Wednesday, June 4, 2014

The Morning Call--Are bonds changing their tune?

The Morning Call

6/4/13

Just a reminder that I have a cataract operation on my second eye tomorrow.  I don’t have a surgery time yet.  If it is late, then there will be a Morning Call.  If early, no.  There will be no Morning Call on Friday and no Closing Bell.

The Market
           
    Technical

            The indices (DJIA 16772, S&P 1924) rested yesterday, closing above their 50 day moving averages and in uptrends across all time frames: short (16021-17500, 1859-2026), intermediate (16162-20519, 1808-2608) and long (5081-18193, 748-1960). 

            Volume was up, but only marginally; breadth was poor.  The VIX rose but remains within short and intermediate term downtrends and below its 50 day moving average.

            The long Treasury fell again, this time closing below the lower boundary of its very short term uptrend.  It remained within its short term uptrend and intermediate term trading range and above its 50 day moving average.  It is too early to be questioning whether the combination of a retreat back below the upper boundary of its former intermediate downtrend (remember it negated that downtrend and re-set to a trading range) plus the potential break of the short term uptrend (1) are setting up the break of the intermediate term downtrend as a head fake and (2) constitute the beginning of a major trend reversal.  If so, it would make a lot sense technically, in that, it would put the bond and stocks markets back in sync more or less.  I am not saying that this is occurring; I am just saying it is something to watch.

            GLD finally got an uptick.  Nevertheless, it remains within very short term, short term and intermediate term downtrends and below its 50 day moving average.

Bottom line:  the Averages rested yesterday; but that was to be expected in that they are pretty overbought.  Certainly, there was nothing to suggest that our base assumption isn’t intact: the indices will assault the upper boundaries of their long term uptrends but fail to break above them.  If anything, the rather abrupt turnaround in the bond market could be hinting at a stronger economy and, thereby, provide support for at least the initial part of that forecast (i.e. the challenge of the 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.

    Fundamental
    
     Headlines
            Yesterday, the US economic data was fairly upbeat: weekly retail sales were up while April factory orders and May light vehicle sales were better than anticipated.  It is nice to have a day like this in which solid improvement is evident in a couple of major indicators (factory orders and vehicle sales).  Clearly, it leaves our outlook intact and takes some of the sting out of last week’s data.

            Little else of note occurred.  There were several relevant articles on issues dealing with some of my concerns:
           
            Hilsenrath on the Fed’s anger (incompetency) (medium and a must read):

            More perspective on the recent EU elections (medium):

            Latest from Ukraine:

                        And finally, what is fast becoming the most talked about event: Bergdahl’s return.

Bottom line: all is quiet on the western front.  While the potential exists that any one of the multiple worries I stew over every day could blow up in our collective faces, no one seems concerned.  This wouldn’t be all that bad if stocks were at least near Fair Value (S&P 1455).  But the combination of generously valued equities and problems that could force a significant revision to Street earnings estimates is like going to bed with a stick of dynamite stuck up my ass.  Nothing may happen; but it sure makes me nervous. 

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.

            For the bulls: there is no bubble (medium):

            And this perhaps more analytical approach (medium):

            On the other hand, the increasing willingness to accept decreasing quality in the search for yield (medium):

            Wednesday morning humor (short):
            http://www.ritholtz.com/blog/2014/06/why-are-treasury-yields-falling/

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