Friday, November 1, 2013

The Morning Call--Oooops

The Morning Call

11/1/13

The Market
           
    Technical

            The indices (DJIA 15545, S&P 1756) were soft again yesterday.  Indeed, the Dow finished below the former (?) upper boundary of its short term trading range (14190-15550).  So the question clearly is, was the time element of our time and distance discipline off by two days and/or is the DJIA repeating the pattern of the prior two occasions that it penetrated 15550 and subsequently sold off?  It is too soon to know; but it also is certainly too soon to be making any big bets on another leg up.  For the moment, I am leaving the Dow’s short term trend as up (15198-20198); but that may not hold.

The S&P closed within its short term uptrend (1700-1854). Both of the Averages are in intermediate term uptrends (15198-20198, 1617-2199) and long term uptrends (5015-17000, 728-1850).

Volume rose; but breadth remained poor.  The flow of funds indicator isn’t even close to confirming the Averages’ recent all time highs.  The VIX was up fractionally, staying within its short term trading range and its intermediate term downtrend.

The long Treasury was up but still traded within its short term trading range and its intermediate term downtrend.  It also continues to build a reverse head and shoulders.

GLD fell 1.5% although it remained within its very short term uptrend.  Unfortunately, it is also trading within short term and intermediate term downtrends.

Bottom line:  in light of yesterday’s pin action, the big question is, did the Dow just make a quadruple top (trading back below 15550 for the third time) or is the Market setting up for a bear trap?  I don’t know but as I said above, I don’t want money riding on the answer.  Patience.

My focus remains on our Sell Discipline: if one of our stocks trades into its Sell Half Range, our Portfolios will act accordingly.

Market record in best six months (November to April) following a positive worse six months (May to October) (short):

            History says buy (short):

            However, consider this and be careful (short):

    Fundamental
    
     Headlines

            Two US economic releases yesterday: weekly jobless claims fell slightly less than anticipated; but we got a blow out number in the Chicago PMI.  The latter drew most of the attention.  In our new QEInfinity world where good news is bad news (Fed tapers sooner), this report added to investor concerns raised by the more economically optimistic tone of Wednesday’s FOMC statement (meaning tapering sooner rather than later). Making matters even worse (assuming that you are betting on QEInfinity), the Chinese central bank executed another monetary tightening move.  These factors took stocks down initially.  Prices then rallied mid day only to plunge once again on reports  of an Israeli attack on Syria.

            ***over night Chinese PMI came in above expectations

            A couple of comments:

(1)    not to beat a dead horse, but I have been emphasizing of late that there are multiple points of origin for the transition from easy to tight money; and the Market to deal with at least two yesterday [the Fed, China]. 

(2)    there was another piece of international economic news yesterday and that was German retail sales which were awful.  As you know, an improving European economy of late has been a buttress to our EU ‘muddle through’ scenario.  Last week we got some disappointing news;  and now this.  It is not going to change our forecast but another week or two of such data and the yellow light will again be flashing.

(3)    except for the totally inept handling of Middle East diplomacy by the White House [curtsying to Iran and poking the Saudi’s in the eye], the ‘blow up in the Middle East’ risk factor has been relatively benign of late.  As you know, one of the two specific risks about which I worry is Israel taking matters into their own hands.  Yesterday’s bombing took place near a Russian naval base and was intended to destroy Russian missiles intended for Hezbollah.  I await the Russian response.

Bottom line:  I remain confident in the Fair Values generated by our Valuation Model---meaning that stocks are overvalued.  And I think that the end of the current up Market will most likely come from an unraveling of the Fed’s unsuccessful, dangerously experimental monetary policy.  That risk was front and center yesterday; though to be clear, I am not saying that the Market is peaking.

            Indeed, I have been suggesting that based on the technicals that another up leg may be in the cards---although, as I noted above, that notion also took a lick yesterday.

Given yesterday’s pin action, I would put any trading moves on hold until the technical pattern is clear. 

As an investor, I would be sure that (1) I had cash reserves, (2) I took advantage of the gift being given me [i.e. high prices] to sell anything that gives me pause and (3) our Portfolios continued to follow their Sell Discipline. 

            Three reasons Buffett isn’t buying (short):

            The latest from Bill Gross (medium and today’s must read):




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.

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