The Morning Call
3/18/14
The Market
Technical
The
indices (DJIA 16247, S&P 1858) staged a big comeback yesterday. The S&P remained within uptrends across
all timeframes: short (1777-1954), 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
was flat; breadth improved. The VIX fell
12% finishing within a short term trading range and an intermediate term downtrend
and above its 50 day moving average.
The
long Treasury fell, bouncing off the upper boundary of its short term trading
range for a third time---not a positive for the long bond crowd (did someone
say triple top?) and potentially for stocks.
It remained within an intermediate term downtrend but above its 50 day moving
average.
Gold
declined, closing within a very short term uptrend, right on the upper boundary
of its short term downtrend (a close above this trend line today will confirm a
break and re-set to a short term trading range) and within an intermediate term
downtrend.
Bottom
line: I am a bit skeptical that
yesterday’s rally was a meaningful display of bullish sentiment: volume was low
and there was a lot short covering. That
said, the news flow was upbeat and clearly the ‘buy the dip’ contingent is
alive and well. I continue to believe
that the Averages will challenge the upper boundaries of their long term
uptrends, though the recent lack of volume and the growing divergences raise my
doubts that those very strong resistance points can be breached
My intent is to use
any price strength (1) that pushes one of our stocks into its Sell Half Range,
to act accordingly or (2) as a gift allowing us to eliminate a stock that fails
to meet its quality criteria.
Corporate
insider trading at near record bearish levels (short):
Fundamental
Headlines
US
economic news was mixed: the March NY Fed manufacturing index was below
forecasts; however, the more encompassing February industrial production number
was above consensus as was capacity utilization. The data continues to fit our outlook.
Overseas,
China and Ukraine continue to monopolize the headlines:
(1) the
Chinese government allowed another company to go into bankruptcy. Perhaps more ominously, it widened the
trading band for the yuan---in effect, raising the risk level for the ‘carry
trade’ crowd. On the other hand, the
central bank executed a mini stimulus exercise relieving liquidity strains and
continuing its ‘hot hand’ in managing the current banking crisis. There is still a lot of risk in this
situation; but so far the government has been successful in containing the
damage,
(2) I have the feeling that there was a lot of
laughing, cigar smoking, whisky drinking and back slapping going on in the
Moscow salons as Russia welcomed Crimea back into its embrace. Meanwhile, back in the morally indignant west,
there were lots of huffing, puffing [‘sharply worded warnings’] and threats of marshmallow sanctions---which likely caused
more laughing, cigar smoking, whisky drinking and back slapping. The good news is that [a] Russian didn’t
invade eastern Ukraine---at least not yet and [b] Obama/Kerry/EU didn’t do
anything sufficiently antagonistic to really piss Putin off. On the other hand, the bad news is that additional
sanctions are apparently coming and we don’t know how Putin will respond.
The latest from
Ukraine:
http://www.zerohedge.com/news/2014-03-17/lady-gagas-vomit-and-state-department-haircuts-search-brain
Russia, Crimea and NATO (medium):
Bottom line: while
yesterday’s news was benign, 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. True, investors appear to have had a
collective sigh of relief that WWIII didn’t start over the weekend; but my
guess is that all the bad news out of Ukraine is not out. In addition, as I noted above, the Chinese
expansion of the yuan trading range is a direct assault on the hot money crowd.
Lastly, I wonder just how much attention
the whole Malaysian airplane disappearance diverted away from Ukraine and
China.
Finally, remember
that the FOMC meets this week and if history is any guide, the Markets are apt
to be subdued ahead of Wednesday’s press release and Yellen interview.
In a nutshell,
the economic data appears to be stabilizing, stocks remain significantly overvalued
and the risk of an exogenous event coming from any number of potential sources
continue to be high
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.
For
the bulls (but also a great example of it’s different this time’ (medium) :
Counterpoint
from John Hussman (medium):
Investing’s
number one rule (medium):
The
latest from Marc Faber on both Crimea and China (medium):
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