The Morning Call
The Market
Technical
The
indices (DJIA 16025, S&P 1808) plodded higher yesterday, remaining well
within uptrends along all timeframes: short term (15472-20472, 1744-1898),
intermediate term (15472-20472, 1651-2232) and long term (5050-17400,
728-1900).
Volume
declined slightly, breadth was mixed. The VIX fell, stuck as it has been in a
short term trading range. It is also in
an intermediate term downtrend.
The long Treasury ticked
up, finishing within a short term trading range and an intermediate term
downtrend and continuing to build a head and shoulders formation.
GLD
was up, but its chart remains a disaster.
It is trading within short and intermediate term downtrends and near the
lower boundary of its long term trading range.
Bottom
line: the price trend is positive and is
being supported by the willingness of investors to view almost any news as good
news. That suggests more upside; and I
think that the most logical target is the upper boundaries of the Averages long
term uptrends (17400/1900).
That doesn’t
leave a lot of reward, especially when viewed relative to current Fair Value
(11600/1440) as measured by our Model.
In addition, there are a number of technical divergences that could
weigh on stocks ability to achieve 17400/1900.
This is a Market
for only the most skilled trader.
If one of our
stocks trades into its Sell Half
Range
Betting
on the Santa Claus rally:
Relative
performance of socks versus bonds (short):
Fundamental
Headlines
No
US economic
stats yesterday, though we did receive some potentially important overseas
news:
(1)
Chinese exports rose; but more importantly, the latest
inflation report was quite tame. That
could reduce pressure on the Chinese central bank to further tighten monetary
policy---which as you know, has concerned me that a Chinese tightening could
lead to global investors pushing up the yield curve across all maturities in
all major countries. If this proves
correct, it won’t stop the debacle likely to occur when Fed tightening
commences; it just means the impetuous won’t come from China ,
(2)
it was reported that the World Trade Organization has
reached an agreement in the latest round of talks on free trade. In it, tariffs would be lowered by 10-15%. This would be a big plus, help stimulate
global economic activity and assure our forecast stays on track.
(3)
German industrial production plummeted 1.2%. Not good for the obvious reason.
Later in the
day, rumors circulated that a budget deal is close BUT that the sequester is
likely dead---the major problem being the GOP defense hawks that wouldn’t sign
on to the mandated cuts. In other words,
spending is going to be higher than under the sequester.
There are some
short term positives to this development (1) it would avoid a government
shutdown and (2) with the slack in the economy, it could provide some
stimulus. However, on a longer term
basis, the republicans have once again made their own contribution to the long
existing irresponsible fiscal policy. Hence.
this is not a long term positive and will simply perpetuate the fiscal drag (too
much spending) that has hampered US
economic growth for the last decade.
Finally, it appears that
US regulators will approve the terms of the Volcker Rule today. As you may recall, this rule is supposed to prevent
banks from engaging in higher risk trading via in-house proprietary trading
desks. Early reporting suggests that the
new rules won’t ban prop trading, it will ban compensation based on prop
trading results. If true, I am not sure
how far this goes in reducing the current level of risk existent on bank
balance sheets.
Bottom line: unfortunately,
if the stories out of DC on the budget deal are true, one of the positives to
our economic outlook will be removed. Also
unfortunate, if the terms of the new Volcker Rule are as loose as described in
the above article, then little will have been done to eliminate the balance
sheet risk of our ‘too big to fail’ banks.
All that aside,
stocks are still considerably overvalued under the best possible scenario. And as I have noted, they are likely to
remain that way until either the Markets stop believing in QE or we get some
exogenous event that hits investors in the face.
In the meantime,
my task is to be sure that our Portfolios take profits when our Sell Half
Discipline becomes operative.
The
Fed’s scandalous monetary policy (medium):
The
latest from Dallas Fed head Richard Fisher (medium):
The
latest from Mohamed El Erian (medium):
The
latest from John Hussman (medium):
The
latest from David Stockman (2 minute video):
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