The Morning Call
The Market
Technical
The
indices (DJIA 16976, S&P 1958) had a rough day as a result of the
international news flow (Israel invades Gaza; a civilian aircraft shot down by
surface to air missile over Ukraine).
Still nothing broke technically; the Averages finished 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
fell but remained at an elevated levels relative to recent trading; breadth as
you might expect was terrible. The VIX
was on a moonshot (up 30%) pushing it well over the upper boundary of its very
short term trading range and its 50 day moving average. It remains within short and intermediate term
downtrends.
The
long Treasury spiked, closing over the upper boundary of its short term trading
range. If it remains above that level at
the close next Monday, the short term trend will re-set to up. It finished above its 50 day moving average
and within its intermediate term trading range.
GLD
also soared. It closed above its 50 day
moving average, within a short term trading range and an intermediate term downtrend.
Bottom line: if history
repeats itself, equity prices are apt to reverse themselves following yesterday’s
pin based on the type of news events we received. In the past, when violence escalated between
Israel and its detractors, stocks generally sold off immediately then quickly
rebounded---primarily because this is a play that investors have seen before and
nothing subsequently occurred to upset the global economy (oil prices). Ditto with the loss of a civilian aircraft to
terrorism or a military accident. The
point here is that the kind of highly volatile days we got yesterday frequently
reverse themselves quickly. So any
comments about the pin action is likely meaningless.
Of course, new
facts/developments may occur that would justify the selloff. But the best thing to do at this moment is to
not jump to conclusions and be patient.
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.
Market
performance following a Fed tightening (short):
Update
on sentiment (short):
Fundamental
Headlines
Yesterday’s
US economic news was mixed: June housing starts were very disappointing, weekly
jobless claims were slightly better than expected and the Philly Fed index was very
positive. The most important of these
stats is the housing starts number because (1) it is a primary indicator and measures
one of the major sectors of the economy and (2) it follows poor reports in two
other major sectors of the economy---retail sales and industrial
production.
As disheartening
as this series of datapoints are, they are still only one month worth of
stats. So it is too soon to be altering
our forecast. Nonetheless, since the
yellow warning light is already flashing as a result of Fed policy, it is now
blinking a bit faster.
Of
course, it was the aforementioned developments overseas that held investors’
attention and provided the juice of the Market selloff. I don’t think that there is anything to add to
the comments in the Technical section---from what we know now, neither
incidence is of a nature that has led to historically significant long term negative
developments in either the economy or the Market.
The
latest from Ukraine (medium):
Bottom line: our
forecast for the US economic growth has taken it in the chops in the last two
days with some disappointing data. At
the moment, we need more numbers before assuming any trend change; so I will
wait. That said, given our conservative
outlook, I am probably a whole lot less nervous about the magnitude of any potential
change than the optimistic crowd.
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.
No comments:
Post a Comment