Tuesday, March 25, 2014

The Morning Call---Confusion still reigns on Yellen's comments

The Morning Call

3/25/14

The Market
           
    Technical

            The indices (DJIA 16276, S&P 1857) had another volatile day, closing down.  Nevertheless, the S&P finished within uptrends across all timeframes: short (1784-1961), intermediate (1735-2535) and long (739-1910).  The Dow remains within short (15330-16601) and intermediate (14696-16601) term trading ranges and a long term uptrend (5050-17400).  They continue out of sync in their short and intermediate term trends---which leaves the Market trendless.

            Volume was below Friday’s option expiration, but was higher than any other day last week (rising volume, declining price is not good).  Breadth was lousy with the flow of funds indicator behaving very poorly.  The VIX rose, remaining within a short term trading range, an intermediate term downtrend and above its 50 day moving average.

            The long Treasury was very strong, ending the day right on the upper boundary of its short term trading range (now working on a potential quadruple top) and above its 50 day moving average.  However, it also finished within an intermediate term downtrend.

            GLD suffered some severe whackage which pushed it well below the lower boundary of its very short term uptrend.  A close below that trend line today will negate that uptrend and once again nip a potential Buy opportunity.  It remains within short term and intermediate term downtrends.

Bottom line:  the greatest damage in yesterday’s market was in the biotech sector which has gotten a bit frothy of late.  Other industry groups did just fine; so I don’t read the pin action as anything other than a healthy correction of a select group of overextended equities.  Indeed, the Market acted pretty well in the face of some bad fundamental news (see below).  On the other hand, the flow of funds indicator is joining the list of divergences and that is not good for the longer term. 

I continue to believe that the upper boundaries of the Averages long term uptrends are apt to be challenged, though, in my opinion, the internal strength of the Market is going to have to improve before those resistance levels can be breached.

Meanwhile, we have a trendless Market; 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.

The latest from Stock Trader’s Almanac (short):

            Update on sentiment (short):

    Fundamental
    
     Headlines

            Yesterday’s US economic data was mixed: the February Chicago Fed National Activity Index was better than expected while the March flash PMI was worse.  That’s not going to disturb our forecast. 

            In addition, the discussion continued on what Yellen meant by her unexpectedly hawkish comments in last week’s post FOMC meeting news conference.  That got investor attention---all the more so because a growing number of pundits are coming to the view that she actually meant what she said and that the Fed was heading for tighter money sooner than previously thought.  I alluded to that possibility in last weekend’s Closing Bell, though I thought the odds were against it.  However, I may have underestimated its likelihood as it seems to be gathering some momentum.  Investors don’t seem enthralled.

That said, I would be very happy if the transition process is at the pace that Yellen suggested for the simple reason that the faster the monetary authorities unwind QEInfinity, the less pain the economy and, in particular the Markets, will have to endure.  Not that there won’t be pain.  There will.

            What the Fed can’t do (medium):

Overseas, the news was not so good.  Both the Chinese and EU March flash PMI’s were below estimates.  In addition, tales of turmoil within the Chinese financial markets continue, the latest in the real estate sector (medium):

            In addition, Obama is now in Europe trying to drum up additional support for stronger sanctions against Russia and/or kicking it out of the G8.  If the Europeans go along---and I am not suggesting for a moment that they necessarily will---Putin is not likely to let that go unanswered.  Of course, his primary economic weapon is gas (prices) which, if raised, would likely play merry hell with any ongoing EU economic recovery.  As I suggested, I don’t see the EU getting really aggressive with Putin; but the potential is there for additional problems.

Bottom line: cognitive dissonance over the likely trajectory of Fed policy raised its head again yesterday.   My preference would be for winding down QE and raising interest rates sooner rather than later; but that is not a commonly held sentiment in the marketplace of America.  So if it comes to pass that Yellen was shooting straight at last week’s news conference, then the moment may be fast approaching for an investor reassessment of asset values.

Just as threatening is the potential fallout from (1) what appears to be the reinjection of moral hazard in the Chinese securities markets, (2) the unwinding of the Japanese carry trade and (3) the potential for Russia creating negative economic consequences in the EU. 

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.
               
            A world priced for perfection (medium):

            The latest from David Rosenberg (medium):

            The latest from John Hussman (medium):

            The latest from Jeremy Grantham (medium):






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.

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