The Morning Call
5/8/14
The Market
Technical
More
schizophrenia yesterday as the indices (DJIA 16518, S&P 1878) rallied. Intraday, the Dow touched and the S&P
penetrated its 50 day moving average, but both bounced strongly. Both finished above their late April
lows---keeping their very short term uptrends in place. On the other hand, the DJIA still hasn’t
surpassed its all-time high and the S&P continues to build a head and
shoulders pattern.
The S&P
closed within uptrends across all timeframes: short (1826-1993), intermediate
(1780-2580) and long (739-1910). The Dow
remains within short (15330-16601) and intermediate (14696-16601) term trading
ranges and a long term uptrend (5055-17405).
They continue out of sync in their short and intermediate term trends.
Volume was up
(contrary to recent trading); breadth was much improved. The VIX fell, ending within its short term
trading range, below its 50 day moving average and within its intermediate term
downtrend. Finally, while I don’t
regularly mention the NASDAQ or Russell small cap indices, they are both
getting slaughtered. Can you say
divergence?
The long Treasury
declined. It remains within a short term
uptrend, above its 50 day moving average and within an intermediate term downtrend.
GLD
continues to perform very poorly, finishing within short and intermediate term
downtrends and below the 50 day moving average.
Bottom line: the
Averages continue to yo yo within the ranges that they have traded within since
the first of the year. To be sure, they
are nearing the upper boundaries of those trading ranges; but they have been
there three other times. As confusing as
the increasing number of divergences and the recent bond market performance
are, the indices aren’t close to breaking down.
So my assumption remains that the momentum will continue to the upside.
Meanwhile, our
strategy remains to take advantage of this 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
Yesterday
was another slow day for data both here and abroad. In the US, the good news is that weekly
mortgage and purchase applications improved; the bad news is that (1) fourth
quarter nonfarm productivity and unit labor costs were awful and (2) consumer credit
expanded, driven largely by student loans and auto loans. Overseas, German factory orders fell 2.3%
while French industrial production dropped 0.7%. All this data is pretty much within the
bounds of our forecast. It would appear that
investors greeted the news similarly.
***overnight,
both Chinese imports and exports grew in April versus a decline in March; and
the ECB left interest rates unchanged.
Or
it could be that they only had eyes for Janet.
As you probably know, Yellen testified before the house (she is at the
senate today). Her major points: (1) the
economy is improving but (2) given the slack in the labor market and the
current low rate of inflation, policy will remain easy.
Two other
points: (1) she avoided committing to the six month timeframe for tightening
money [which you will recall she more or less affirmed in her first
congressional testimony and it caused all kinds of Market spasms]---a clear
sign that she is a fast learner. That
said, it doesn’t mean that the Fed won’t raise rates in six months; it is just
not going to commit to it today. (2) having
said that the Fed would remain easy, no one asked [a] isn’t tapering tightening?
[b] if not, why not end it completely today? [c] isn’t being easy destroying
the savings class? and [d] hasn’t being easy distorted price discovery within
all asset classes? The point here is
that the Fed can say anything and no one challenges it. Investors just want to have fun.
Another
excellent piece by Lance Roberts; this discussing Fed policy and the declining
yield conundrum (medium and today’s must read):
Putin
was out pulling the world’s collective chain, claiming Russia is withdrawing
troops from the eastern border of Ukraine.
Yeh, right. I have this image in
my mind of Putin sitting back with his feet up on his desk with a couple of
advisors, drinking vodka, smoking cigars and laughing their collective asses
off. ‘Hey, Ivan, what do we do today to
jerk these clowns around? I know, let’s
announce that we are withdrawing troops from the Ukrainian border. If those idiots believe us, we can short the
shit out of the rally and then we’ll invade.
We will make a bundle. Oh and how
about this? Ukraine just got a loan from
the IMF. Let’s raise the price of gas,
so the Ukrainians will owe all that money to us. Is that a good one or what? Those guys won’t know whether to shit or go blind. You want another drink?’
Latest
from Ukraine:
Bottom line: Yesterday’s
economic news was not all that great but the data is well within the parameters
of our outlook. Yellen testimony proved
that (1) she is a quick study in being honest [not] and (2) the herd has banked
its financial future on the Fed and hence, it will believe anything to
rationalize its current investment position.
Which wouldn’t be so bad if stocks weren’t overvalued. That said until investors get really worried
about something for more than a day or two, prices will likely continue to rise. The question is, is the bond market telling
us that ‘something to worry about’ is upon us.
We will know soon enough.
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.
Fundamentals
haven’t mattered for two years (medium):
The
latest from Marc Faber (medium):
Subscriber Alert
In
our most recent review of Cato’s (CATO) fundamentals, it failed to meet the
minimum criteria for inclusion in the High Yield Universe. Accordingly, it is being dropped from the
High Yield Universe and the High Yield Portfolio will Sell its position at the
Market open.
Investing for Survival
Seven
tips to make your retirement saving last:
http://www.usatoday.com/story/money/columnist/brooks/2014/05/06/retirement-401k-pension-savings/8695897/
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