Wednesday, August 6, 2014

The Morning Call---How much do you bet on a war in Ukraine?

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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