The Morning Call
8/5/14
The Market
Technical
The
indices (DJIA 16569, S&P 1938) rebounded yesterday, partially at least,
from last week’s losses---not surprising given its deep oversold position. The Dow remains below its 50 day moving average
and finished below the lower boundary of its intermediate term uptrend for the
third day, thereby confirming the break of that uptrend. It is now searching for lower boundaries of a
new short term trading range (candidates: 16331, 16009) and a new intermediate
term range (candidate: 15321). It is
still within its long term uptrend (5101-18464).
The
S&P closed below its 50 day moving average.
However, its bounce carried it back above the lower boundary of its
recently negated short term uptrend---one day following the confirmation of
that break. I am going to watch the
S&P for another day or two before ruling that the short term uptrend was
broken. In the meantime, it remains in
an intermediate term uptrend (1862-2162) and a long term uptrend (762-1999).
Volume
declined; breadth snapped back smartly.
The VIX dropped 11%, but stayed above its 50 day moving average and
within a very short term uptrend, a short term downtrend and an intermediate
term downtrend.
The
long Treasury fell, finishing above its 50 day moving average, within a short
term uptrend and an intermediate term trading range.
GLD
was also down, closing below its 50 day moving average, within a short term
trading range and an intermediate term downtrend and continues to build a
pennant formation.
Bottom line: yesterday’s
pin action left the Dow picture reasonably clear---its short and intermediate
term uptrends have been broken and it must now establish the lower boundaries
of the trading ranges for both trends.
The upper boundary for both is 17158.
The S&P is
less clear, given its bounce yesterday.
I am leaving open the possibility that it could either re-confirm the
break of its short term uptrend or remains within it. We will know the answer to this question in
the next couple of days.
In the meantime,
the Dow is for sure out of sync with the S&P on their intermediate term
trends (Dow flat, S&P up) and may or may not be out of sync with the
S&P on their short term trends---depending on how the S&P resolves its
near term direction. Recall under our
Price Discipline, the Market is considered trendless when the indices are out
of sync.
While yesterday’s
trading had the signs of a bounce from an oversold condition, the Averages
could still have put in a bottom. After
all, that has been the pattern for the last three years. So it is still too soon to betting on mean
reversion; although I would be reviewing my holdings to be sure that I know
what I own.
Our strategy remains to do nothing. 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.
Andrew
Thrasher’s weekly update (medium):
For
the bulls (short):
Stock
Trader’s Almanac looks at equities’ August performance (short):
Fundamental
Headlines
There
were no economic data releases either in the US or abroad yesterday. About the only news item of substance was the
report that the Bank of Portugal was splitting Banco Espirito Santo into a ‘good
bank’ and ‘bad bank’ in attempt to protect depositors (good bank) and let the
creditors and shareholders of the old bank absorb the bank losses (bad
bank). For the moment, that seems to have
assuaged investor fears that Espirito Santo’s insolvency could spread to other
financial institutions; and indeed, if that is the way it plays out, then the
EU banking system will have dodged another bullet.
***overnight,
July Chinese services PMI plunged to the lowest level on record; EU July
composite PMI were mixed.
Bottom line: equities’
response to the action by the Bank of Portugal was weak enough that it was difficult
to tell if the bounce was one of the dead cat variety or yet another ‘buy the
dip’. Follow through is always the key
to a big one or two day directional move; and yesterday’s performance was a
little inconclusive in its informational value.
So we wait.
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.
Thoughts
on a correction (medium):
Bonus
from Peter Lynch (medium):
Deutsche
Bank raises warning flag (short):
The
math on mean reversion (short and a must read):
The
latest from John Hussman (medium):
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