The Morning Call
The Market
Technical
The indices
(DJIA 16501, S&P 1878) continued to rest yesterday. Technically speaking, when stocks work off an
overbought condition by going sideways versus correcting to the downside, that
is a positive sign for the bulls. The
S&P closed within uptrends across all timeframes: short (1816-1993),
intermediate (1770-2570) and long (739-1910).
The Dow remains within short (15330-16601) and intermediate
(14696-16601) term trading ranges and a long term uptrend (5055-17405). While they continue out of sync in their
short and intermediate term trends, the Dow remains close to the upper boundary
of its short/intermediate term trading range (s).
Volume was flat,
breadth mixed. The VIX rose slightly,
remaining within its short term trading range, its intermediate term downtrend
and below its 50 day moving average.
The long
Treasury was up again, finishing within its short term uptrend, above its 50
day moving average and within an intermediate term downtrend.
GLD managed an
up day, but closed within short and intermediate term downtrends and below its
50day moving average.
Bottom
line: the Averages are working off their
overbought position exactly like the bulls would have it---even as the news
flow remains unsettling. If this pattern
holds, I think it increases the odds of a move to challenge the upper boundaries
of the indices’ long term uptrends (17405/1910); though as I have noted, they
must still move through their former all-time highs (16601/1898). However, as I
have also noted, if the current Market divergences keep growing, I think that the
indices will be unable to break above those levels.
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.
Interesting
(short):
Fundamental
Headlines
Yesterday’s
US economic news was…….you guessed it…. mixed: weekly jobless claims were a
disappointment, the April Kansas City Fed manufacturing index was slightly less
than anticipated and March durable goods were much stronger than expected. Do I
need to give my conclusion?
Overseas:
(1) the
ECB promised asset purchases if necessary.
Because of its recent monetary austerity, I opined that it has room to do
so assuming that it doesn’t follow the Bernanke/Abe model. That said, the EU has more problems than just
a stagnant economy. Its grossly indebted
sovereigns and overleveraged banks pose as great if not greater risks as a zero
growth economy. Asset purchases will do
nothing to lessen those difficulties,
(2) the
Chinese yuan continues to fall; and that is a big problem for the carry trade:
http://www.zerohedge.com/news/2014-04-24/real-pain-about-begin-chinese-currency-slumps-19-month-lows
(3) and fighting broke out in Ukraine:
Bottom line: in
the last eight trading sessions, investors are saying that they are either not
concerned about a confusing Fed policy, a fiscal policy that is more a function
of the election than the economy, turmoil in the Japanese, Chinese and European
economies and the potential for further Russian aggression in Ukraine or they
are all priced in.
As I said
yesterday, it is pointless to argue with either notion. Price is reality and prices are up. However, our Valuation Model as it is applied
to individual stocks is giving us precious few choices of stocks to buy and a
host of stocks that are near or within their Sell Half Ranges---and those
calculations reflect little of the aforementioned risks. In other words, it doesn’t matter if
investors are ignoring or pricing in those risks, individually stocks are
overvalued in either case. Hence, by
extension, stocks in aggregate (the Market) faces a terrible risk (Fair Value,
as calculated by our Model)/reward (upper boundaries of the Averages long term
uptrends) equation.
My
bottom line is that for current prices to hold, it requires a perfect outcome
to the numerous problems facing the US and global economies AND investor
willingness to accept the compression of future potential returns into current
prices.
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.
Dividends
and valuation (short):
The
latest from Doug Kass (medium):
http://www.thestreet.com/story/12679960/1/kass-money-doesnt-talk-it-swears.html
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