The Morning Call + Subscriber Alert

The Morning Call

2/4//14

The Market

           

    Technical

            The indices (DJIA 15372, S&P 1745) had another rough day.  The Dow is now in a short term downtrend (15362-15786) and an intermediate term trading range (14696-16601).  It has also traded below its 200 day moving average ((circa 15468).  The S&P is challenging its short term uptrend.  If it remains below the lower boundary of its short term uptrend at eh close today, it will re-set to a short trading range.  It is still within an intermediate term uptrend and above its 200 day moving average (circa 1705).

            Volume rose dramatically; breadth was terrible.  The VIX closed near the upper boundary of its short term trading range.  A break above that boundary would be bad for stocks.  It remains within an intermediate term downtrend and above its 200 day moving average.

            Fear and greed index (short):

            http://money.cnn.com/data/fear-and-greed/

            The long Treasury closed above the upper boundary of its short term trading range for a second day.  A finish above that level will re-set it to an uptrend.  It remained within an intermediate term downtrend but above its 200 day moving average.

            GLD rose but for the third day closed below the lower boundary of that very short term uptrend---invalidating that trend.  It remains within short and intermediate term downtrends.  Still untradeable.

Bottom line:  the Market is in a disorganized state.  The indices are not in sync in either their short or intermediate term trends. Volume has expanded big time, suggesting that institutional investors are selling. The VIX is eyeing the upper boundary of its trading range---also not a good sign. Finally, the first trading day of January and now February was down---exactly the opposite of 2013’s trading pattern. 

All that said, while the short term momentum is to the downside, there won’t be a clear sign of a roll over until both of the Averages have confirmed a break of their intermediate term uptrends and their 200 day moving averages. 

In the meantime, we can only watch.  It is too soon to be Buying and too late to be Selling anything other than stocks that violate their Stop Loss Prices.

    Fundamental

    

     Headlines

            US economic news did not make great reading:  the June Markit PMI was weaker than expected; that was offset by slightly better than anticipated construction spending.  The killer was the January ISM manufacturing report which was dismal (though the optimists are blaming weather).  What makes it worse is that retail sales numbers have been weak and the most recent jobs report was disappointing.  Those are three big datapoints that investors watch, so it is no surprise that as the evidence begins suggesting that the economy could be weakening, the Market got squirrelly.

            International developments aren’t helping either---yesterday’s data included slowdowns in the Chinese and UK PMI’s, though the EU PMI was better. 

            Topping all this off is economic and social unrest in a number of the emerging markets.  The fear being growth problems in these countries will simply add further downside pressure on our own economy.

The outlook for emerging markets (medium):

            http://www.project-syndicate.org/commentary/nouriel-roubini-explains-why-many-previously-fast-growing-economies-suddenly-find-themselves-facing-strong-headwinds

            Emerging market contagion (medium):

            http://www.nakedcapitalism.com/2014/02/emerging-markets-contagion-starting-hit-eurozone.html

            Bottom line: where this all leads us is the concern that the Fed’s easy money policy has been unable to stimulate growth and indeed could be exacerbating deflationary forces.  That is not a prediction, it is simply a statement that the most recent spate of data may be a sign that deflationary (recessionary) forces are gathering steam. 

            http://www.zerohedge.com/news/2014-02-03/goldman-warns-global-slowdown-getting-more-serious  (must read)

            That said, it is far too soon to be altering our forecast.  An alternative explanation for the Market’s behavior is that investors are starting to realize that stocks are very generously valued and are using the recently weak data to propound a scenario that provides an excuse to lighten up on their equity exposure.

            Major asset class performance in January (medium):

            http://www.capitalspectator.com/major-asset-classes-jan-2014-performance-review/#more-3168

            The latest from John Hussman (medium):

            http://advisorperspectives.com/commentaries/hussman_020314.php

            Update on valuation (medium):

            http://advisorperspectives.com/dshort/updates/Q-Ratio-and-Market-Valuation.php

            http://advisorperspectives.com/dshort/updates/PE-Ratios-and-Market-Valuation.php

      Subscriber Alert

            The recent weakness has resulted in a number of stocks trading into their Buy Value Ranges.

            In the Dividend Growth Portfolio: Proctor & Gamble (PG-$75) and Nucor (NUE-$47).

            In the High Yield Portfolio: Cato (CATO-$27) and Dr Pepper (DPS-$47).

            In the Aggressive Growth Portfolio: Reliance Steel (RS-$67).

            This is typical when stocks start to weaken; more is likely.  It is no reason to be Buying.  So our Portfolios are keeping their powder dry.

            The stock price of British American Tobacco (BTI-$95) has traded below the lower boundary of its Buy Value Range.  Accordingly it is being Removed from the High Yield Buy List.  It remains well above its Stop Loss Price.  The High Yield Portfolio does not own BTI, so action is being taken.

            The stock price of Target (TGT-$55) has traded below its Stop Loss Price.  Therefore, the Dividend Growth Portfolio is Selling its position at the Market open.

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.