The Morning Call
5/6/14
The Market
Technical
The
indices (DJIA 16520, S&P 1884) opened down big yesterday, then rallied
through the day to close in the plus column.
The good news about this pin action is both Averages made a third higher
low and remained above their 50 day moving averages; the bad news is that the
Dow still has to overcome a triple top and the S&P hasn’t negated its
developing head and shoulders pattern.
The S&P
closed within uptrends across all timeframes: short (1824-1951), intermediate
(1778-2578) 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 fell;
breadth was mixed. The VIX was up but
remains within its short term trading range, below its 50 day moving average
and within its intermediate term downtrend.
More
divergences:
Expect
more volatility (medium):
The
long Treasury was down, but continues to trade within a short term uptrend,
above its 50 day moving average and within an intermediate term downtrend. I have spent a lot of space in this note noodling
over the recent unusual performance of bonds.
Here is a reasonable thesis:
Latest
from Bill Gross:
http://www.bloomberg.com/news/2014-05-02/gross-says-no-asset-bubbles-given-2-fed-long-term-rate.html
GLD
traded up but still ended within short and intermediate term downtrends and
below its 50 day moving average.
Bottom line: yesterday’s
intraday recovery was noteworthy; on the other hand, neither index has overcome
its all-time high and the S&P remains in a developing head and shoulders
pattern. That notwithstanding, the technicals
still look like the Averages will challenge the upper boundaries of their long
term trading ranges---with the caveat that the long bond is not signaling something
that the stock guys (me included) at too stupid to see.
Meanwhile, we
have a trendless Market; so there is really not much to do save using any price
strength that pushes one of our stocks into its Sell Half Range and to act
accordingly.
Market
cycle analysis looks bearish (medium):
Fundamental
Headlines
Yesterday’s
US economic data was tilted to the plus side:
both the April Markit service PMI and the ISM nonmanufacturing index
came in positive; though the Markit PMI was slightly below estimates while the
ISM index was above consensus.
Overseas,
the numbers once again weren’t nearly as good: the April Chinese PMI was
negative, below expectations but not as bad as the March reading; Chinese home
sales plunged; the European Commission raised its economic growth outlook but
lowered its inflation expectations (dream on); JP Morgan lowered its global PMI
forecast.
And, of course,
Ukraine continues in turmoil:
***overnight, April EU
services PMI showed improvement from March; and this---according to the Hang
Seng China Enterprises Index, first quarter revenue of Chinese firms fell 7%.
Bottom line: in
short, the US economy continues to move along with no help from our main
trading partners. Yesterday’s pin action
suggested that investors are tiring of Ukraine as an issue. If the only thing at stake was whose flag
flies over the eastern part of the country, I would probably agree. The one thing that bothers me is the capacity
of the current administration to fuck up a foreign crisis (Libya, Syria,
Benghazi, Afghanistan). That doesn’t
mean that they will. I just don’t think
that the risk of an act of stupidity that could lead to our public humiliation
and/or higher oil prices is as low as the rest of the Market seems to
think.
Furthermore, the
recent performance of the bond market is potentially I think a signal that
negative developments could be in the offing.
Topping it all off, stocks are, in my opinion, priced for a Goldilocks environment. I know Goldilocks; and this is no Goldilocks
environment.
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
latest from John Hussman (medium):
Your
home as an investment (short):
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