The Morning Call
7/10/14
The Market
Technical
On the back of
more Fed equivocation, the indices (DJIA 16985, S&P 1972), not
surprisingly, bounced yesterday---finishing above their 50 day moving averages
and within uptrends across all time frames: short (16168-17647, 1901-2068),
intermediate (16422-20781, 1843-2643) and long (5083-18464, 762-1999).
Volume fell;
breadth improved. The VIX fell back
below the upper boundary of its very short term downtrend, thereby negating
Tuesday’s break. It remains below its 50
day moving average and within short and intermediate term downtrends.
The
only net buyer left (short):
The
signs of market exuberance (medium):
The
long Treasury was up again. It is still
within short and intermediate term trading ranges and is trading between the
upper boundary of a very short term downtrend (on the upside) and its 50 day moving
average on the downside. A violation of
one of these resistance/support levels could provide a clue on direction. It remains a confusing chart and, at the
moment, is muddying the economic scenario (growth, easy Fed, rising inflation)
of the stock crowd.
GLD
rose. It is once again outside the
trading range from two weeks ago and is nearing its prior high. A move above this level would be a big
plus. It remains above its 50 day moving
average and within a short term trading range and an intermediate term
downtrend.
The
seasonal trading pattern for gold (medium):
Bottom line: the
old pattern (buy the dips) remains in force, notwithstanding a growing number
of divergences and the uncertainty resulting from bond and gold investors more
equivocal posture.
My most likely
scenario for the Averages continues to be a challenge of the upper boundaries
of their long term uptrends---and then failure to hold. 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.
At the moment,
GLD seems to want to go higher but can’t commit; while bonds continue their
recent schizophrenic behavior. Until I
can make sense of what these Market are discounting, I am holding off buying
gold.
Fundamental
Headlines
The
only US economic indicator released yesterday was weekly mortgage and purchase
applications which were both up.
Overseas, the Chinese CPI plunged---not a great sign of economic vigor.
Neither
seemed to matter a lot as all eyes were on the publication of the latest FOMC
minutes; and if the expectations were for pabulum, well, investors weren’t
disappointed.
The
highlights of the FOMC minutes:
(1) tapering
would continue and likely end in October,
(2) investors
may be getting to complacent,
(3) the
Fed has no clue what ‘normalization’ means or when it might start.
The bottom
line being that the Fed is in no hurry to do anything even if it knew what to
do.
Here is a more
detailed synopsis:
And Fed
mouthpiece Hilsenrath’s take (medium):
***overnight (1)
a Portuguese bank announced that it was considering bankruptcy; this was
followed by big declines in the stocks of large related bank shareholders and then
spread through all EU exchanges, (2) French, Italian and Dutch industrial
production came in well below expectations, (3) Japanese machine orders fell
19%.
Bottom line: it
certainly appears that the Fed is unwilling to lead the market to tighter money
(‘normalization’ another new euphemism in the Fed lexicon). I assume that means that the bond market is
going to have to decide for itself that it will no longer accept US debt
obligations at ridiculously low yields. I have no clue when that happens; and judging
by the recent pin action in the bond market, fixed income investors don’t seem
rushed to do so. My guess is that until
they are, there will remain a bid under stock prices. I would note that this is an historical
pattern of the Fed (following the market, rather than leading) and explains to
a large extent why it has always botched the transition from easy to tight
money. Those who don’t learn from
history are doomed to repeat it.
That doesn’t
mean that we are in for a moon shot. It
just means that as long as stocks remain a viable yield alternative to bond,
there is unlikely to be any ‘reversion to mean’ in equities.
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 reading from the Macro Markets Index (short):
Ignoring
history (medium):
Does
this sound familiar? (short):
Dealing
with hot markets (medium):
Median
LBO multiple at record high (medium):
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