The Morning Call
The Market
Technical
The
indices (DJIA 16563, S&P 1930) had a rough day. Both have broken their 50 day moving averages;
so now we start to watch their 200 day moving averages. The S&P broke below the lower boundary of
its short term uptrend. Under the time
element of our Time and Distance Discipline, if it finishes below the support
level today, the short term trend will re-set to a trading range. The Dow pushed below the lower boundary of
its intermediate term uptrend. Under our
Time and Distance Discipline, if remains below this trend line at the close
Monday, its intermediate term trend will re-set to a trading range. For the moment, the trends are up: short (16232-17711, 1921-2085), intermediate
(16624-20922, 1862-2662) and long (5101-18464, 762-1999).
Not
surprisingly, volume was up and breadth was terrible. The VIX spiked 27%, keeping above its 50 day
moving average, within a very short term uptrend and short term and
intermediate term downtrends.
Update
on sentiment (short):
The
long Treasury fell but remained above its 50 day moving average, within a short
term uptrend (but below the upper boundary of its former short term trading
range) and an intermediate term trading range.
Clearly, the damage to the bond market was much less than to
equities. That said there is plenty of
bond worriers out there:
More
pessimism (short):
Counterpoint
(short):
Fitch
warns of high yield defaults (medium):
Getting
more correlated with stocks (short):
GLD
continues to mystify, trading down yet again.
It is now below its 50 day moving average and within its short term
trading range and an intermediate term downtrend.
Bottom line: the
technical picture may be getting a bit less murky assuming that the Averages
made a move to sync with all those divergences that I keep harping on. That said, under our Discipline, which
requires follow through, it is premature to be predicting a change in Market
direction. We will have a much clearer
picture technically speaking by the close on Monday. We can then start making some assumptions
about price trends.
I am still
watching the bond market closely, though of late it hasn’t been all that clear
about investors’ expectations. Long
term, I respect the message of the bond market; it just hasn’t been much help
the last month or so. GLD’s message has
never been more obscure. I am
embarrassed to say that I am clueless what is driving gold right now.
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.
Fundamental
Headlines
Yesterday’s
US economic news was tilted somewhat to the negative: weekly jobless claims
rose slightly more than expected, second quarter employment costs rose more
than anticipated and the July Chicago PMI was atrocious. However, none of this made much difference to
investors.
Overseas,
EU inflation numbers are in and they weren’t good, which is to say they were
low and fed the fears of deflation.
***overnight,
Markit released its July PMI numbers: EU
down, Japan down, China up.
The
question on everyone’s minds was what in the world sparked the sharp
selloff. If the Averages had held their
primary uptrends, I would be inclined to attribute it to nothing more than a
random selloff like we have seen periodically over the last 18 months. To be sure, stocks could bounce today and in
hindsight that will likely turn out to have been the best explanation. However with so much technical damage, there
seems to be more going on.
Of course, there
were multiple thesis presented throughout the day on every media outlet. I am not going to pretend that I know the
specifics that might have caused it but I will give you two possibilities:
(1) Plosser’s
dissent in the FOMC minutes coupled with the strong second quarter GDP number
and the higher than expected second quarter employment costs served as the ‘slap
in the face’ to the Markets---waking them to the prospect that inflationary
pressures are building and the bond market will not stand around and accept
unreasonably low rates in that environment.
In other words, our ‘the bond market will have to beat the Fed over the
head before its raises rates’ scenario.
As I have said more times than I can count, when the Market realizes
that the Fed has botched the transition yet again, equity prices will likely
seek lower levels,
The latest from
Paul Singer (medium and today’s must read):
(2) investors
have realized that in the Ukraine/sanctions, West/Russian face off, someone
will have to blink, that it is probably not going to be Putin, ergo how far is
Obama really willing to push before He precipitates a crisis in which He has to
blink? Given His penchant for self-righteousness
and His complete lack of experience in managing our foreign affairs, the fear
is that He will error and get Himself or, even worse, the rest of us hammered.
All that said,
there may be an exit from the current dilemma if these rumors of a deal being negotiated
between Germany and Russia are true.
Assuming, of course, that Obama is smart enough to make a graceful exit (medium):
Bottom line: after
a day like yesterday, my tendency for the last two years has been to wonder if
that decline is the start of the ‘big one’.
As we are all well aware, the dip buyers have made sure that it never was. And that may happen this time as well. However, the risks to the economy and the market
have continued to grow and worsen even as stocks prices have continued to advance. Sooner or later, something has to give.
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.
Global
QE is ending and that has consequences (medium and today’s must read):
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