The Morning Call
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):
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