The Morning Call
The Market
Technical
The
indices (DJIA 15995, S&P 1819) smoked yesterday on the back of Yellen’s
dovish testimony. Nevertheless, they are
still within their short term trading ranges (15330-16601, 1746-1858). The Dow remains 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 (1708-2488) and above its 50 day
moving average. Both are in long term uptrends
(5050-17400, 728-1900).
Volume
rose though not by that much; breadth improved.
The VIX continues to trade within that year long plus trading range and
within an intermediate term downtrend.
The
long Treasury fell, finishing within its short term trading range and
intermediate term downtrend.
GLD
was up strongly, leaving it well above the upper boundary of that very short
term downtrend. A close above that level
today will confirm the break. It is also
developing a very short term uptrend.
However, it is still within short and intermediate term downtrends. In addition, as noted previously, it has had
a dismal record of late following through on upside breaks. That said, if GLD confirms the break
of the very short term downtrend and if it dips and tests the developing
short term uptrend, then our Portfolios will likely begin to nibble.
Bottom line: yesterday’s euphoria notwithstanding, the
Averages remain in a short term trading range---the upper boundary of which has
been tested and validated once before. Furthermore, this rally has been on
lousy volume; not a great sign of strength. Certainly, the current spike could continue
and blow through the aforementioned resistance level. Even if that occurs, the upper boundaries of the
indices’ 82 year long term uptrends (17400, 1900) loom ahead and should pose much
more formidable barriers than the 16601/1858 levels. Given the downsides, whether fundamental
(11900/1480---2014 year end Fair Value) or technical (5050/728---lower boundaries
of their long term uptrends), the risk/reward at current levels isn’t
sufficient to be chasing stocks up.
For now, we just
sit back and wait for either a break over the prior highs or for the S&P to
follow the Dow and break the lower boundary of its intermediate term uptrend.
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.
Hopeful
signs (short):
Is
technical analysis of any benefit right now (medium)?
The
Market’s growing schizophrenia (short):
Are
emerging markets oversold? (medium):
And:
NASDAQ
parabolic? (short):
Fundamental
Headlines
Almost
everything came up roses yesterday. US
economic data included: January small business confidence was up, beating
estimates, December wholesale inventories were up less than anticipated but well
below sales (that sets up a build of inventories). The only bad news was weekly retail sales
which were down versus the prior report.
However
as I noted yesterday, investor attention was really focused on Yellen’s first testimony
as Fed chief and she did not disappoint---which is to say that she parroted Bernanke
perfectly. Clearly a relief to
investors who reacted giddily.
It
is pointless of me to reiterate the risks associated with unwinding the
unprecedented expansion of the Fed’s balance sheet because no one seems to give
a shit. The Fed may successfully negotiate the
transition to tighter money; but (1) it would be the first time in history and (2)
even if it does, there is no way of knowing that before the fact. Meaning that the risk is there and should
somehow be accounted for in security pricing.
The
other event that helped stocks out was the announcement by Speaker Boehner that
the GOP caucus would vote for a clean debt ceiling bill and the subsequent
passage by the house. I opined yesterday
that this was a positive for the Market short term but does little to help us
poor taxpayers longer term. Apparently,
others shared that thought as Tea Party leaders launched a replace Boehner
movement. If this effort gains any
traction that could spell trouble for the republicans in this year’s
election---as the saying goes ‘a house divided against itself….’.
Bottom line: clearly
the bulls are jiggy about having a Ben Jr. in place. I assume that they believe that there will
always be plenty of money whatever occurs in the economy or in Washington. And they may be right. The issue is, how long will investors
tolerate the endless spiking of the punch bowl?
I would argue that
(1) the longer it lasts, the higher the risk, (2) easy money has been a
miserable failure at stimulating economic growth and that seems unlikely to
change and (3) easy money has been an outstanding success in inflating asset
values including stocks which are already at lofty heights. I believe that there is sizeable downside
risk in stock prices even in the absence of any negative economic developments.
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.
Chasing
alpha (medium):
Bob
Farrell’s #9 Rule of Investing (short):
More
on emerging market problems (medium):
And
(medium):
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