The Morning Call
The Market
Technical
The
bulls held sway again yesterday as the indices (DJIA 16481, S&P 1848)
continued their move up (the S&P making an all time high), closing within
major uptrends across all timeframes: short term (15776-20776, 1789-1942),
intermediate term (15776-20776, 1684-2265) and long term (5050-17400,
728-1900).
Volume
was up slightly; breadth was mixed. The
VIX was unchanged, leaving it near the lower boundary of its short term trading
range and within its intermediate term downtrend.
More
weak technical indicators:
And:
The
long Treasury was off fractionally, finishing within a short term trading range
and an intermediate term downtrend.
GLD
traded down, finishing within short and intermediate term downtrends. It needs more follow through from the double
bottom and penetration of the very short term downtrend before I will ready to
make a commitment.
Bottom
line: the Averages are fighting to make
new highs (S&P si, Dow nada) despite the divergences that I keep
documenting. Of course, there is no hard
rule about how long those divergences
exist before the indices and stocks as a whole are back in sync. However, there is precedent that they don’t
go on forever. Sooner or later, the
Averages decline or the rest of the Market rallies. Given the current significant overvaluation (as
computed by our Model), my money is on the former.
However, until the
bears can develop any kind of sustained momentum, my underlying assumption for
this Market remains that it is going higher.
As you know, my current target is
the upper boundaries of the Averages long term uptrends (17400/1900).
However, if one
of our stocks trades into its Sell Half Range, our Portfolios will act
accordingly.
Update
on sentiment (short):
Fundamental
Headlines
Yesterday’s
US economic news was generally upbeat: both mortgage and purchase applications
were up; the January NY Fed manufacturing index came in well above
expectations; while December PPI was in line.
The only negative stat was PPI, ex food and energy, which was much
hotter than anticipated. This data does
nothing to disturb our forecast.
The
Fed released its most recent edition of its Beige Book which read largely as
did its predecessor---the economy improving at a slow but steady pace.
One
data point from overseas: German real GDP slowed slightly. Since Germany is the bell cow of EU economic recovery,
that is not exactly great news. However,
it is a single number and most of the data flow in recent weeks have been
positive. So I am treating this as an
outlier until or if more weak data emerges.
Bottom
line: the economy continues to track our
forecast. Fiscal policy is more confusing
than it is terrible, though it still has the potential to be just that. Monetary policy is the most likely source of
future trouble should the Fed bungle the transition to tighter money---on which
it has a 100% track record of failure.
However, even if
I make the most positive assumptions within reason on the economy and all
facets of government policy, I still can’t get equity valuations close to
current levels. Hence, I believe that we
are faced with either a prolonged period of Market stagnation or a correction. Either
way,
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.
Great
bull/bear debate on market valuation (4 minute video):
Stocks
versus commodities (short):
More
on valuation (medium):
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