The Morning Call
6/19/14
The Market
Technical
The indices (DJIA 16902, S&P
1956) got all jiggy yesterday as Yellen proclaimed the inflation numbers ‘noise’
and stocks ‘bubbleless’. They closed up,
above their 50 day moving averages and within uptrends across all time frames:
short (16045-17524, 1877-2044), intermediate (16263-20624, 1821-2621) and long
(5081-18193, 757-1974).
Volume
rose slightly; breadth was strong.
The VIX (10.61) fell
12%, finishing within very short term, short term and intermediate term downtrends
and below its 50 day moving average. It
is nearing the lower boundary of its long term trading range (9.8) which should
present a tough barrier to break.
The
long Treasury continues its schizophrenic behavior, closing back above both the
lower boundary of its short term uptrend and the upper boundary of its former intermediate
term downtrend. It is also above its 50
day moving average and within a new intermediate term trading range. I can only assume that TLT’s recent
performance reflects a bond community that is just as confused as I am. I await clarity.
GLD
was up, finishing above the upper boundary of its very short term downtrend. Our time and distance discipline now kicks
in. The break of the very short term
trend will be confirmed at the close Friday.
It remains within short and intermediate term downtrends and below its
50 day moving average.
Bottom
line: the Fed gave investors all that
they needed to remain giddy---accommodation as far as the eye can see. I assume
that means that good news will remain good news and bad news will remain good
news. Gold investors seem to be agreeing
with that assessment while the bond markets are giving off mixed signals. However, it sure seems like systems are on go
for an assault on the upper boundaries of their long term uptrends, if not the
next set of ‘round numbers’ (Dow 18,000/S&P 2000).
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.
Update
on sentiment (short):
Fundamental
Headlines
Yesterday’s
economic releases were both disappointing but secondary indicators: mortgage
and purchase applications were down and the first quarter US trade deficit was
larger than expected.
The
news, of course, was the FOMC meeting, its subsequent statement and Yellen’s
press conference. By way of summary, I am
reminded of the Seinfeld episode in which he and George make the presentation
for a new show and George says that he can summarize about the show’s plot in
one word: nothing.
The
FOMC’s economic summary was largely unchanged---economy improving, labor market
improving, housing improving, inflation within objectives (more on this
later). And its actions were just as
most expected: tapering purchases of another $10 billion a month.
It did lower its
2014 economic growth estimate as a result of the first quarter weather’
problems---which appeared to heighten investor ecstasy presumably because it
means QEInfinity just keeps on going. I
had to scratch my head on that one in as much as one of the big debates on the
Street since the release of first quarter GDP has been whether or not the US
would slip into deflation/recession. Why
anyone would expect this Fed to do anything but remain highly accommodative
after that GDP number is beyond me. So surely
this couldn’t have been a surprise.
Indeed, I was thinking that there was a chance that there would be a ‘sell
the news’ response. But then, any news
is good news.
The FOMC
statement also suggested that interest rates might rise sooner than previous estimates;
but in Yellen’s news conference, the answer to every question regarding the
timing of such an event was ‘it depends’---meaning nothing is in the works, so
feel free to continue to assume that QEInfinity remains as such.
Also in the
Yellen news conference (1) she dismissed the notion that inflation was now at
the Fed’s target by declaring the rise as ‘noise’ and (2) she said that she
sees no bubble in stock prices. In sum, I
would judge FOMC and Yellen’s comments as full of platitudes, demonstrated that
the Fed has no idea what to do [‘it depends’] and that its default position remains
to say or do nothing new that would upset the Markets---forget about what is
best for the economy.
The
complete statement (medium):
The
range of estimates from individual FOMC members (short):
Hilsenrath’s
summary (medium):
About
that ‘noise’:
Is inflation
here at last? (medium):
And:
And, inflation and
the Market (medium, a must read):
In other news,
the hope for a slowdown in the escalation of violence in Iraq that I expressed
in yesterday’s Morning Call appears to have been just that---only a hope. The latest from Iraq:
Bottom line: I
thought that the FOMC and Yellen’s performance yesterday demonstrated that it
is clueless. The one hard number going
into this meeting that should have generated some discussion was
inflation. But the FOMC chose to ignore
it and rather stated that inflation was within its guidelines; and, when asked
about it, Yellen swatted it aside as ‘noise’.
The other obvious issue was how to reconcile stock prices with its own
economic forecasts. Even if she
interprets the maze of conflicting data in a positive way, one would expect her
to say something more than ‘there is no bubble’.
So the answer to
the question I posed in yesterday’s Morning Call is that the Fed will remain
accommodative which in turn means that the Market ‘goldilocks’ scenario will
remain the consensus forecast and stocks will continue to advance.
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.
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