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.
http://www.bloomberg.com/news/2014-03-24/russia-suspended-from-g-8-as-leaders-warn-of-sanctions.html
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):
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