The Morning Call
The Market
Technical
The
indices (DJIA 16422, S&P 1877) drifted higher yesterday, continuing to
consolidate from an overbought condition.
The S&P closed above the upper boundary of its short term trading
range/all time high (1746-1848) for the third day of our time and distance
discipline. It remained within its
intermediate term uptrend (1725-2505) and above its 50 day moving average.
The
Dow finished within its short term (15330-16601) and intermediate term
(14696-16601) trading ranges and above its 50 day moving average. Both of the Averages are within long term
uptrends (5050-17400, 736-1910).
Volume
was flat at a depressed level; breadth was mixed. The VIX rose fractionally, ending within its
short term trading range and intermediate term downtrend and right on its 50
day moving average.
The
long Treasury took it in the snoot, though it remained within a short term
trading range and an intermediate term downtrend and above its 50 day moving
average. However, it also broke below a developing very short term uptrend; and
that follows its bounce off the upper boundary of its short term trading range---perhaps
a precursor to improving economic activity/higher interest rates/higher
inflation? That, of course, is a giant
step from a couple of bad price days; so at the moment, this is just something
to watch.
GLD
continued its almost uninterrupted upward path, closing within a very short
term uptrend, short and intermediate term downtrends and above its 50 day
moving average.
Bottom
line: the S&P inched its way up for
the third day (time) and ever closer to the distance objective (1885). At the moment, every indication is that the
S&P’s short term trend will be re-set to the upside. However, the upward momentum is being
restrained by the lack of confirmation from the Dow, the transports and our
internal indicator. So more work needs
to be done to re-set the entire Market to up.
However, even if
that happens, there is formidable resistance at the upper boundaries of the
Averages long term uptrends (17400/1910) which really doesn’t leave a lot of potential
‘reward’ unless you are willing to bet that an 85 year trend is about to be
broken.
That
doesn’t mean that it won’t be breached or that prices won’t stick to the upper boundary
and progress at the same rate. It does
mean that the risk/reward offered by stocks at such lofty prices isn’t that
great; and given the proximity of current prices to those more generous valuations,
I think it dangerous to try to trade the interval. However, if I wanted to play with fire, I would
do with a single well traded ETF that could be sold easily with little trading
friction (VTI, IWO).
Meanwhile, 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.
A
different look at market history (short):
Household
equity allocations near all-time highs (short):
Update
on sentiment (short):
Fundamental
Headlines
The
US economic stats were mixed again yesterday: weekly jobless claims and
February retail chain store sales were better than expected while fourth
quarter productivity and unit labor costs were disappointing as were January factory
orders. While not the ideal data flow,
mixed is still better than we have gotten over the last month; so I remain
encouraged by the improvement.
There
was a lot going on overseas:
(1) the
ECB left interest rates unchanged though it signaled that monetary policy would
get more accommodative. Given that it
has been the most austere of the large global central banks, an easier ECB is
not necessarily a negative,
(2) Ukraine
isn’t going away as a ‘hot spot’. The
Crimean parliament voted to secede from Ukraine and re-join Russia. That is not making a lot of folks in
Washington happy but I am sure Vladimir has a smile on his face. What will keep this situation on the front
burner of risk is our own ruling class getting its collective panties in a wad
and doing something stupid to provoke the Russians. Clearly, investors have ceased worrying about
it; but I never underestimate our politicians’ ability to make a bad situation
worse.
(3) today
is ‘D’ day for the bankruptcy of that Chinese solar company. How the government handles this situation
could potentially have a major impact on the Markets. That said, the world knows this bankruptcy is
coming, so it should be in the price of stocks.
***overnight, the company
failed to make its interest payment. So
the game is on.
Bottom line: while
the economic news flow has turned from outright positive early in the week to mixed
presently, it is still an improvement over recent data and therefore
encouraging. However, as you know, the US
economy has never been a risk in our forecast.
So any news confirming that outlook is basically no news. The issues are, assuming the economy remains
on track and, therefore, the Fed’s tapering remains on track, how will
investors react? and (2) stock valuations are excessive even under our ‘good
news’ scenario.
Of course,
overvalued equities tend to stay that way or become even more overvalued until
acted upon by an outside force. To date,
there have been no such outside forces sufficient to cause enough cognitive
dissonance to alter psychology, especially in a free money world.
Clearly, if I know
this, then why not (to coin a now infamous phrase) ‘keep dancing until the
music stops’? And the answer is, go ask
the guy who said that (Chuck Prince) how it worked out for him (hint---not
good). The other answer is that I am not
that smart. There is only going to be
the opportunity for a few to exit before the carnage starts and most of them
will be likely just be lucky. So I would
rather preserve principal, forego the last leg of an uptrend in the knowledge
that I have plenty of cash to buy stocks cheap from the geniuses that are still
dancing.
In the meantime,
there are a couple of potential attention getting outside forces at work: (1) the
geopolitics of Ukraine is not likely settled; and (2) the Chinese government is
apparently about to do something no central bank has done since 2009, i.e.
inject moral hazard into the investment process. How that plays out I haven’t a clue; but it
could impact the calculation of security valuation going forward. We can only watch events unfold.
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.
Bear
in mind, this is not a recommendation to run for the hills. Our Portfolios are still 55-60% invested and
their cash position is a function of individual stocks either hitting their
Sell Half Prices or their underlying company failing to meet the requisite
minimum financial criteria needed for inclusion in our Universe.
It
is a cautionary note not to chase this rally.
Update
on valuation (medium):
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