The Morning Call
The Market
Technical
The indices
(DJIA 16915, S&P 1964) had quite a ride yesterday, selling off big in the
morning, then gradually recovering through the rest of the day. Of course, one day’s highly volatile pin
action is meaningless in the scheme of things.
What matters is the longer term trends; and on that count, things are
just fine. The Averages finished above
their 50 day moving averages and within uptrends across all time frames: short
(16168-17647, 1901-2068), intermediate (16422-20781, 1846-2646) and long
(5083-18464, 762-1999).
Volume
was flat (so no sign of panic here); breadth, not surprisingly, was negative. The VIX did spike and closed above the upper boundary
of its very short term downtrend. If it
ends today above that boundary, the trend will be broken. However, don’t forget that this is the second
such occurrence this week; so we shouldn’t assume that volatility is starting
to pick up---at least not yet.
A
dramatic decline in stock buy backs (medium):
Rejoice
in the reminders of risk (medium):
Update
on sentiment (short):
The
long Treasury moved up slightly, finishing within short and intermediate term
trading ranges. Intraday, it pushed
above the upper boundary of a very short term uptrend and a prior high but then
declined back below both levels---hence, keeping confusion alive and well over
exactly what is being discounted by the bond guys. Given that pin action, I am now watching for
a further decrease in price. If it
happens, TLT would (1) set a second lower high, keeping the very short term downtrend
intact and (2) likely break below the 50
day moving average, (3) which together would suggest the expectation for the
growth/easy money/higher inflation scenario.
GLD
continued to advance. It is now in a
very short term uptrend as well as short and intermediate term trading ranges
and is above its 50 day moving average.
Bottom line: despite
the early sell off on some pretty rough international economic news, the ‘buy
the dip’ crowd showed up right on schedule and cut the early losses by more
than 50%. True stocks were still down;
but it was on little volume; and breadth, while negative, could have been a lot
worse. Plus stocks were overbought, anyway.
Which is not to say that a long anticipated correction hasn’t
started. But it does mean that we need a
lot more follow through before that would become obvious.
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.
GLD has begun to
move higher but I am too chicken to initiate a position until I get some
clarity from bonds.
Fundamental
Headlines
Yesterday’s
US economic data was upbeat: weekly jobless claims fell and while wholesale
inventories rose less than anticipated, sales increased more. These are not what got investor attention.
Overseas, (1) a
Portuguese bank announced that it was considering bankruptcy which prompted
fears of additional insolvencies not only at other Portuguese banks but also across
the economically weak southern EU countries, (2) French, Italian and Dutch
industrial production came in well below expectations and (3) Japanese machine
orders fell 19%.
As much as (1)
was the more flashy headline, (2) and (3) have much wider global implications---they
call into question the generally accepted proposition that the rest of the world’s
economies are sufficiently healthy to make for clear sailing in the US. That
said, as I am fond of noting, one day’s data doesn’t make a trend. So we just have to watch the data flow before
starting to alter our forecasts.
There is another
troubling development: the very early earnings reports have not made great
reading. To be sure, a lousy couple of
days doesn’t mean the entire season will be a disappointment. But it something to which we must pay
attention.
Bottom line: yesterday
witnessed two of our frequently mentioned risks hitting the headlines:
(1) a
financially weak global banking system. While
the Portugal bank insolvency got the major early headlines, still it was quite
small. Plus it was already known to be
having problems---which presumably means the ECB/Portuguese banking authorities
have taken steps to ring fence this bank’s difficulties---‘presumably’ being
the operative word. I am not poo pooing
this news; I am just saying that we need more information before deciding just
how serious this situation is
(2) economically
weak sovereigns. It has been sometime
since so many poor numbers from so many countries have been reported. Unfortunately, all these countries [except
maybe the Dutch] are already on the injured reserve list. True this data and its timing could be an
outlier. But, at this point, I am more
concerned about the economic implications for the US from multiple negative economic
surprises from multiple countries than I am about one small bank’s solvency
problem that apparently already known to banking officials.
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.
No comments:
Post a Comment