The Morning Call
8/7/14
We leave bright and early
tomorrow morning for the beach. Gone
until 8/17. As usual, I will have my
computer with me and if the need arises will be in touch via Subscriber Alerts.
The Market
Technical
The
indices (DJIA 16413, S&P 1920) marked time yesterday. Both are below their 50 day moving average
(the Dow is near its 200 day moving average), both are in short term trading
ranges (16331/16009-17158, 1814-1991) (I am calling the break of the S&P
short term uptrend) and both are within their long term uptrends (5101-18464,
772-1999). However, they are out of sync
in their intermediate term trends---the DJIA being in trading range
(15132-17158) and the S&P remaining within its uptrend (1865-2665). As a reminder under our Price Discipline,
when the Averages are out of sync, the Market is considered to be
directionless.
Volume
rose slightly; breadth recovered. The
VIX declined, finishing above its 50 day moving average, within a very short
term uptrend and short and intermediate term downtrends. Until the VIX starts breaking trend lines, I don’t
think that the upward momentum of stock prices is subject to reversal.
The long Treasury moved
higher, closing above its 50 day moving average and within a short term uptrend
and intermediate term trading range.
GLD
surged. It is back above its 50 day
moving average and the upper boundary of what had been a developing short term downtrend. It remains within a short term trading range
and an intermediate term downtrend.
Bottom line: the
short term trends of the indices have re-set to a trading range. By itself, this is not an unusual occurrence in
a bull market. However, (1) they both
have broken below their 50 day moving averages and the Dow is near its 200 day
moving average and (2) they are out of sync on their intermediate term
trends---the Dow re-setting to a trading range, the S&P remaining within
its uptrend. Even this doesn’t necessarily
portend much lower prices.
On the other
hand, given that Market peaks are generally processes versus a sudden change of
direction, this pin action fits within the definition of a ‘process’. In addition, the ‘buy the dippers’ seem to have
lost some of their enthusiasm---even in a very oversold market. To be sure, they have twice managed to stem losses
following big down days; and given yesterday’s bad news out of Europe, they
held the Market to a flat performance.
But that’s it and, as yet they have been unable to manage any follow
through. Net, net, the jury is out as to
whether we are witnessing a topping process or simply a much needed hiccup in
an otherwise strong market.
So it is too
early to be making a Buy List but not too late to Sell stocks that are near or
at their Sell Half Range or whose underlying company’s fundamentals have
deteriorated.
Update
on the retail investor (short):
Fundamental
Headlines
Yesterday’s
US economic data consisted of two secondary indicators which were mixed: weekly
mortgage applications were up but purchase applications were down and the June
US trade deficit was less than expected.
Overseas,
the numbers weren’t so good and became the center of investor focus on the day:
Italian second quarter GDP fell which technically puts Italy back in recession and
German factory orders plunged 4.3%.
Clearly, both leave open the question of a downturn in the entire EU
economy---which would not be good for either the US corporate earnings or the
continent’s overly indebted sovereigns or overly leveraged banks.
***overnight
the ECB left interest rates unchanged---somewhat surprising in light of the
recent lousy economic data out of the EU: German industrial production was well
under expectations.
Bottom line: buyers,
having been on something of a strike of late, acquitted themselves well
yesterday---holding stocks flat in the face of bad economic news. Nevertheless, they have clearly backed off of
their two year long propensity to ‘buy the dips’ on reflex.
I have no way of
knowing what investor psychology will be today or tomorrow. But I do know that based on many measures of
valuation including our own, stocks are overvalued. When that realization comes is not in my
control. What is in my control is
insuring that our Portfolios are well positioned whenever it occurs. And that is what I have done. Remember that I am not predicting economic
malaise; I am predicting that a Fed induced mispricing of assets will end.
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 Doug Kass (medium and today’s must read):
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