The Morning Call--Lockhart suggest tapering. Yeah, right.

The Morning Call

11/13/13

The Market

           

    Technical

            The indices (DJIA 15750, S&P 1767) slid lower on minimal activity yesterday.  However, both remain within uptrends across all time frames: short term (15251-20251, 1712-1866), intermediate term (15251-20251, 1624-2206) and long term (5015-17000, 728-1850).

            Volume was up, but just barely; breadth was poor.  The VIX rose, finishing within its short term trading range and it intermediate term downtrend.

            The long Treasury recovered a bit, closing within its short term trading range and it intermediate term downtrend.

            GLD took it in the mouth again.  It busted through the lower boundary of its very short term uptrend; if it remains below that boundary through the close on Thursday, the break will be confirmed.  It continues to trade within short and intermediate term downtrends.

Bottom line:  all trends of both indices are up and will be until they are not.  However, the financial press is full of technicians pointing at one indicator or the other that suggest that the technical risk in the Market is increasing.

Many times, the last gasp of an up Market is a sort of blow off top in which prices are up 5-7% in a matter of days.  Given the pattern of the Market that we are in, that seems like a reasonable scenario to me---which is why I think it likely that the Averages will take a run at the upper boundaries of their long term uptrends (17000/1850). 

A trader still might want to play this potential leg up but I would do so only if tight stops are used.  As a longer term investor, I would take advantage of the current high prices to sell any stock that has been a disappointment and to trim the holding of any stock that has doubled or more in price.

If one of our stocks trades into its Sell Half Range, our Portfolios will act accordingly.

    Fundamental

     Headlines

            Yesterday’s US economic data was neutral: weekly retail sales were up and the Chicago Fed National Activity Index rose slightly.  On the other hand, the small business optimism index fell.  As you know, I have been concerned that the DC fiscal circus could negatively impact consumer and business confidence.  We now know that consumer and small business sentiment have indeed taken a hit.  Now the question is, will this more pessimistic psychology translate into lower economic activity?  I don’t have the answer; but we will know soon enough.

            Overseas, inflation in Germany, Italy and the UK came in below estimates.  That should give comfort to the ECB, which as you know, recently moved toward easier monetary policy.  And as I noted in last Saturday’s Closing Bell, since the ECB has been far more austere than the US or Japanese central banks that policy change carries far less risk than is the case in the US or Japan.

            The other item that had the talking heads all atwitter was comments by dovish Atlanta Fed chief Lockhart that suggested that the Fed could start tapering in December.  Two words: yeah, right.  However, it was enough to put pressure on stock prices and keep them below the flat line at the close.

Bottom line: the assumptions in our Economic and Valuation Models remain on track.  That means that I remain confident in the Fair Values generated by our Valuation Model; hence, stocks are overvalued. 

That said, year end is approaching which means that all those money managers who have underperformed this year (which according to the stats that I have seen, is most to them) will be chasing higher returns through year end.  That provides an upward bias that is not likely to go away until 12/31; and that means the stock prices will probably continue to levitate through year end.

This doesn’t mean that stocks are a value; it means that catching up is an economic necessity for those trailing money managers.  It may also mean that by the end of December, a Chevy Market could be carrying not a Cadillac, but a Mercedes price.

    

            More on valuation (medium):

            http://online.barrons.com/article/SB50001424053111904227604579191423064929870.html?mod=BOL_hp_highlight_4

            And (medium):

            http://www.nakedcapitalism.com/2013/11/wolf-richter-the-day-the-bubble-became-official-and-everyone-was-happy-except-twitter-casualties.html

            Money is not capital (medium and today’s must read):

            http://www.minyanville.com/business-news/markets/articles/Monetary-Policy-Myths-Debunked-Money-Is/11/11/2013/id/52628?refresh=1

            The latest from Doug Kass (medium):

            http://www.thestreet.com/story/12104017/1/kass-10-laws-of-stock-market-bubbles.html

            The latest from Jim Rogers (3 minute video):

            http://www.zerohedge.com/news/2013-11-12/why-has-nobody-gone-jail-financial-crisis-according-judge-rakoff-its-governments-fau

            The QE trap (short):

            http://pragcap.com/low-inflation-creating-a-qe-trap

            This is scary (medium):

            http://www.zerohedge.com/news/2013-11-12/peak-insanity-retail-investors-are-making-direct-subprime-loans-reach-yield

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.