Tuesday, April 29, 2014

The Morning Call--The Tuesday ramp

The Morning Call

4/29/14

The Market
           
    Technical

The indices (DJIA 16448, S&P 1869) yo yoed yesterday, first up big, then down, then closing up.  Both finished above their 50 day moving averages but did nothing to negate the developing head and shoulders formations.  The S&P closed within uptrends across all timeframes: short (1819-1996), intermediate (1773-2573) 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).  They continue out of sync in their short and intermediate term trends. 

In a surprise break from the recent pattern, volume was up; breadth improved only slightly.  The VIX fell, remaining within a short term trading range and an intermediate term downtrend and below its 50 day moving average.

The long Treasury declined but continued to trade well within its short term uptrend, above its 50 day moving average but within an intermediate term downtrend.

GLD dropped, continuing its dreadful performance of late.  It closed within short and intermediate term downtrends and below its 50 day moving average.

Bottom line: though Monday’s pin action had a touch of schizophrenia, the Averages reversed Friday’s rough performance.  That bolstered the notion of a consolidation following the rapid eight day run up in prices.  While the developing head and shoulders pattern was not negated, a strong near term follow through would. 

I continue to believe that the best bet is for the indices to challenge the upper boundaries of their long term uptrends, but fail.  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.

            Historical stock performance in midterm years (short):

            The Fed and Tuesday’s (medium):

            Update on sentiment (short):

    Fundamental
    
     Headlines

            Yesterday, the economic news was a positive both here and abroad: March pending home sales were well above expectations, ditto the April Dallas Fed manufacturing index; finally, in contrast to what has been a drumbeat of disappointing stats, Japanese March retail sales were very strong.

            ***overnight, the UK reported first quarter GDP up but short of expectations, April German CPI fell and Spanish unemployment rose (it is already at 25%+).

            On the other hand, there is our banking system which collectively continues to prove that it is unworthy of our confidence.  The latest example is Bankamerica suddenly having to revise its recent positive financial report (medium):

            Ukraine is being pointed to as the source of Friday’s (Russia to invade Ukraine over the weekend) and yesterday’s (it didn’t…yet) pin action.  I am sure Putin is having a grand ol’ time yanking all of our collective chains; and I am sure that it will continue.  How it ends, only The Shadow knows.  However, I maintain the opinion that Putin will be happy with the outcome---which likely means that the Ukrainians won’t.

            The latest from Ukraine:

            Don’t forget about China.  The government continues to enact policies to shut down speculation (short):
                       

Bottom line: (1) the economy continues to advance albeit sluggishly, (2) we will hopefully know more about Fed policy come Wednesday [FOMC meeting], though, given its recent communications policy, I am not going to bet on it, (3) I am in the midst of watching the first season of House of Cards and we should be so lucky to have a ruling class that intelligent, (4) internationally, things are a mess with the Chinese economy and the Ukraine at the top of the list of potential problems.

Meanwhile, investors have remained unconcerned; and until they are, stocks are likely to go higher—despite rich valuations (as calculated by our Model) and an increasing number of technical divergences.  So as I noted above, the most probable Market scenario appears to be a move to the upper boundaries of the Averages long term uptrends.

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.
               
            The latest from John Mauldin (long but always a good read):

            The latest from John Hussman (medium):

            Why it is hard to win in investing (medium):

            Deutsche bank’s derivative exposure (medium):
           
            Consumer spending and recession (medium):

            US corporate earnings versus the rest of the world (short):

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