The Morning Call
Number two granddaughter is with
us for a long weekend on her spring break, so no Closing Bell tomorrow. Back on Monday.
The Market
Technical
The
indices (DJIA 16108, S&P 1846) underwent some serious whackage yesterday. Still, the S&P remained well within
uptrends across all timeframes: short (1773-1950), intermediate (1732-2532) and
long (739-1910). The Dow finished within
short (15330-16601) and intermediate (14696-16601) term trading ranges and a
long term uptrend (5050-17400). So they
continue out of sync in their short and intermediate term trends---which leaves
the Market trendless.
Volume
picked up a bit; but it remains anemic.
Breadth deteriorated. The VIX was
up 12% but it stayed within its short term trading range and intermediate term
downtrend.
And
(short):
The
long Treasury was strong, largely I assume on the basis of a growing risk off
sentiment due to the Chinese and Ukrainian situations. It finished within a very short term trading
range, a short term trading range and an intermediate term downtrend.
GLD
inched higher---not in harmony with the long bond risk off trade but likely
digesting Wednesday’s strong advance. It
remains within a very short term uptrend but a short term downtrend (it closed
right on the upper boundary of that trend) and an intermediate term downtrend.
Bottom
line: I thought it unusual that
investors finally decided to get worried about China and Ukraine yesterday
since they had some good economic news about which to be encouraged. That said, given the underlying upward price
momentum, one bad day is not enough to change my opinion that the Averages are
likely to challenge the upper boundaries of their long term uptrends---the
whole mentality of ‘buy the dips’ has likely not been dispelled by a little bad
news and a tough day or two in the Market.
True the Dow has to get back in sync with the S&P but, at the
moment, that seems like an annoying detail rather than a major obstacle.
So technically
speaking, the odds still favor movement to the upside; although my intent is to
use any price strength (1) that pushes one of our stocks into its Sell Half
Range and to act accordingly or (2) as a gift allowing us to eliminate a stock
that fails to meet its quality criteria.
Fundamental
Headlines
Yesterday’s
US economic news was mostly upbeat: jobless claims fell versus expectations for
a rise, February retail sales were better than expected and January business
inventories grew---though the bad news was that sales declined. This keeps the economic news flow for the
week in ‘mixed’ territory---which as you know, is an improvement over what we were getting a couple of weeks ago. That keeps our forecast on track which I rate
as a positive.
Overseas
the stats weren’t so good: Chinese industrial production and retail sales were
noticeably below consensus which comes on the heels of the poor trade
numbers. As you know, investors are
worried about two different but related problems---an economic slowdown and a
credit crisis. The above data clearly addresses the former but the growing
risks of bankruptcy and/or a severe reduction in lending could prompt a much
faster decline in economic activity than many expect.
Faber
on China (6 minute video):
And:
The
other economic development was the strength in the yen which is causing
heartburn amongst the carry trade.
Coupled with the much more stringent monetary policy in China which is
also a negative for the carry trade, the risks are rising for severe
financial/liquidity strains in the hedge fund/proprietary trade community.
Finally,
tensions continue to rise in Ukraine.
The referendum in Crimea occurs this Sunday. The foregone conclusion is that it will
secede from Ukraine and join the Russian Federation. The question is what are the other players
(US, EU, UN) going to do about it and what will be Putin’s response. As you know, I worry about Obama attempting
to prove He is a hard guy (and/or rescue His plummeting poll ratings) and doing
something stupid. I guess that we will
know early next week.
Latest
on Ukraine:
And in action overnight:
Finally, the official
Russian line on this conflict as presented in an editorial in the Moscow Times
(medium and a must read):
Bottom line: the
risks to our Markets haven’t changed: the Chinese financial system, the
Japanese economy, the US economy, the EU economy, Fed tapering and the
political instability in Ukraine. I am
assuming that investors finally awoke to the fact that the odds of a goldilocks
scenario are somewhere south of 100%.
That doesn’t mean that they didn’t take a Vicodin last night and will
return all bulled up today.
However, whatever
their mindset is or will be going into the weekend, it doesn’t change by one
iota the fact that equities are significantly overvalued on a relatively positive
economic scenario. So nothing could
happen and the risk to the downside (20-30%) would still be there waiting for
some other event to slap investors up the side of the head. In other words, why would I want to buy
stocks in that environment?
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.
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