The Morning Call
4/22/14
The Market
Technical
Yesterday was
fairly quiet for the indices (DJIA 16449, S&P 1871) with the European
markets closed for the Easter holiday. The
S&P closed within uptrends across all timeframes: short (1813-1990),
intermediate (1765-2565) 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.
Volume declined
(part of the pattern; but not unusual because of Europe); breadth was
mixed. The VIX fell fractionally, ending
ever closer to the lower boundary of its short term trading range, below its 50
day moving average and within its intermediate term downtrend.
The long
Treasury was lower but remained within its short term uptrend, above its 50day
moving average and within an intermediate term downtrend.
GLD dropped
again, closing within short and intermediate term downtrends and below its 50
day moving average.
Bottom line: yesterday’s low volume day gave us little
insight into the technical question before us at the moment: how much of last
week’s rebound was the result of a bounce off of a very oversold condition and
how much of it was a renewed round of euphoria.
My attention is
on the last lower high of each Average (16484/1873). A move above those levels would break a very
short term downtrend; a close below would set a second lower high and keep that
very short term downtrend intact. We
should know more by the end of trading today.
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.
What happens next when
the ‘best six months (November to April) is flat (short):
Fundamental
Headlines
Yesterday’s
US economic news was mixed: the March Chicago National Activity Index was down
and the March leading economic indicators inched higher. I have no complaints.
Overseas, Japan
delivered another record stat—this one was the March trade deficit which was
the largest ever. Bear in mind that part
of the rationale for the current explosion in money supply was to weaken the
yen---which according to Keynesian economics should lead to an improved trade
balance (cheaper exports, more expensive imports). This is just another sign that the global central
bankers (except maybe the Chinese) and their QEInfinity have altered many
historical economic relationships to the detriment of all. However, not to be deterred, Abe has vowed
that the next round of QE will make everything before it look like child’s play---which
suggests something akin to Custer announcing that he had not yet begun to fight
after being surrounded at Little Big Horn.
Bottom line: our
economy continues to be the bright spot in the investment outlook. After that I struggle for something positive
to say. The above reference to Japanese
economic policy simply makes me shake my head.
If just one central bank had sent its reserves into the stratosphere and
had a positive economic result, I could understand continuing to pursue
QEInfinity. But that hasn’t occurred;
what has happened is that asset prices have been driven to historically high
valuations. I acknowledge that prices
can go even higher. But the risk (Fair
Value, as calculated by our Model)/reward (upper boundaries of the Averages
long term uptrends) is lousy.
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 Mohamed El Erian (medium):
A
good year’s stock performance doesn’t mean the next will be bad (short):
The
latest from John Hussman (medium):
Latest
from Ukraine:
Don’t
forget about China (medium):
Lance
Roberts on earnings (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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