Bottom line:  yesterday’s whackage notwithstanding, the indices closed in uptrends across on timeframes.  While little technical damage was done to those Averages, the growing number of internal Market divergences captured in the lousy breadth reading are a red flag, the bond Market is acting like rates are going higher and the ‘outside’ day created by the indices powerful reversal from Wednesday’s highs is  concerning. 

That said, stocks don’t go up everyday.  I had thought that the sideways movement of prices over the preceding 8 trading sessions was a sign that the Market was biding its time before resuming it uptrend.  Yesterday’s pin action suggests that either it may take more than time to build the base for another leg up or we have hit a top---although it is far too soon to be making such a call.  For the moment, I am assuming the former. 

If that is the case, it still looks to me like the upper boundaries of the Averages (17000/1850) long term uptrends as the most logical price objectives.  For a trader that  wants to try to play this next potential leg up, any continuing weakness offers an opportunity for entry at a lower price.  However, I would do so only if tight stops are used. 

My strategy is to sell a portion of any of our stocks that trade into their Sell Half Range.

            Margin debt still rising (short):

            http://advisorperspectives.com/dshort/guest/Sasha-Cekerevac-131108-Margin-Debt-Warning.php

    Fundamental

    

            There were all kinds of cross currents yesterday.  In the US, weekly jobless claims were lower than anticipated (which is good); but more importantly, the initial third quarter GDP number was much better than expected (though inventories played a big role) as was the price deflator.  Overseas, Spanish industrial production was up and Ireland is getting the final tranche of bail out funds.  We also received a big surprise from the ECB which reduced its Fed Funds rate equivalent. 

            http://blogs.cfr.org/geographics/2013/11/06/ecbratecut/

            http://www.bloomberg.com/news/2013-11-08/draghi-aggression-shows-pledges-backed-by-rate-surprise.html

            The first news of the day was the ECB rate drop.  That got stocks up big in pre- Market trading.  Later the new GDP number was released and stocks turned on a dime.  If the investor operating thesis remains that good (economic) news is bad news (Fed tapering), then the Markets reaction to the surprisingly strong GDP report was to be expected.

            ***overnight, S&P lowers France’s credit rating, German and Chinese trade surpluses were bigger than expected and it appears that the world powers have reached an agreement with Iran halting the advanced elements of its nuclear policy.

            At the end of the day, I have more questions than answers to the foregoing events:

The most important is, did the Fed know the GDP and deflator stats when it wrote the recent more hawkish FOMC statement? 

            http://advisorperspectives.com/commentaries/arp_110713.php

If not, will this data move it to begin the transition quicker than anyone expects?

How does ECB’s dovish move on interest rates fit with the current more hawkish German position?

            I will be attempting to find the answers as quickly as I can.

Bottom line:  I remain confident in the Fair Values generated by our Valuation Model---meaning that stocks are fundamentally overvalued.  I am also confident that the spark that will push stock prices back towards Fair Value will likely come from the agents of global monetary policy whether they are American, European or Chinese.  I have no idea when it will occur.  But I believe that it will be ugly.

Hence, I am happy to own cash and would be unconcerned if higher prices pushed our Portfolios into even higher cash levels.

            For investors in general, my best advice at the moment is to use the current high prices to sell any asset that hasn’t performed as expected or has done far better than expected.  You don’t have to sell everything (our Portfolios are 60% invested in stocks), just put some of your profits in your pocket.

           

            The latest from David Stockman (3 minute video---a must watch):

            http://www.zerohedge.com/news/2013-11-07/david-stockman-blasts-brace-explosion-mother-all-bubbles

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.