The Morning Call
5/14/14
Just a reminder that I will be
out of the office until next Monday.
The Market
Technical
The
indices (DJIA 16715, S&P 1897) continued their advance albeit at a more
moderate pace. The Dow closed above the
upper boundary of its short and intermediate term trading ranges for the second
day. If it remains above 16601 through
the close Friday, the DJIA will re-set to short and intermediate term
uptrends. It will also be back in sync
with the S&P on those trends. At the
moment, it remains above its 50 day moving average and while testing its short
(15330-16601) and intermediate (14696-16601) term trading ranges and within a
long term uptrend (5055-17405).
The
S&P again finished very near its former all-time high (1899) though it tried
to surmount it and couldn’t. It continues to trade above its 50 day moving
average and within uptrends across all timeframes: short (1832-1999),
intermediate (1784-2584) and long (739-1910).
The
small cap stocks took it on the chin, once again diverging from the major
Averages.
Volume
was flat (and low); breadth was mixed with the flow of funds indicator
continuing to do very well. The VIX
inched lower, ending near the lower boundary of its short term trading range,
below its 50 day moving average and within an intermediate term downtrend.
The
long Treasury rose, closing within a short term uptrend, above its 50 day moving
average and within an intermediate term downtrend. The entire yield curve responded positively
(higher prices) to a poor April retail sales number---suggesting that bond
investors believe that the economy is not as strong as consensus.
Yet
another theory on why bond prices are rising (short):
GLD
continued its losing ways, ending within short and intermediate term downtrends
and below its 50 day moving average.
Bottom line: while
the major indices continue to either surpass (DJIA) or toy with (S&P) their
all-time highs, the small cap stocks resumed their move to the downside, bonds
ticked higher, presumably on a poor economic number and volume remained
pathetic. In sum, a whole lot less
decisive pin action than on Monday and quite similar to price pattern of the
last couple of weeks.
This probably
means that the Averages will struggle to but ultimately succeed in challenging
the upper boundaries of their long term uptrends and then fail to break above
them. Hence 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.
Fundamental
Headlines
Several
secondary US economic indicators were released yesterday and were basically neutral:
the April small business optimism index rose slightly, weekly retail sales were
mixed and March business inventories came in a bit less than expected but sales
were up strong. However, the big number
was April retail sales and they were very disappointing. This doesn’t disturb our forecast but it puts
a fine point on the fact that the economic growth rate is sluggish and not
improving.
Posted
with no comment (short):
Overseas,
China reported soft industrial output and retail sales. In addition, their property market is not
getting any better (medium):
In
an all too funny official statement, the Bank of Japan appears to be setting up
the market for more disappointing economic data by blaming….drumroll, please…….the
weather. It couldn’t possibly be that
tax increase.
The
ECB is already crawfishing on easier monetary policy.
And
this from the German finance minister (short):
Ukraine
continues to deteriorate. Fighting has
left several dead, there was an assassination attempt on an eastern pro-Russian
politician and Putin has responded to sanctions---no rocket engines for you, no
dollars for me!
http://www.zerohedge.com/news/2014-05-13/russia-retaliates-blocks-gps-bans-us-use-its-rocket-engines
Bottom line: the
economy continues to plug along. However,
stocks are valuing the resulting corporate earnings stream near historic highs
(at least as calculated by our Valuation Model). If the
economic/political environment were benign, I could see equities at least
holding current price levels. However, it
is fraught with headwinds. The GOP is
not offering a free market alternative to the dems. The Fed is trying to extricate itself from a
horrendous monetary policy and will likely be no more successful in this effort
than its predecessors. The Japanese, Chinese and EU central banks are all faced
with a sundry of serious problems resulting from monetary mismanagement. And
Putin continues to thumb his nose at the west as he moves to regain some of the
former hegemony of the Soviet Union. Any one of these problems could cause
heartburn were conditions get out of control.
God forbid that two or more degenerate.
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
‘don’t fight the Fed’ bull case (medium):
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