The Morning Call
7/3/14
The Market
Technical
The indices
(DJIA 16976, S&P 1974) inched higher yesterday, getting ever closer to 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
declined again---though to be fair, we are approaching a big holiday weekend;
plus most investors were awaiting today’s nonfarm payrolls number. Breadth was mixed. The VIX fell finishing within very short
term, short term and intermediate term downtrends and below its 50 day moving
average.
Update
on sentiment (short):
The
long Treasury (111.08) took in the snoot for a second day. It closed below the lower boundary of its
short term uptrend, also for a second day.
If it ends there today, the short term trend will re-set to a trading
range. It also broke below the 50 day moving
average. I noted in a prior Morning Call
that when TLT turned down, it established a lower high. If it moves below the 110.5 level, it will create
a lower low and re-set the short term trend to down.
GLD
was unchanged, thereby remaining above its recent trading range and its 50 day
moving average. It is now in a short
term trading range and an intermediate term downtrend.
Bottom line:
after a quiet day, the Averages remain on the doorstep of the upper boundaries
of their long term uptrends; and so far, 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.
We got a bit
more clarity from the bond and gold markets.
The gold market continues to confirm the stronger economy, higher interest
rate/inflation scenario; while the bond market inched closer to supporting it. As I mentioned above, if TLT breaks the
110.5, it will re-set the long bond in a short term downtrend which I will take
as a decent sign that investors outlooks are shifting.
If the bond and
gold markets confirm the improving economic growth/easy Fed 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’s
US economic news included some bad news.
Weekly mortgage and purchase applications and May factory orders both
down. However, the stat that got
investor attention was a strong June ADP private payroll report. While I think that improving employment is a
plus, I would point out that (1) the ADP number always plays second fiddle to
the nonfarm payroll data. That comes out
today; and if it is at odds with the ADP figure, then that stat will be quickly
forgotten, and (2) employment is a lagging indicator. So it says little about the near term course
of the economy.
***overnight,
the ECB left interest rates unchanged and continued to hold off on its own
version of QEInfinity. Chinese and
Japanese service PMI’s fall. Japanese
wages decline the most since Lehman Bros.
The
highlight of the day was a speech made by Yellen to the IMF, followed by an interview
with Christine LaGuard. In those
presentations, Yellen repeated the familiar Fed themes of ‘no bubbles’ and ‘steady
as she goes’ monetary policy. However,
her most noteworthy comment (I thought) was that monetary policy is not an
effective tool in controlling financial stability---this after two rounds of
massive Fed easing (2000 & 2007) that led to extreme financial instability
and, dare I mention, its current historically unprecedented expansion of
monetary policy.
No, her
preferred method of insuring financial stability is ‘macroprudential’ policies
(increasing bank capital requirement, tighter loan policies, etc.). Macroprudential being the kind of smug, we-know-best
because we are all knowing and all powerful, faux intellectual bullshit term that
clueless, elitist ruling class bureaucrats use to dazzle the unwashed masses. Policies which, dare I also mention, the Fed completely
and utterly failed to follow in both of the two aforementioned financial crises.
Bottom line:
with the indices approaching long term trend highs as well as psychologically
big ‘round’ numbers, they got a minor boost from the Yellen as she reiterated
the Fed’s tapering for pussies policy. To
state the obvious, as long as current investor euphoria persists, stock prices are
going higher. This despite historically
rich valuations. At some point this will
end, likely as not from some exogenous event versus any of the multiple risks I
keep harping on---because investors are already ignoring them. On the other hand, any one of them could
still materialize and negatively impact those rich valuation based as they are
on some very rosy projections.
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.
Subscriber Alert
On
our latest review of Sonoco Products (SON), it failed to meet the fundamental
financial criteria for inclusion in the High Yield Universe. Accordingly, it is being Removed from that
Universe. The High Yield Portfolio will
Sell its position in SON at the Market open.
United
Parcel Service (UPS) has traded above the lower boundary of its Sell Half
Range. Therefore, at the Market open,
the High Yield and Dividend Growth Portfolios will reduce their UPS positions
to 50% of normal.
No comments:
Post a Comment