The Morning Call---The news just isn't that good to warrant chasing stocks up

The Morning Call

2/21/14

The Market

           

  Technical

            The indices (DJIA 16133, S&P 1839) bounced back strongly yesterday, closing within their short term trading ranges (15330-16601, 1706-1858).  The Dow remained within its intermediate term trading range (14696-16601) and rallied back above its 50 day moving average, while the S&P is in an intermediate term uptrend (1716-2496) and above its 50 day moving average.  Both are in long term uptrends (5050-17400, 728-1900).

            Volume continued anemic though breadth improved.  The VIX fell, finishing within its short term trading range and its intermediate term downtrend and above its 50 day moving average.

            The long Treasury dropped again, leaving that head and shoulders formation in play.  However, it remained within a short term trading range and an intermediate term downtrend.

            GLD returned to its winning ways, closing within a very short term uptrend and short and intermediate term downtrends.  I have a tough time considering Wednesday minor decline as any kind of downside test, so I am holding my fire until a more serious assault on the lower boundary of the very short term uptrend takes place.

Bottom line:  yesterday’s dramatic bounce back was at least partially a function of today’s option expiration and leaves stocks in overbought territory; so the potential is there for more volatility.  Add into that mix the proximity of the S&P to its all-time high and the roller coaster pin action could continue. 

At the moment, the major technical factor on my mind is whether or not the 16601/1858 resistance levels hold.  If not, the next stop is the upper boundaries of the Averages long term uptrends.  If they do, then the focus will shift to the lower boundary of the S&P’s intermediate term uptrend.

Meanwhile, we have a Market in a trading range, whose upper boundary remains a serious resistance level; so there is really not much to do save using any price strength that pushes one of our stocks into its Sell Half Range and to act accordingly.

             

            Update on sentiment (short):

            http://www.bespokeinvest.com/thinkbig/2014/2/20/bullish-sentiment-rises-for-second-straight-week.html

            The history of down January/up February in the S&P (short):

            http://blog.stocktradersalmanac.com/post/SPX-SPY-Down-JanuaryUp-February-Historically-Bearish

    Fundamental

     Headlines

            The economic numbers turned mixed yesterday: CPI came in as expected, weekly jobless claims were down fractionally also as anticipated, the Markit flash PMI was much better than estimates while the Philly Fed index was equally as bad and the January leading economic indicators were ahead of forecasts.

            Overseas, the news wasn’t quite so rosy as the Chinese and EU flash PMI were well below consensus, the Japanese trade deficit soared (not good for a country with central bank policy of devaluing its currency) and the Chinese central bank removed reserves (a monetary tightening move).

Bottom line: Pop quiz: yesterday’s rally was powered by (1) investors electing to ignore the bad news and focus on the good news, (2) investors regaining confidence in the  assumption that the Fed will make everything right whatever the economy does or (3) technical factors (option expiration, rebound from a sharp selloff),  

You choose because I don’t care.   What I do care about is that

(1) yesterday’s leading economic indicator report notwithstanding, the stats this week have been atrocious.  That doesn’t necessarily mean recession because this whole weather thing has left economic forecasting with a dart board as its best tool.  Hence, in my opinion, there is reason to suggest that investors should at least be cautious [not run of the hills] about where they put their money.

(2) the FOMC minutes stated in about as clear a language as you could ask for that tapering was on schedule and that the Fed was contemplating new guidelines for future tightening moves.  I have made it clear that they [a]  are both are both good news, long term, in my opinion [b] may have a limited impact on the economy but [c] a much more profound effect on the Markets.  Investors may choose to ignore the Fed’s statement or kid themselves that tightening will not upset the securities markets.  But they do so at their own risk.  However, I am not even suggesting that they are incorrect about the outcomes.  I am saying that the probabilities of such are not sufficient to warrant chasing stocks up to their all-time highs---especially when a recovering economy may not be there as a backup.

  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.

            Final fourth quarter earnings and revenue ‘beat’ rates (short):

            http://www.bespokeinvest.com/thinkbig/2014/2/20/final-earnings-and-revenue-beat-rates-for-q4-2013.html

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.