The
Morning Call
7/17/14
The Market
Technical
The
indices (DJIA 17138, S&P 1981) returned to the upside, closing above their
50 day moving averages and within uptrends across all time frames: short
(16185-17664, 1912-2078), intermediate (16514-20872, 1851-2651) and long
(5083-18464, 762-1999).
Volume
rose noticeably for the second day in a row.
I am not sure what to make of it, if indeed there is anything to
make. But it is an aberration from the
general trading pattern of the last three or four months, which suggests that
we should be alert that something is in the offing---‘should be alert’ being
the operative words. I am making no
prediction.
Breadth
improved. The VIX did another reversal
and finished back below the upper boundary of a very short term downtrend. Which makes my comment on the confirmation of
a break of that trend (‘though given the recent
schizophrenic behavior, I am not sure this is more than a one day call’) in
yesterday’s Morning Call far more prophetic than I thought at the time. Rather than re-setting the very short term
trend back to down, I am going to wait a couple of days before making any call
on the very short trend.
Another
aberration has been developing over the last week---the small cap indices have
been performing terribly versus the major Averages. If this situation continues, history suggests
that it is not a good sign for the Market.
The
long Treasury rose; and like the VIX, reversed itself through a very short term
trend for the second time in a week. It
remained above its 50 day moving average and within short and intermediate term
trading ranges. As with the VIX, I am confessing
my confusion, retreating from making a very short term trend call and choosing to
wait for clarity.
Hoisington
Investment’s outlook for the bond market (medium):
http://pragcap.com/hoisington-investment-management-quarterly-review-and-outlook-second-quarter-2014
GLD
was up fractionally, bouncing off its 50 day moving average and remaining
within a short term trading range and an intermediate term downtrend. Uncertainty reigns supreme with GLD as it does
with VIX and TLT.
Bottom line: optimism
returned to the Market accompanied by strong volume and improved breadth. The bad news is that the schizophrenia in the
VIX, TLT and GLD markets suggests that investors in other markets are not as
certain as the straight stock guys. However,
given the S&P proximity to the upper boundary of its long term uptrend and
the 2000 ‘round number’, it continues to seem likely to me that these levels will
be challenged; although I also believe that any break will not be confirmed.
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 was disappointing: weekly mortgage and purchase applications
fell, June PPI rose more than expected and June industrial production was less
than forecast.
There was some upbeat
economic news on the day: the Fed’s release of its latest Beige Book which
continues to portray an economy growing at a modest pace. A summary of the report (medium):
Finally,
Our Leader imposes additional sanctions on Russia. So far, these measures have done little to
curb Russian behavior. Indeed, I think
that Obama’s press conference in which the sanctions along with several other
international trouble spots were discussed was more a ploy to address the
growing criticism of Obama’s inept foreign policy than to actually announce
anything of substance. Whether these
newly imposed measures will have an impact remains to be seen.
On
the international front, there were rumors that Espirito Santo would be able to
raise capital which would secure it in the face of a default of an affiliated
company. If that occurs, it will clearly mean that the ‘muddle through’
scenario remains in effect in Europe.
***overnight, that rumor was put to rest; Espirito Santo’s stock is
crashing
In addition, the
Chinese reported some decent economic data: GDP and industrial production beat
expectations and retail sales were up albeit a bit short of estimates. The bad news was that housing prices
fell. In addition, this improvement has
come at a price---the abandonment of monetary tightening, a sign that the
Chinese government just couldn’t resist the temptation to join the rest of the
world in QEInfinity.
Bottom line: the
US economy remains the bright spot in our outlook. But yesterday’s disappointing industrial
production report following Tuesday’s poor June retail sales number (and today’s
lousy housing starts---three primary indicators representing major portions of
the economy) suggest that any talk of accelerating growth is likely only
wishful thinking. I am not saying that a
recession is ahead. I am basically
re-iterating our forecast that economic progress will remain a slow and
tortured affair---and that assumes that the litany of global problems that pose
a threat to our economy are resolved to perfection.
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.
More
on valuation (medium):
Druckenmiller
on Fed policy (short):
Investing for Survival
Investing
with only those money managers that invest in their own strategy (medium):
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