The Morning Call
7/31/14
The Market
Technical
After
another roller coaster day, the indices (DJIA 16880, S&P 1970) finished
mixed (Dow down, S&P up slightly).
The Dow closed below its 50 day moving average, while the S&P ended
right on this trend line. Nonetheless,
they both remained within uptrends across all time frames: short (16232-17711,
1919-2085), intermediate (16624-20922, 1862-2662) and long (5101-18464,
762-1999).
Volume
was flat; breadth mixed. The VIX rose,
finishing within short and intermediate term downtrends but is now back above
its 50 day moving average. Further, it
is forming a very short term uptrend.
And:
The
long Treasury was down. It is above its
50 day moving average. While TLT is also
within its short term uptrend, it is back below the upper boundary of its
former short term trading range. I am
leaving the uptrend intact. But I also remind
you that this chart has been really schizophrenic of late; so I have little
confidence in the strength of this trend.
It remains within its intermediate term trading range.
Very
counterintuitive (short and a must read):
GLD
was down, closing below its 50 day moving average and within its short term
trading range and its intermediate term downtrend.
Bottom line: the
technical picture remains cloudy (at least for me). The Markets received good news yesterday in
the form of a solid second quarter report as well as an unchanged (easy) Fed
statement---the goldilocks scenario. Yet
stocks went nowhere in spite of its oversold condition. Indeed, the Dow has dropped below its 50 day
moving average while the S&P is challenging its average and the VIX is
forming a very short term uptrend.
Bonds sold off
strong, presumably because the economy is stronger than many thought and the Fed
said it would remain accommodative into the foreseeable future (inflation). That makes sense. However, GLD was down on the same stronger
economic numbers and an easy Fed---both of which generally pushes gold prices
higher.
If I try to
factor in geopolitical risks, it brings no clarity.
In short, the
technical picture keeps getting murkier; but price declines remain de minimus. Until that changes, momentum by definition is
to the upside.
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
brought lots more data; but this round carried more weight---the ADP private
payroll report showed growth but less than expected, weekly mortgage and
purchase applications were mixed and the first reading of the second quarter GDP
was much stronger than anticipated. Of
the three, the GDP number was by far the most important and clearly goes a way
to offsetting the recent string of lousy primary indicator reports.
Also
as you know, the FOMC meeting ended---and its statement read pretty much as
expected: (1) it is tapering another $10 billion a month and (2) it spent the
bulk of the statement giving us its ‘on the one hand’ ‘on the other hand’
routine with the end result as expected---no prospect of rising interest rates
in sight. There was one dissenting vote
(Plosser), providing just a hint of hawkishness.
Overseas, the
stats weren’t so good: the June Japanese industrial production figure was down
a whopping 3.3%---this at a point where the recent explosion of money into the economy
was supposed to overcome the initial negative impact of a tax increase. In addition, second quarter French housing
sales plunged 19%. Clearly, this data
does nothing to assuage my concerns about international economic risks.
Bottom line: I
would have thought that the bulls would be all over yesterday’s primary
economic headlines. That is what I get for
thinking. Nonetheless, those stats are
encouraging regardless of what is happening the short term. For myself, the data makes me want to lean toward
the improving economy/higher inflation scenario (as opposed to recession).
As I always say, one day doesn’t make a trend; but if nonfarm payrolls
and personal income and spending stats follow the upbeat GDP lead, then I will
start the move.
In the meantime,
stocks are overvalued whether the economy is slowing or holding its own or whether
inflation is under control or not. That
said, I continue to believe that Fed policy when, as and if it ever raises
rates will have a much smaller impact on the economy than it will on the market.
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.
The
latest from Bill Gross (medium and today’s must read):
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