The Morning Call
The Market
Technical
The
indices (DJIA 15914, S&P 1795) continued to work off an overbought
condition yesterday. It was the third down day in a row---pretty unusual of
late. On the other hand, the decline has
been mild at worse; so clearly there is no sign of panic in the Market. The Averages remained within uptrends across
all time frames: short term (15426-20426, 1736-1860), intermediate term
(15426-20426, 1646-2227) and long term (5015-17000, 728-1850).
Volume
rose; breadth was mixed. The VIX rose
but not nearly as much as I would have expected given the magnitude of move
down. It finished within its short term
trading range and its intermediate term downtrend.
The
long Treasury was up, closing within its short term trading range and
intermediate term downtrend.
GLD
bounced modestly but remained within short and intermediate term downtrends and
is still hovering around the lower boundary of its long term trading range.
Bottom
line: the Averages busted back below the
psychologically important 16000/1800 levels.
Now the question is follow through.
At the moment, I think that the pin action reflects consolidation from
an overbought condition.
So it still
seems reasonable to assume that there is at least an even chance of another leg
up, despite the growing divergences. My
most likely upside targets are the upper boundaries of the Averages long term
uptrends (17400/1900). Of course, if
that is the case and the downside is simply Fair Value (11575/1436), then the
risk reward from current levels is not all that attractive.
As a longer term
investor, I think that the risk/reward ratio (17400/1900 up; 11575/1436 down) is
an invitation to lose money. I would,
however, 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.
December
sentiment survey (medium):
Cash
on the sidelines (short):
Which
twin has the Toni? (short)
Fundamental
Headlines
Yesterday’s
US economic news was mediocre: weekly retail sales were mixed, though
apparently Cyber Monday proved a good day.
Light vehicle sales were better than expected; however, there was some
evidence of channel stuffing by GM. Only
one EU datapoint: Spanish unemployment fell---but remember the recent exposure
of data falsification by the Spanish government. Nothing really market moving here.
***overnight
the EU and Chinese services PMI were below
estimates.
Not
much out of the political class either, other than (1) the monotonous back and
forth between Obama, insisting that Obamacare is progressing to its goals, and
most everyone else citing plenty of cognitive dissonance---who cares, this
thing will implode on its own, (2) the endless speculation about [a] when tapering
will start and [b] what the Market reaction will be when it does---I think it
is less relevant when tapering starts than when the Markets have a belly full
of QEInfinity, and (3) Detroit is eligible for bankruptcy and pensions aren’t
exempt---look for lots of fireworks over the pension issue and, if the unions
lose, more cities and states lining up to bust the unions, just like what
happened in industry.
Bottom line: at
current price levels, stocks (as measured by the S&P) are considerably
overvalued (as measured by our Valuation Model). That said, this condition is likely to exist
until either (1) there is some technical blow off that sucks the last guys on
the sidelines into equities or (2) a negative exogenous event occurs that slaps
investors in the face with reality.
So as an
investor not a trader, my long term strategy calls for me to sit on my hands
until valuations return to normalcy.
The
latest from John Hussman (medium):
The
CIO of Buffett’s GenRe speaks out (medium and a must read):
The
end of trust (medium/long but today’s must read):
Four
steps for 2014 (short):
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