The Morning Call
4/15/14
The Market
Technical
Yesterday, the
indices (DJIA 16173, S&P 1830) had a roller coaster day, but ended nicely
to the upside. The S&P closed within
uptrends across all timeframes: short (1807-1984), intermediate (1756-2556) 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; though they
are both below their 50 day moving averages. The Market remains trendless.
Volume fell
(pattern persists); breadth improved.
The VIX declined, leaving it within a short term trading range and an
intermediate term downtrend and above its 50 day moving average.
The long
Treasury dropped, finishing within a short term uptrend and intermediate term
downtrend and above its 50day moving average.
GLD was up,
continuing to trade within short and intermediate term downtrends but above its
50 day moving average.
Bottom line: the
Averages closed last Friday in a fairly oversold condition Furthermore, the strategy
that has worked best for investors in the last couple of years has been to ‘buy
the dips’. So a bounce yesterday was not
that surprising. The key now is follow
through. To be sure, as time has
progressed, the hurdles to new highs have grown; but I continue to think that
the safe assumption is that the indices will challenge the upper boundaries of
their long term uptrends and will remain so until the S&P starts breaking
support levels.
That said, as I noted
in last weekend’s Closing Bell ‘with the current magnitude of stock
overvaluation and the multiple sources of potential risk (Japanese economy, EU
economy, Chinese financial markets, Ukraine, Fed policy), there is a reasonable
argument for a change in paradigm. That
may or may not be the case this time; but it is something to be paying
attention to.
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.
A
chart of the presidential cycle (short):
Trading Easter week
(short):
Fundamental
Headlines
We
received two upbeat US economic stats yesterday: March retails came in above
forecast and the February results were revised up; these numbers are a big step
towards putting the recession concerns to rest.
February business inventories were up though not quite as much as
expected; however, sales were stronger than consensus.
Overseas,
there was some dovish mewing out of the ECB.
On the other hand, the situation in Ukraine keeps getting worse; though
clearly, investors didn’t seem too worried yesterday.
***overnight,
Chinese new car sales slowed and the Bank of China tightened money supply; UK
retail sales fell 0.3%.
Bottom line: those
retail sales were very encouraging; barring some really awful news later this
week, I will likely turn off the flashing yellow light. That shouldn’t come as a surprise, since I have
been hinting at it for a couple of weeks.
It is also very welcome in that our economy, sluggish though it may be,
is still the major positive in our Valuation Model.
Gosh only knows
that no one in our ruling class is doing much to help. Ditto the European and Japanese
mandarins. Putin clearly understands
what is in his (and Russia’s) best interest; but that is not such good news for
Ukraine or Europe and perhaps the US, especially if Obama tries to do something
that is really threatening.
The only group
that seems focused on trying to do the right thing for its economy and citizens
for the long term is the Chinese----irony of ironies; and even they may precipitate
some short term pain.
Unfortunately,
the improving US economy is well reflected in our Valuation Model at much lower
price levels---which, in my opinion, means 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.
For
the bulls (short):
The
latest from Jeff Gundlach (medium):
The
latest from John Hussman (medium):
First
quarter earnings and revenue estimates declining (short):
http://www.zerohedge.com/news/2014-04-14/flashing-red-warning-q1-earnings-growth-plunges-lowest-2012
GMO
seven year rate of return forecast (short):
Are
low yields bullish for P/E’s? (short):
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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