Friday, February 14, 2014

The Morning Call---Bad news is good news again

The Morning Call

2/14/14

The Market
           
    Technical

            The bulls have it.  The indices (DJIA 16027, S&P 1829) rallied on poor economic news yesterday.  However, they remained within their short term trading ranges (15330-16601, 1746-1858).  The Dow closed within its intermediate term trading range (14696-16601) and below its 50 day moving average, while the S&P is in an intermediate term uptrend (1709-2489) and above its 50 day moving average.  Both are in long term uptrends (5050-17400, 728-1900).

            Volume remains low; breadth improved.  The VIX was off fractionally, finishing within its short term trading range and its intermediate term downtrend and right on its 50 day moving average.

            The long Treasury finally had a good day, closing within its short term trading range and its intermediate term downtrend and above its 50 day moving average.  However, it continues to build a head and shoulders formation.

            GLD had another strong day, leaving it above the lower boundary of a new very short term uptrend but within short and intermediate term downtrends.   I am waiting for a test of the lower boundary of the aforementioned uptrend.

Bottom line:  the upside momentum returned yesterday and in the face of some bad economic news.  That has got to make the bulls happy.  Short term, though, we are now in overbought territory. However, volume remained low, the VIX is having difficulty pushing below its 50 day moving average and the upper boundaries of the Averages short term trading range are still some distance.  So the bulls are going to have to get a whole lot happier before the all-time highs get taken out.

Even if they do, the risk/reward from current price levels is dramatically tipped to the risk side.  So I am happy to let others fight over another 3-5% upside to insure that our Portfolios don’t get clocked.

The only potential action that would be needed is if any price strength pushes one of our stocks trades into its Sell Half Range and our Portfolios act accordingly. 

            For the bulls (short):

    Fundamental
    
     Headlines

            Yesterday witnessed nothing but bad news both here and abroad.  In the US, weekly jobless claims were higher than anticipated, January retail sales were a big disappointment and December business inventories were up considerably more than sales.  The weak stats just keeps piling on.  Weather remains the chief culprit.  While I give weight to that argument, I am not sure it makes sense to discount all this data---which is why the yellow light is flashing.

            Overseas, Greek unemployment hit record highs, the Italian government folded and China allowed several investment trusts to default.  By far the most concerning risk is the latter.  If the Chinese rulers have decided to start unwinding the speculative boom there, that has deflationary implications certainly for the emerging markets, probably Europe and perhaps the US.  I am not predicting that this is happening, but allowing these defaults could be a signal that we can’t afford to ignore.

            All that said, judging by the Market’s performance, investors must have either had their radios and TV’s on mute or they were assuming that Yellen will bail them out if times got tough.  Assuming that it is the latter, then the bet is that the Fed is willing to abandon tapering and dig itself an even deeper hole.  That may be happen; certainly Yellen’s testimony gives life to the prospects. But if it does, the Fed will have just built itself a higher platform off of which to fall.  However, on the offhand chance that the Fed continues to taper in the face of weaker economic data, the euphoria could fade fast.
           
Bottom line: a fine point was made (1) on the economy’s sluggish performance by yesterday’s numbers and (2) on the perception that the Fed will stay accommodative in the absence of a generally improving recovery by the Market.   To be sure, everything may work out as the optimists seem to think.

However, it may not.  Certainly, there are more potential risks to the economy and current valuations than there were two months ago including a less clear view of both the US and the global economies and a new Fed chief.  It seems reasonable to me that these increased risks would be reflected in security prices---but they are not.  To be clear, I am not arguing for a Market collapse; I am not even arguing that prices dip below the Year End Fair Value based on our now somewhat optimist economic outlook.
   
I am arguing that stocks remain very richly valued on almost any (upbeat) economic scenario.  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.

            The latest from Rick Santelli (3 minute video):

            Munis and TIPS beckon (medium):




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.

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