The Morning Call
5/29/14
The Market
Technical
There
was little follow through by the indices (DJIA 16633, S&P 1909) yesterday;
on the other hand, they are pretty overbought.
So a day of rest is not that surprising.
They both remain above their recent 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 finish above 16601 today
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 (1853-2020),
intermediate (1800-2600) and long (748-1960).
Volume
was back to nonexistent; breadth deteriorated.
The VIX rose but closed below the lower boundary of its short term
trading range. That fulfills the time
element of our time and distance discipline and confirms the break of the short
term trading range. Hence, the trend
will re-set to down---although I feel very uneasy with this call. The renewed downtrend should be a plus for
stocks.
The
long Treasury rose, finishing within very short term and short term uptrends,
above its 50 day moving average and above the upper boundary of its
intermediate term downtrend for a second day.
If it remains above this boundary through the close Friday, the
intermediate term will re-set to a trading range.
The
latest from Ed Yardini (short and a must read):
GLD
is ugly, ugly, ugly. It is within short
and intermediate term downtrends, is building a very short term downtrend and
is below its 50 day moving average.
Bottom line: the absence of follow through notwithstanding,
I still believe that the base assumption is that momentum is up and the
Averages will challenge the upper boundaries of their long term uptrends. As I noted previously, those long term boundaries
present a formidable technical barrier and are even more so, given the many
divergences that currently exist.
While it has
always been impossible to call a top, it nevertheless has been frustrating to
me that our internal indicator was clearly way too early in its negative read and
our Sell Half Discipline has left some money on the table. That said, 55-60% of our Portfolios are still
participating on the upside, I couldn’t sleep at night if their equity exposure
was too much higher than current levels and the bond ETF’s in our new ETF
Portfolio are helping performance.
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.
The
latest from Stock Traders’ Almanac (short):
The
latest from Lance Roberts (medium):
Update
on sentiment (short):
Fundamental
Headlines
Yesterday
was slow on news. In the US, weekly mortgage
and purchase applications were both down and weekly retail sales were mixed.
Overseas,
the fighting in Ukraine continues and the players are starting to focus the
Ukrainian gas contracts expiring in June.
My bottom line remains that whatever the outcome, Putin will be happy.
And
in China, in an interview, its largest property developer says that the jig is
up (medium):
Bottom line: I continue
to believe that stocks are priced for perfection. To be sure, the economy is a bright
spot. It has recovered despite fiscal, regulatory
and monetary burdens and is a monument to the hard work and ingenuity of all
Americans save the ruling class and the banksters. But sometime, somewhere, somehow, the Fed
will be forced to unwind QEInfinity.
Whenever that occurs, there is the risk of financial dislocations. What are the probabilities? I don’t know, but they are not zero.
Three of our
major economic trading partners are experiencing economic difficulties as we
speak. Can all three muddle
through? Sure. But what is the probability that one may not?
Or two? I don’t know, but it is not
zero.
The situation in
Ukraine is not over and Russia is going to have its way. There is little doubt in my mind that the
harder the west wants to try to punish Russia, the harder it will punish
itself. What is the probability that oil
prices will rise as a consequence? I don’t
know, but it is not zero.
The point here
is that the economy is doing OK but that is more than adequately reflected in
stock prices (as computed by our Valuation Model)---even assuming that it is
able to continue to overcome the barriers being thrown in its way by our ruling
class. In other words, all other things
being equal, stocks are pushing valuation limits assuming economic perfection
occurs. The problem is that all other
things aren’t equal. If one factors in
the risk of occurrence of any one or combination of events mentioned above, the
impact it/they would have on the US economy, computes a mathematical equivalent
value and plugs that into our Model, stocks would be even more overpriced.
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.
Great
article on managing risk (medium and today’s must read):
A
deeper look at corporate capex and stock buybacks (short):
Investing for Survival
The
five top stresses in retirement and how to cope (medium):
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