The Morning Call
4/10/14
The Market
Technical
The
indices (DJIA 16437, S&P 1872) responded robustly yesterday to the release
of the latest FOMC meeting minutes. The
S&P closed within uptrends across all timeframes: short (1802-1979),
intermediate (1752-2552) and long (739-1920).
In addition, it touched its 50 day moving average and bounced
strongly. The Dow remained within short
(15330-16601) and intermediate (14696-16601) term trading ranges and a long
term uptrend (5050-17400). The focus now
is on the extent of the follow through.
However, until the Dow makes a new high, the Averages will continue out
of sync in their short and intermediate term trends---which leaves the Market
trendless.
Volume
fell (a recurring pattern); breadth was mixed (surprising for such a powerful
up price day). The VIX unsurprisingly
fell, finishing within its short term trading range and intermediate term
downtrend and below its 50 day moving average.
The
long Treasury fell, closing right on the upper boundary of its short term
trading range, hinting that it might again have given a false breakout. As you might expect, I am holding off making
a confirmation call. The good news is that
it remains within its very short term uptrend and above its 50 day moving average. The bad news is that the high on the current
break is below the high from the previous break (hence, a lower high) and it
continues to trade within an intermediate term downtrend.
GLD
rose, remaining within its short and intermediate term downtrends but closed
right on its 50 day moving average.
Bottom
line: however mediocre Tuesday’s pin
action, yesterday certainly made up for it.
It was seemingly driven primarily by a very dovish message in the latest
FOMC minutes. Importantly, follow through
is key. If the promise of money for
nothing generates enough enthusiasm to overcome the numerous developing
divergences, then the Averages are most likely on their way to a challenge of
the upper boundaries of their long term uptrends. However, if the FOMC statement was simply an
excuse to relieve an oversold condition, then the directionless volatility of
late will probably continue.
Whatever the
case, given the proximity of the Averages to the upper boundaries of their long
term uptrends and the degree of stock overvaluation (as calculated by our
Model), 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.
Another
opinion on the markets I watch (short):
The
Market’s historical performance during and after Passover (short):
Fundamental
Headlines
The
economic data flow this week remains sparse.
Yesterday in the US, mortgage applications were reported down but the
more important purchase applications number was up and wholesale inventories
and sales were up. Overseas, February
German exports fell.
***overnight,
Japanese machine orders were down big, Chinese March exports fell 6.6%, imports
declined 11.3% and the Chinese government said that there was no new stimulus plans.
Ordinarily,
these stats would be of little significance.
Yesterday, they went unnoticed largely because the minutes from the
latest FOMC meeting portrayed a much more dovish Fed than currently
assumed. What is puzzling to me is that
this Fed meeting took place before Yellen’s ‘six months’ comments and the subsequent
Fed member dovish/hawkish dialogue that has to date so confused investors. In other words, this supposedly clarifying
discussion took place before the ensuing string of perplexingly contradictory
statements from various Fed members.
Given the pin
action, it seems that investors decided to ignore all the recent evidence that
doesn’t comport to [a] the most out of date policy statement and/or [b] the
original market driving thesis of QEInfinity {i.e. don’t fight the Fed}. If this is the correct interpretation, then
while it might give the stock guys a short term buzz, I think it will raise not
only the probability of the Fed bungling the transition to a normalized
monetary but also the ultimate pain that will have to be endured in that
transition process.
On the other
hand, if this was just an excuse to relieve an oversold market, then it will
soon be relegated to the ongoing litany of Fed obfuscation.
Bottom line: investors
seemed perfectly clear in their reaction to the FOMC minutes though I was
somewhat puzzled. That doesn’t mean that
investors aren’t correct or that the Fed isn’t as dovish as they believe. It is just that I would feel more comfortable
with that interpretation after a few more signs that all the intervening
confusion was just s big mistake.
If we assume
that investors are correct, then I believe that the longer term outlook for the
economy has deteriorated---in that, the Fed will be prolonging a policy that
is ineffective at best and
counterproductive at worse and that will ultimate increase the pain of
normalization.
Of course, in
the meantime, the music will keep playing and the punch bowl remain full. That
said, as I noted above, even if I was bullish right now, I would want to be
sure that the Market’s positive interpretation of Fed policy is correct before
committing to chasing prices higher.
For me, pushing
stocks to even more overvalued levels is not the right prescription for capital
preservation.
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.
Percentage
of assets in bullish funds at a high (short):
Four
reasons to have contingency plans (medium):
Excellent
article on managing risk and return (medium):
Dare
to look wrong (medium):
The
case for bonds (medium):
Greece
prices a new long bond offering below 5%.
This is about as good an example of the current irrational exuberance that
I could think of: (short):
Citi
on the current leverage in the financial system (medium):
Investing for Survival
Twenty
tips for a better life (medium):
Analysts designation in 1973. His 40 years of investment experience includes institutional portfolio management at Scudder, Stevens and Clark and Bear Stearns. Steve's goal at Investing For Survival is to help other investors build wealth and benefit from the investing lessons he learned the hard way.
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