Tuesday, May 13, 2014

The Morning Call---International news lousy but apparently discounted

The Morning Call

5/13/14

The Market
           
    Technical

            The indices (DJIA 16695, S&P 1896) made a Titan III shot yesterday, driven, at least in part, by short covering.  The Dow busted through the upper boundary of its short and intermediate term trading ranges.  That starts the clock on our time and distance discipline.  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 within short (15330-16601) and intermediate (14696-16601) term trading ranges and a long term uptrend (5055-17405).

            The S&P closed very near its former all-time high (1899) but did negate that developing head and shoulders formation.  It closed above its 50 day moving average and within uptrends across all timeframes: short (1828-1995), intermediate (1780-2580) and long (739-1910). 

            Volume fell (back to the old pattern); breadth was positive.  The VIX finished very near the lower boundary of its short term trading range, below the 50day moving average and within its intermediate term downtrend.  A check of our internal indicator showed that in a 144 stock Universe, 32 stocks are at or above their all-time highs, 19 are below but close enough for government work and 93 are discernibly short of their highs.

            The long Treasury was down again but remained within its short term uptrend, well above its 50 day moving average and within an intermediate term downtrend.  As an aside, the bulk of our long muni ETFs continue to make new highs.

            David Rosenberg on bonds (medium):

            While up, GLD is still a broken chart.  It finished within short and intermediate term downtrends and below its 50 day moving average.

Bottom line: yesterday’s price move was anything but muddled or schizophrenic.  The move up was decisive.  That said, volume was puny and the indices were in no way reflective of the stocks in our Universe.

I believe that this pin action is very supportive of my expectation that the Averages will challenge the upper boundaries of their long term uptrends but fail to break above them; and 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.

            This article seems quite prescient of Monday’s rally (medium and a must read):

            More from Lance Roberts (medium):

   Fundamental
    
     Headlines

            No US economic news yesterday.  However, we got a lot from overseas: the March Japanese trade surplus plunged unexpectedly (not supposed to happen in an easy money, weak currency environment) and Chinese officials indicated more market reforms were on the way (still the only adults in the room).

In addition, an ECB official implied that more was needed to help the EU economy than just lower interest rates.  I assumed, as apparently did most investors, that meant that the ECB would be joining the QE club.  The only difference is that I consider it a negative while investors used the prospect as the rocket fuel for yesterday’s rally.  I have already linked to several articles suggesting that the ECB has a much different agenda than portrayed to the public.  Here is another.  This one a research piece from Goldman, Draghi’s alma mater. (medium):

            ***overnight, Chinese industrial output and retail sales softened.  And this on EU corporate earnings:

            Finally, investors appear to have either become bored with or fully discounted conflict in Ukraine/Russian territorial expansion/the prospect for higher oil prices and their impact on global economic growth.  Whatever the explanation, I don’t think that this situation is going away; and it still holds the potential, in my opinion, for serious disruptions to the EU economy and higher energy prices.

            The latest from Ukraine:

                Ron Paul on Ukraine (medium):

Bottom line: the economy continues to plug along.  Unfortunately, the daily international news flow generally contains nothing but threats to this accomplishment.  (1) despite an easy money policy that puts our own to shame, Japanese stats continue to portray an economy that not only isn’t improving but is displaying a worsening in all the negative economic characteristics QE is supposed to be curing, (2) the Chinese are maintaining their tough approach to unwinding speculation.  That is great news for the long term, but short term it is apt to bring pain, (3) the ECB is between a rock and a hard place.  If they go all in on QE, they will likely get the same result as the Japanese, Chinese and Americans---with the short term benefit of postponing the inevitable [recession] but making it worse; if they hang tough, they get the inevitable up front.  (4) Russia will soon control eastern Ukraine.  The only questions are [a] who does Putin go after next? and [b] will the US and EU ever draw a real line in the sand?

The latest from John Hussman (medium):

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.
               
            Update on this season’s earnings and revenue ‘beat’ rates (short):

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