The Morning Call--Well, maybe not

The Morning Call

12/12/13

The Market

           

    Technical

            The indices (DJIA 15843, S&P 1782) got whacked yesterday, but remained within uptrends along all timeframes: short term (15509-20509, 1746-1900), intermediate term (15509-20509, 1653-2234) and long term (5050-17400, 728-1900).

            Volume picked up (not a particularly good sign on a big down day); breadth was terrible.  The VIX spiked 11%, as you might expect, finishing within its short term trading range and its intermediate term downtrend.

            The long Treasury fell, closing within its short term trading range and its intermediate term downtrend.  It continues to build a head and shoulders formation---which if completed would be bad for bonds.

            GLD dropped, closing back below the upper boundary of a very short term downtrend---so what little positive a breaking of this boundary could bring is now in question.  GLD ended within its short and intermediate term downtrends.

Bottom line:  there were a couple of negatives in yesterday’s pin action: (1) stocks were down on rising volume and (2) following the rebound after the five down days, the Averages were unable to get back to their former highs before rolling over again.  I am not suggesting that it is all over but the shouting.  I am pointing out a couple of negative elements to watch if there is any follow through. 

Meanwhile, the trends are up until they are not; so the underlying technical assumption has to be for further gains.  As you know,  my upside targets for the indices are the upper boundaries to their long term uptrends (17400/1900)---which are a close enough to current levels that they don’t tempt me to buy.  Indeed, I continue to believe that the current advance is creating opportunities for our Portfolios to take advantage of our Sell Price Discipline.

            Advisors near all time high for bullishness (short):

            http://greedometer.tumblr.com/post/69625602145/advisors-hit-new-all-time-record-for-bullishness 

   

            Does Market strength beget more strength (short):

            http://www.thereformedbroker.com/2013/12/11/does-stock-market-strength-beget-more-strength/

            Three bearish charts (short):

            http://pragcap.com/3-very-bearish-charts

    Fundamental

    

     Headlines

            Not much economic news yesterday: weekly mortgage and purchase applications were up slightly and the US budget deficit was considerably lower than expected.  Overseas, Japanese October machinery orders were up nicely.  All good news but not forecast altering.

            ***over night, EU industrial production was down 1.1%.

            The chattering class spent its day re-hashing Tuesday’s news.  I have already opined on all these matters, so I will simply bottom line them:

(1)       the budget deal.  My take: slight short term positive [no government shutdown], sizeable long term negative [the loss of fiscal discipline, again],

Business as usual (medium):

http://washingtonexaminer.com/budget-deal-is-either-same-old-same-old-or-pragmatic-step-toward-2014/article/2540531

(2)       the Volcker Rule.  My take: close but no cigar. The banks are still too big to fail.

The devil is in the details (medium):

http://www.nakedcapitalism.com/2013/12/volcker-rule-the-devils-in-the-unimpressive-enforcement-details.html

(3)       the taper.  Yesterday’s pin action notwithstanding, I still don’t think that it will happen.

                  The likelihood of a taper (medium):

                   http://www.marketwatch.com/story/central-banks-will-move-goal-posts-to-keep-qe-forever-2013-12-11?dist=beforebell

There was one other development with respect to monetary policy.  Stanley Fischer was nominated as Vice chairman of the Fed.  This run down from Goldman on his policy outlook (medium and a must read):

http://www.zerohedge.com/news/2013-12-12/goldmans-qa-stanley-fischer-next-fed-vice-chairman

Bottom line: unfortunately, the budget deal and the new Volcker Rule provide only marginal improvement in the outlook for government spending and the balance sheet risk of our ‘too big to fail’ banks.  While ‘marginal improvement’ is better than nothing, there is nothing forecast altering about these developments.

Investors seem to take the CNBC ‘the Fed will taper’ story a bit more seriously than they did on Tuesday, probably because the budget deal now seems a lock.  Many observers had opined that there was no way the Fed would taper in the absence of a deal.  As I noted yesterday, if the Fed does taper, it is a positive in the sense that the sooner the Fed goes about the business of tightening, the less severe the consequences.  However, (1) I think that the Fed won’t taper and (2) even if it does, the pain both in the economy and in the Market will probably make your eyes water. 

So stocks remain considerably overvalued in spite of the marginal possible positive that could come from any of the above; hence, my task is to be sure that our Portfolios take profits when our Sell Half Discipline becomes operative and hold on to their cash for dear life. 

           

            An interesting perspective on risk (short and today’s must read):

            http://servowealth.com/resources/articles/not-all-investment-risks-are-worth-taking

                More on valuation (short):

            http://advisorperspectives.com/dshort/updates/Q-Ratio-and-Market-Valuation.php

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.