The Morning Call
7/2/14
The Market
Technical
Everything was
coming up roses yesterday as the indices (DJIA 16956, S&P 1973) moved up to
within smelling distance of the upper boundaries of their long term uptrends. They remain above their 50 day moving
averages and within uptrends across all time frames: short (16145-17624,
1895-2062), intermediate (16416-20781, 1835-2635) and long (5081-18193,
757-1974).
Volume was down;
breadth was up slightly. The VIX fell,
finishing below its 50 day moving average and within very short, short term and
intermediate term downtrends.
The long
Treasury plunged, closing back below the lower boundary of its short term
uptrend. That re-starts the clock on our
time and distance discipline. It also
means that TLT just made a lower high.
While it is still above its 50 day moving average, the chart remains
confusing and with yesterday’s pin action has become a bit more negative.
GLD was off
fractionally, though it remained above last week’s trading range and its 50 day
moving average. It is in a short term
trading range and an intermediate term downtrend.
Bottom line: the
Averages are on the doorstep of the upper boundaries of their long term
uptrends; and nothing appears to stand in the way of more upside. The question now is, will they be able to
confirm the break above those boundaries? Further, can they take out those
‘round’ numbers (17000/2000)? Momentum
says yes; multiple divergences says no.
The bond and gold markets are still struggling to confirm the scenario
that has equity investors so pleased---better economic growth but with an easy
Fed.
If the bond and
gold markets confirm the aforementioned outlook, our ETF Portfolio will likely
lighten up on its bond position and all Portfolios will start adding to
GLD. I would much rather own GLD which
is near a four year price low than stocks that are near or at all time highs.
As far as stocks are concerned, 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.
Fundamental
Headlines
Yesterday’
US economic news was indecisive: the June Markit PMI was slightly better than
expected, weekly retail sales were mixed, the June ISM manufacturing index was
a little below estimates and May construction spending was well below
forecasts. Nothing noteworthy.
Overseas,
the economic news was also balanced: Chinese PMI came in higher than anticipated,
Japanese PMI lower.
Bottom line:
with the indices approaching long term trend highs as well as psychologically
big ‘round’ numbers, the Market itself is the headline. Until we get some major unexpected
economic/political/military event, this scenario is not apt to change. What
could that event be? I don’t know; but
at the moment, I believe that it more likely to be negative than positive. How much longer can this advance last? I don’t
know; but statistically this market is very mature. How far can it go? I don’t that either; but
how much further can it go when it is already at all-time valuation highs.
As I noted
above, if equity investors euphoria about growth and easy money are confirmed
by the bond and gold markets, our Portfolios will likely add GLD which I think
has a much better risk/reward ratio than stocks.
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.
Update
on Market valuation (short):
David
Rosenberg on the Fed (medium):
Optimism
bias (short):
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