The Morning Call
5/21/14
The Market
Technical
Yesterday
was not a good day for the indices (DJIA 16374, S&P 1872). First of all, gone was what has become the
usual Tuesday ramp in prices created by the Fed pouring money into bank
reserves (QEInfinity). Then, the Dow
fell below its 50 day moving average and broke the recent string of higher
lows. Nonetheless, it remains within its
short (15330-16601) and intermediate (14696-16601) term trading ranges and
within a long term uptrend (5055-17405).
The good news
was that while down, not quite as much damage was done to the S&P. It closed above its 50 day moving average,
its trend of higher lows remained intact; and it finished within uptrends
across all timeframes: short (1839-2006), intermediate (1790-2590) and long
(739-1910). They remain out of sync in their
short and intermediate term trends and their 50 day moving averages.
Volume
was even worse than Monday’s pathetic performance; breadth was lousy. The VIX rose, ending within a short term
trading range, below its 50 day moving average and within an intermediate term downtrend.
Number of days
without a correction (short):
The
long Treasury was up but remained below the upper boundary of its intermediate
term downtrend. It is still in a short
term uptrend and well above its 50 day moving average.
GLD
rose, but is still stuck in short and intermediate term downtrends and below
its 50 day moving average. In addition,
it closed very near the tip of the pennant formation I pointed out in Monday
Morning Chartology. The direction of
the move off the tip of a pennant formation historically has generally continued
for some time.
Bottom line: the
DJIA broke below that narrowing trading range (between all-times and 50 day
moving averages) I mentioned yesterday while the S&P held. This performance left the indices out of sync in
yet another measure. That said, all major
trends of both of the Averages are still intact and will remain that way until
they are not. That says to me that our
base assumption hasn’t changed: the indices will most likely challenge the
upper boundaries of their long term uptrends.
But the more divergences, the more tepid that challenge is apt to
be. Our strategy remains to do nothing
save taking advantage of the current momentum to lighten up on stocks whose
prices are pushed into its Sell Half Range or whose underlying company’s
fundamentals have deteriorated.
Latest
from Stock Traders’ Almanac (short):
Fundamental
Headlines
Only
a single economic indicator was released yesterday: weekly retail sales were
mixed.
In
addition, a number of retailers released earnings and forward guidance and ‘mixed’
would not be word that I (or apparently most other investors) would use to
describe those results. ‘Lousy’ comes to
mind. The point here is that these retailers’
assessment does not match up with current economic forecasts. Now, five or six retailers do not speak for
the entire industry. On the other hand,
these were major retailers (TJX, SPLS, DKS, URBN) hence, they are clearly
somewhat indicative. So we need to start
paying a little closer attention to the consumer for more signs of weakness.
Not
helping investors’ mood, two regional Fed chiefs spoke yesterday. One (Dudley) delivered a dovish take on Fed
policy, i.e. when, as and if the Fed raises rates, it won’t be as high as is
generally expected. That, of course,
implies a weaker economy than is presently anticipated:
The second (Plosser)
delivered a hawkish take on Fed policy, i.e. the economy is strong and the Fed
will have to raise rates quicker than the consensus believes:
Leaving
aside the issue of whether or not these guys have a clue about what Fed policy
really is or if indeed there is a Fed policy, Markets hate uncertainty and
nothing says uncertainty like two guys from the same committee making totally
opposite statements.
The
Fed releases the minutes from its last meeting today which have the potential
to settle investor schizophrenia or make it worse.
No
economic news from overseas; but the political fallout from Ukraine continued.
***overnight, the Bank of
England left interest rates unchanged but sounded more hawkish (sound
familiar?) while May retail sales were ahead of expectations; the Bank of Japan
left rates unchanged and the April trade deficit narrowed.
Bottom
line: how many times have I said that the Fed was going to bungle the
transition from easy to tight money?
Yesterday only reinforces my case.
Even if the Fed has a very specific plan and even if, all other things
being equal, that plan would serve the economy perfectly, it could still blow
it by completely confusing the Market (two Fed officials making dramatically
different statements about Fed policy on the same day?)---and remember, my
contention is that the Market not the economy is where most of the pain will be
felt.
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.
Investment
widowmakers (medium):
The
latest from John Hussman (medium):
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