The Morning Call
5/28/14
The Market
Technical
The
indices (DJIA 16675, S&P 1911) smoked again yesterday. Both hit all-time highs; both are above their
50 day moving averages. The Dow closed above
the upper boundaries of its short (15330-16601) and intermediate (14696-16601)
trading ranges. A close above 16601 on
Thursday will re-set the short term trend to up; ditto the intermediate term
trend on Friday. Its long term uptrend
is now defined by 5081-18193.
The
S&P remains within uptrends across all trends: short (1850-2017),
intermediate (1797-2597) and long (748-1960).
Volume
rose slightly; breadth was mixed. The
VIX finished below the lower boundary of its short term trading range for the
fourth day. If it remains there at the
close today, the short term trend will be re-set to down---a plus for stocks.
The
long Treasury was up, ending above the upper boundary of its intermediate term downtrend. That re-starts the clock on our time and
distance discipline. If it remains above
that upper boundary through the close on Friday, that trend will re-set to a
trading range.
GLD
fell 2%, clearly breaking to the downside from the tip of that pennant
formation that I have been following.
That suggests a larger move lower.
Support exists at the lower boundary of its intermediate term downtrend (115.5)
and the lower boundary of its long term trading range (114.4).
Bottom line: the
bulls appear to be taking control of this Market. However, that won’t be confirmed by our time
and distance discipline until the close Friday; and, of course, it will take a
much longer time for the numerous divergences, including our internal
indicator, to provide any support. That
doesn’t mean that it won’t happen; but, at the moment, it lends credence to my assumption
that the indices will most likely fail in any assault the upper boundaries of
the Averages long term uptrends. Our
strategy remains to do nothing save taking advantage of the current momentum to
lighten up on stocks whose prices are pushed into their Sell Half Range or
whose underlying company’s fundamentals have deteriorated.
Who
is buying (medium)?
And:
Stock
performance in June of midterm year (short):
For
the bulls (medium):
Fundamental
Headlines
There
was a lot of US economic and a long weekend of foreign political news to digest
yesterday. In the US, the March Case
Shiller home price index, April durable goods orders and the May Markit flash
service PMI came in better than anticipated; May consumer confidence was in
line; and both the Richmond and Dallas Fed manufacturing indices were disappointing. This kind of mixed economic news flow has
been the standard for the last month or so.
Our forecast incorporates this performance; so no need to reconsider our
outlook.
Overseas,
the pro-Western politicians won the elections in Ukraine although violence
continues; the anti EU parties won the elections in Europe which seems to have
prompted more talk of further monetary easing; meanwhile, Japan is apparently considering
tightening monetary policy; and China is taking a move from Putin’s playbook,
pressing military action against both Japan and Vietnam. I linked to news analysis of all these developments
in yesterday’s Morning Call.
The point here
is that there continues to be economic and political instability among our
major trading partners. Not that anything
tragic will come of it---our forecast is that the world will ‘muddle through’. However, it is a source of risk to our
outlook and therefore needs to be monitored.
Latest
from Ukraine:
Interview
with new head of the Bank of Japan (medium):
Chinese
nonperforming loans hit new high (short):
Bottom line: the
data continues to support our sanguine outlook for the economy, the Fed
continues to mask its uncertainty about how to navigate the transition process
to a normalized monetary policy, to the extent that the US was ever in control
of foreign policy, it is now adrift and stocks continue to discount Nirvana. It seems clear that equity prices will
continue to advance until acted upon by an outside force. Whether that force is technical or
fundamental and when it might occur, I haven’t a clue. I do know our Valuation Model, which hasn’t
failed me (except that it is usually too early) for almost 50 years, is
pointing to equity valuations in nose bleed territory.
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.
No comments:
Post a Comment