The Morning Call
8/19/14
The Market
Technical
The
recovery continued, though the technical damage has not been completely
undone. The DJIA (16838) closed above
the lower boundaries of its former short term and intermediate term uptrends;
but I leave them in trading ranges (16331-17158, 15132-17158). It remained below its 50 day moving average.
The
S&P (1971) finished within a short term trading range (1814-1991), an intermediate
term uptrend (1881-1681) and above its 50 day moving average. The Averages remain out of sync in their intermediate
term trends and their 50 day moving averages.
Volume
fell; breadth improved. The VIX declined
ending below the lower boundary of a very short term uptrend, below its 50 day
moving average and within short and intermediate term downtrends---all bullish
signs for stocks.
The
long Treasury dropped but remained well within its short term uptrend, above
its 50 day moving average and within an intermediate term trading range. The debate continues as to whether TLT is
being driven by fears of a recession or fears of a major geopolitical flare up. Whichever it is, bonds are reflecting a
different scenario than stocks---which suggests more caution than is being exercised
by equity investors.
And,
what are bonds telling us? (medium):
GLD
fell, closing within a short term trading range, below its 50 day moving
average, within its intermediate term downtrend and continues building a
pennant formation.
Bottom line: the
indices have had a nice bounce off the recent low; however, technically, they are
not out of the woods as they remain out of sync on a couple of measures. No doubt the ‘buy the dippers’ have come back
in force and that likely portends the resumption of upward momentum. But our Discipline is to force the Market to
prove that it can re-establish its uptrends.
Our strategy
remains to Sell stocks that are near or at their Sell Half Range or whose
underlying company’s fundamentals have deteriorated.
Andrew
Thrasher’s latest analysis (medium):
Fundamental
Headlines
It
was a slow news day. In the US, the only
economic data was an upbeat report on the NAHB housing index---a secondary
indicator which taken by itself means little (***but appears to be reflecting
better housing starts; see below).
Overseas,
(1) the ECB said that it expects EU banks to borrow E250 billion from it under
its targeted long term financing operation.
That is a positive in the sense that it provides some additional
liquidity for the banks; but it doesn’t solve their long term problems of being
overleveraged with too many investments of questionable quality.
(2)
Russia threatened to ban vehicle imports---the operative word being ‘threatened’. But as the day progressed, rumors sprung up
that Kiev and Moscow were talking [negotiating]. While investors got jiggy with it, I remain
of the opinion that Putin will settle this standoff, when he gets what he
wants---and not before. So I think the
news would be more accurately reflected in saying Russia is telling Ukraine the
conditions on which it will cease stirring the pot. How this all works out, I haven’t a clue; but
the sources of my concern [assuming WWIII is avoided] remain [a] Obama pushes
His luck and is forced to blink, undermining investor confidence, and [b]
Russia cuts off the gas to Europe, pushing it into a deeper recession than
already may be occurring.
The
others item on investor radar is the release this week of the most recent FOMC
minutes and the Fed meeting in Jackson Hole starting Wednesday---raising hopes
for more Fed mewing about the economy, an accommodative monetary policy and the
lack of reasons to raise interest rates.
Bottom line: clearly,
the buyers are back. No one knows how
much fire power they still have left.
‘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 Lance Roberts (medium):
The
latest from Robert Shiller (medium):
The
latest from John Hussman (medium):
Geopolitical
turmoil and stocks (medium):
More
on valuation (medium):
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