The Morning Call
7/23/14
The Market
Technical
Happy
days returned yesterday with the indices (DJIA 17113, S&P 1983) closing above
their 50 day moving averages and within uptrends across all time frames: short
(16202-17681, 1916-2082), intermediate (16593-20891, 1856-2656) and long
(5083-18464, 762-1999).
Volume
increased slightly; breadth improved.
The VIX fell, finishing below its 50 day moving average and within short
and intermediate term downtrends. With
the S&P a mille short hair away from a new high, a check of our internal
indicator shows that in a 147 stock Universe, 22 stocks are at or near new
highs, 27 are below but only slightly and 98 aren’t close. This is the worse reading in sometime and reinforces
the growing number of divergences.
The
long Treasury rose, closing above the upper boundary of its short term trading
range for the second day. If it finishes
above that boundary today, it will confirm the break and re-set to a short term
uptrend. This pin action is likely reflecting
rising concerns about a weakening economy brought on by that string of negative
datapoints that I have been worried about.
TLT remains above its 50 day moving average and within its intermediate
term trading range.
GLD
declined, closing above its 50 day moving average and within a short term
trading range and an intermediate term downtrend.
Bottom line: the
investors remain impervious to bad news in the sure knowledge that the music isn’t
about to stop and that they are smart enough to be the first out the door when
it does. However, the divergences continue
to grow. The small caps (higher risk) haven’t
been able to keep up with the large caps---a sign of increasing worries; and
our internal indicator just gave off the worse reading in this Market cycle. Nonetheless, until investors cease assuming
that all news is good news as long as Fed policy is easy and realize that there
is only one ‘first’ out the door, the Market bias will likely remain to the
upside.
That said, the
bad news that the prevailing euphoria has to overcome keeps piling up: violence
in Gaza/Israel and Ukraine is increasing, China has apparently forsaken its
earlier attempt at monetary rectitude and Portugal’s Espirito Santo insolvency
may be more systemic than anyone wants to acknowledge. But at this moment, only the Shadow knows
when investor psychology is going to change.
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.
What
does the small caps relatively poor performance mean? (short):
Fundamental
Headlines
Yesterday’s
US economic news was generally upbeat: weekly retail sales were mixed; June CPI
was very slightly better than expected; and June existing home sales and the
July Richmond Fed manufacturing index were above estimates. It is nice to finally have a positive day of
data; but it was insufficient to assuage my concerns about the recent trend of
lousy stats.
Bottom
line: meanwhile, they are dropping like flies in Gaza, threats of sanctions are
sailing in both directions in Ukraine, Iraq is collapsing, China has joined the
QE crowd, the Espirito Santo insolvency may not be contained and the recent
economic numbers here are not that reassuring. I am not suggesting that any of the
aforementioned will blow up in our face today.
But to ignore them when stocks are priced for perfection seems a bit
overly sanguine to me.
Chinese debt
continues to grow (short):
Espirito
Santo’s problems could be systematic?
Who’d thunk? (medium):
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.
Sell
now or keep dancing? (medium):
More
on valuation (medium):
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