The Morning Call
3/27/14
The Market
Technical
Yesterday
was another volatile one, with the indices (DJIA 16268, S&P 1852) closing
down. Nonetheless, the S&P finished within
uptrends across all timeframes: short (1786-1963), intermediate (1738-2538) 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
rose; breadth was terrible. The VIX
jumped 6%, taking it back above its 50 day moving average. It remains within a short term trading range
and an intermediate term downtrend.
Six
trading myths (medium):
The
long Treasury rose, busting through the upper boundary of its short term
trading range on its fifth try. The
break will be confirmed at Friday’s close if it stays above that upper boundary. If that occurs, it could be signaling either
a weaker economy or a flight to safety.
TLT remains above its 50 day moving average and within an intermediate
term downtrend.
GLD
fell again, breaking below its 50 day moving average. It finished within short and intermediate
term downtrends. No flight to safety
here but a sign of rising interest rates.
Bottom line: I noted yesterday that if the Averages failed
to overcome the March 7 high, they make establish a second lower high. Given the roller coaster ride stocks have
been on of late, I would like to see if there is any follow through before
declaring it a fait accompli. But if it
occurs, it would not be plus for stocks; and the fact that divergences continue
to grow in number and in magnitude doesn’t help.
That said, the
Market remains healthy enough that it still seems likely that the upper boundaries
of the Averages long term uptrends will 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.
In addition, the
long Treasury breaking above the upper boundary of its short term trading range
and GLD breaking its very short term uptrend could be signs that the Market
narrative may be about to change. The
problem is that (1) it is so early in the potential process, that they could
very well be false signals and (2) the two are somewhat contradictory---or
maybe I am just too stupid to see why they are consistent. In short, this may be nothing but it bears
watching.
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.
Fundamental
Headlines
Yesterday’s
US economic news was once again mixed: weekly mortgage applications fell but
the more important purchase applications were up; February durable goods orders
were up more than expected but ex transportation, they were weaker---plus the
prior month was revised down. To be sure
the durable goods orders was the more important number; but as long as we are
getting positives along with the negatives, there is no reason to question our
forecast.
Overseas,
German consumer confidence improved; and the ECB announced that it was
contemplating steps to combat the EU’s weak economic performance including
instituting negative interest rates (the banks would have to pay the ECB to
hold reserves, hence encouraging them to lend) and buying some of the banking
system’s ‘impaired’ assets. In short,
the one central bank that has been tight (until the recent moves by the Bank of
China) is now considering joining the QEInfinity crowd. Both are positive signals to the bulls. But China spoiled the show as the yuan
weakened and the Chinese stock market began to tumble again. So investors received some mixed news from
the international community.
And (a bit long):
Meanwhile,
(1) in
a sub set of the bank ‘stress’ test, regulators released their response to
individual bank plans for increasing their dividends and/or buying stocks
back. The results were mixed, i.e. some
banks got approval of big dividend increase/buyback plans, some announced small
raises and others were prevented from following through on their plans. I rate this a neutral,
(2) Obama
made some public comments in Europe about getting tougher on Russia. If He would actually do something (pledge to
reinvigorate NATO, resume negotiating the treaties with Poland and the Czech Republic)
to project American power and show Putin that He is dead serious about preventing
further expansion from Russia, I could get behind the Guy. Sure it would likely send nervous tremors
through the Markets---but it would be a long term positive. But trying to scare Putin with a lot
diplomatic bullshit accomplishes nothing because Putin doesn’t care and doesn’t
respect Obama enough to think that anything He does will materially impact
Russia. Indeed as I have voiced many
times, my concern is that Putin responds to these antics by kicking Obama in
groin, humiliating Him publicly. I
suspect that the Markets would be even less enthralled with this scenario.
Bottom line: yesterday
started out looking like a repeat of Tuesday, then our president shot His mouth
off again and investors got nervous. Those
comments would also explain the rally in Treasuries (flight to safety); but I can’t
figure out why gold didn’t follow suit.
I have heard speculation that the financial turmoil in China could be
forcing liquidation of gold stocks to meet creditor demands; but to date there
is no real proof of that. So I remain a
bit puzzled by the action of all the Markets yesterday.
What I am not
puzzled about is the current extreme level of equity overvaluation; and if one
of the many high profile risks (China’s financial system, the Japanese economy,
the standoff with Russia) should materialize, it could prompt one of those emperor’s
new clothes moments.
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
somewhat positive piece on China (medium):
The
latest from Lance Roberts (medium and today’s must read):
Counterpoint
from David Stockman (medium):
Money managers underweight
emerging markets (short):
Spreads
on distressed debt near highs (short):
Subscriber Alert
In
our quarterly review of NuSkin Enterprises (NUS-$86), it failed to meet the
financial standards for inclusion in the High Yield Portfolio. Accordingly, it will be Sold at the Market
open this morning.
Investing for Survival
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