The Morning Call
7/24/14
The Market
Technical
The
indices (DJIA 17086, S&P 1987) turned in a mixed performance (S&P up,
Dow down) yesterday but both remained above their 50 day moving averages and within
uptrends across all time frames: short (16232-17711, 1916-2082), intermediate
(16593-20891, 1858-2658) and long (5083-18464, 762-1999).
Volume
fell; breadth was off. The VIX declined,
finishing below its 50 day moving average and within short and intermediate
term downtrends. Despite breaking out of
a very short term downtrend, this indicator is still reflecting complacency and
the likelihood of rising stock prices.
The
long Treasury declined slightly but closed above the upper boundary of its
short term trading range for the third day, thereby confirming the break and a
re-set of the short term trend to up. It
is above its 50 day moving average and within an intermediate term trading
range.
GLD
fell, finishing above its 50 day moving average and within a short term trading
and an intermediate term downtrend.
Bottom line: individual
earnings reports were the focus of investors’ attention yesterday, with some good,
some bad---witness the contrary albeit low volatility performance of the Dow
and S&P. The internal divergences remain,
the macroeconomic/geopolitical problems remain but so does the promise of the
Fed to have the Market’s back. At this
moment, it is clearly the latter that carries the greatest weight with the investors. Hence, my expectation that the Averages will
challenge the upper boundaries of their long term uptrends hasn’t changed.
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.
More
on divergences (medium):
A
breakout in the Chinese indices? (short):
Fundamental
Headlines
There
was only one secondary US indicator reported yesterday---weekly mortgage and
purchase applications which were up slightly.
This adds little to the overall economic picture.
Overseas,
there were no economic releases though:
(1) UK
regulators are trying to speed up the settlement in the FX price rigging trading
scandal---yet another example of why I worry about the loss of confidence in
global financial institutions.
(2) a
Chinese bank official warned of further weakness in that country’s real estate
market.
(3) Putin
recalled the Duma to consider a new plan for Ukraine. No details were given; but I seriously doubt
that it will withdraw support from the eastern Ukrainian rebels.
I also
seriously doubt that Putin is worried about a new round of sanctions being
proposed by Obama, especially since the EU has been so reticent to agree.
(4) efforts
continued to negotiate a cease fire in Gaza; although I don’t know how it can
get done when one side is controlled by idiots.
Bottom line: as I
noted above, it’s earnings season; indeed, its busiest week. That seems to have been investors’ focus
yesterday---as it should be. Earnings
are important. They are one of the
obvious determinants of valuation, at least in the long run. And so far this
quarter they are coming in better than expected. My complaint is that for current valuations
to hold, earnings have to continue to grow into the foreseeable future at a
pace that is historically unsustainable for an extended period of time and/or
valuation measures (P/E’s) have to continue to expand.
Unfortunately, profits were not the only thing
reported yesterday. And therein lies the
rub; because very little of that was good.
True none of the long list of potential risks may occur today. But stocks aren’t priced on today; they are
priced on the future. And anyone of those
risks, if it materializes, could alter current valuations---some significantly.
The point being
that an investor ignores assets priced to perfection and those risks that could
destroy that ideal scenario at his own risk.
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.
A
close look at Buffett’s investment strategy (medium):
The
SEC votes to impose money market fund redemption ‘gates’ (medium and today’s
must read):
Five
reasons you can’t count on the Market not crashing (medium):
High
yield bonds extremely overvalued (short):
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