The Morning Call
The Market
Technical
So
much for that very short term downtrend---gone.
The indices (DJIA 16167, S&P 1810) rallied mightily, closing near
their former highs and within uptrends along all major timeframes: short term
(15566-20566, 1756-1910), intermediate term (15566-20566, 1660-2241) and long
term (5050-17400, 728-1900).
Volume
rose (modestly); breadth improved though the flow of funds and on balance
volume indicators saw little of it. The
VIX dropped 14% but remained well within its short term trading range and
intermediate term downtrend.
I ran another
check of our internal indicator. In a
universe of 149 stocks, 19 finished the day at the proximate level of their all
time highs (in line with the Averages), 21 closed above their former highs
while 109 remain noticeably below their recent highs. To say that this is a
significant divergence would be an understatement and, at least as of
yesterday’s close, doesn’t suggest a strong follow through.
The long
Treasury fell slightly, indicating that the bond guys were not nearly as
emotional about the day’s events as the stock boys. It closed within a short term trading range
and an intermediate term downtrend and continues to build a head and shoulders
formation.
GLD declined, leaving
it within short and intermediate term downtrends and nearing the lower boundary
of its long term trading range. As long
as it holds this level, all is not lost; but there is little else about which
to be happy.
Bottom
line: investors have to be overjoyed
with yesterday’s price performance; and I am sure are anticipating even better
times to come. As you know, I have
opined that there is a better than even chance of the indices challenging the
17400/1900 level. Given yesterday’s
bombastic pin action, the question is, should I raise those objectives and give
myself a little more room? Not at the
moment at least. One day does not a trend make; so follow through remains a
key; and our internal indicator actually supports the notion of a limited follow
through/upside. So I am sticking with my
targets and will continue to use any advance as an opportunity for our
Portfolios to take advantage of our Sell Price Discipline.
Fundamental
Headlines
Yesterday’s
economic news was mixed: weekly mortgage and purchase applications were down
while November housing starts were gangbusters.
Overseas, UK
unemployment hit a four and a half year low.
***overnight,
the senate passed the new budget and Chinese interest rates spiked causing the
Bank of China to ease liquidity conditions.
Of
course, none of that is relevant because the big news of the day was the Fed’s
decision to start tapering---which it did in a masterful way: (1) it was
tapering for pussies, i.e. it is only reducing its bond buying by $10 billion
per month [so it is still buying $75 billion a month] and (2) it loosened up
its guidelines for when any rise in the Fed Funds rate might occur. So it took away a tiny bit of liquidity with
one hand and offered an expended vista of lower interest rates with the
other. My hat is off to the Ber-nank for
this finesse move. Clearly, the stock
jockeys agreed, though the rest of the Market [bonds, commodities] seemed
relatively unimpressed.
This
makes me wrong on the call that the Fed wouldn’t taper in December if ever; but
that is a lesser issue than:
(1)
am I wrong that the Fed will botch the transition? Has
the Fed [Bernanke] really figured out how to make the transition from easy to
tight money? To be sure, one day of
investor approval is not a sign of long term success; but it does raise the
point: will this time be different? I
hate the very concept of ‘this time is different’ especially when there exists
so many examples of the Fed’s inability to manage a transition properly. Still, the issue is now before us and we must
pay attention and allow for the possibility.
That is not the same thing as betting money on it at this early
date. But it is being prepared to be
open minded and flexible.
(2)
am I wrong that either tapering will prompt a severe
reaction from the Markets or that, sooner or later, the Markets will refuse to
go along with a molasses like transition process? Yesterday’s pin action notwithstanding, again,
way too soon the make that call. But
let’s assume that I am wrong that the tapering process will be the catalyst
that prompts investors to make a more realistic assessment on valuation---that
doesn’t mean that some other event or series of events won’t. As I noted previously, stocks can remain
overvalued for a period of time until some event slaps investors ‘up side the
head’.
(3)
finally, I should point out that even if [a] the Fed
has figured out how to transition to a normalized monetary policy and, hence,
avoid the negative economic consequences of either a too rapid or to slow
transition to tighter money and [b] investors retain complete faith in Fed
policy, they are only tangentially related to current overvaluation in
stocks. Stocks are overvalued based on
historical relationships between price and trailing earnings, price and sales,
price and book value and all the other valuation measures that I reference time
and again on these pages. The fact that
the Fed won’t screw the pooch and make those valuation measures appear even worse,
doesn’t keep them from being out of line today anyway.
Bottom line:
clearly, I was wrong that the Fed wouldn’t start tapering, though I give myself
some style points based on the lack of muscle in the taper and the fact that
Bernanke suggested interest rates could stay low for my lifetime. Nonetheless, a start has been made. The questions are; (1) will it prove
effective in unwinding QE without causing economic disruptions? [way too soon
to know], (2) will it even matter to the Markets if current overvaluations
persist or get more extreme? [this won’t continue indefinitely].
I can’t emphasize strongly enough that I
believe that the key investment strategy today is to take advantage of the
current high prices to sell any stock that has been a disappointment or no
longer fits your investment criteria and to trim the holding of any stock that
has doubled or more in price.
Goldman’s
take on the Fed action (medium):
Hilsenrath’s
take (medium):
The
key points and projections from the FOMC statement (short):
Tapering
versus tightening (medium):
Is
this move a ‘feeler’? (short):
What
we learned (medium):
What happened the last
time a major central bank tapered (medium):
Investing for Survival
6 retirement
myths you should ignore (medium):
The
latest from Doug Kass (medium):
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