The Morning Call
8/6/14
The Market
Technical
The
indices (DJIA 16429, S&P 1920) had another rough day yesterday. The Dow finished below its 50 day moving
average, not far from its 200 day moving average (16331) and within new short
and intermediate term trading ranges. I
am just not sure of the boundaries yet.
Short term, there are two candidates for the lower boundary of the short
term trading range (16331, 16009). The
most likely support level for the intermediate term is 15132. The upper boundary of both new trading ranges
is 17158. The DJIA remains within its
long term uptrend (5101-18464).
The
S&P remained below its 50 day moving average; and appears to have confirmed
the break of its short term uptrend (1928-2094); the new short term trading
range will defined by 1814-1991.
However, given the recent schizophrenia among all the indices, I am
going to wait one more day before definitely going with a short term trading
range. Unlike the Dow, it finished within its intermediate
term uptrend (1862-2662). It is also
well over its 200 day moving average (1858) and within its long term uptrend
(762-1999).
Volume
was flat; breadth deteriorated. The VIX
jumped 11%, leaving it over its 50 day moving average, within a very short term
uptrend, a short term downtrend (though it is once again near the upper boundary)
and an intermediate term downtrend.
The
long Treasury rose, closing above its 50 day moving average and within a short
term uptrend and intermediate term trading yesterday. We did get a pretty clear message yesterday
on bond investor sentiment: bonds sold off early in the day on good economic
data (good economic news = interest rate hikes sooner) then rallied hard
following the rumors that Russia was preparing to invade Ukraine
GLD
declined, finishing below its 50 day moving average, within a short term
trading range and an intermediate term downtrend. I continue to be surprised by GLD’s pin
action, to wit, it failed to follow suit of both stocks and bonds in its
reaction to heightened geopolitical concerns.
Bottom line: yesterday’s
pin action confirmed the Averages’ break out of short term uptrends, though I
am hedging my call on the S&P until the technical picture is a bit
clearer. Even assuming a break is
confirmed and the Averages are out of sync, it is important to remember that
this damage is only to the short term uptrend.
To be sure the intermediate term has also become cloudy; and if the
S&P busts through the lower boundary of its intermediate term uptrend, then
the technical outlook will become much more dire. But until that occurs, we shouldn’t be getting
too beared up on Market technicals.
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.
Subscriber Alert
Our
Aggressive Growth Portfolio is making a very small (3%) trading bet in the
Ranger Bear Hedge Fund (HDGE---this is an all short fund) with a very tight
Stop.
Fundamental
Headlines
The
US economic data reported yesterday was tilted to the plus side: the July
Markit services PMI was slightly below estimates, weekly retail sales were
mixed while both June factory orders and the July ISM nonmanufacturing index
were much stronger than expected. This extends
the rebound to more positive stats which is good for the economy and provides
more support for our base forecast.
Foreign
economic numbers were mixed: a terrible Chinese service PMI and mixed EU
composite PMI’s.
***overnight,
Italy reported second quarter GDP down 0.2% while German July factory orders
plunged 4.3%.
But
yesterday’s main event centered on rumors of an imminent Russian invasion of
Ukraine. I have linked to several
articles describing the buildup of Russian troops and equipment on the
Ukrainian border; so clearly the possibility exists. If it were to occur then there is all kinds
of negative implications not just for an escalation of violence but also for
adverse economic consequences for the EU (don’t forget those overly indebted
sovereigns and over leveraged banks).
For the US, it would
probably mainly impact the electorate’s psychology. I have opined that Obama has pushed the issue
of Ukraine to the point where someone has to blink, that I doubt seriously if
it will be Putin and that the only choices Obama has would be (1) military action on our part---which I believe
is unthinkable---or (2) He blinks for the world to see and the American people
get to see this country bitch slapped for the first time in its history (OK the
second---when Great Britain burned Washington; but that doesn’t really count
because we subsequently kicked their ass in New Orleans) and forced to take it,
at least in the short term. I can see
that scenario playing merry hell with the Markets near term.
The problem with
assuming a major stock decline based on an act of war versus say the economic
consequences of a disastrous transition from a historically unprecedented easy
in monetary policy is that the former lacks the inevitability of the
latter. Putin may not invade Ukraine; or
the rumors of he and Merkel negotiating a way out of this crisis may come to
fruition. So I am hesitant, at least for the moment, to
assume that conflict in Ukraine will precipitate ‘the big one’. That said, if this crisis serves to bring
investor expectations back into the ‘normal’ range, then the physical outcome
would matter less than the psychological one.
Bottom line: clearly,
Monday was a dead cat bounce. The Market’s
primary issue now seems to boil down to the events occurring in and around
Ukraine; and who knows what will happen there.
Even if everything comes up roses, for the moment, we don’t know how
much permanent damage has been done to investors’ psyche. But if causes them to start looking at equity
valuation using historical measures, Ukraine won’t matter because mean
reversion will be upon us.
This is, of
course, all idle speculation with nominal investment value. The best strategy now is to follow the one we
have been using for the last year:
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.
Some
Market history from Jeffrey Saut (medium):
An
interesting thought on the Market (medium):
Update
on valuation:
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