The Morning Call
8/21/14
The Market
Technical
The
indices (DJIA 16979, S&P 1986) had another good day. The Dow remained within its short
(16331-17158) and intermediate term (15132-17158) trading ranges but is clearly
drawing ever closer to the upper boundaries of those ranges. It also finished above its 50 day moving average
and within a long term uptrend (5101-18464).
The
S&P also closed near the top end of its short term trading range
(1814-1991). It also remained within its
intermediate (1881-2681) and long term (752-1999) uptrends and above its 50 day
moving average.
Volume
again declined. Surprisingly, breadth remained
mixed. The VIX, not surprisingly, fell,
finishing within short and intermediate term downtrends and below its 50 day moving
average.
The
long Treasury dropped again; but remained within its short term uptrend, above
its 50 day moving average and within an intermediate term trading range.
GLD
continued its dismal performance, closing within a short term trading range, an
intermediate term downtrend, a developing pennant formation and below its 50
day moving average.
Bottom line: the
indices seem poised to bust through their former all-time highs and re-set
short and intermediate term trends to the upside. Adding credence to that assessment, I thought
that the more hawkish tone in the FOMC minutes would have put a crimp in
investors’ enthusiasm. Not so. Furthermore, the Market is way overbought;
but investor euphoria reigns supreme. So
it seems likely that prices will push through those former highs (17158, 1991) today
or after the Yellen speech. Nonetheless,
I remain of the belief that the Averages will be unable to confirm a breach
above the upper boundaries of their long term uptrends.
Our strategy
remains to Sell stocks that are near or at their Sell Half Range or whose
underlying company’s fundamentals have deteriorated.
The
latest from Stock Traders’ Almanac on bull markets and corrections (short and a
must read):
Fundamental
Headlines
There
was not much by way of economic data releases yesterday. Weekly mortgage applications were up, but the
more important purchase applications were down.
These numbers have little meaning following Tuesday’s terrific housing
starts report.
Overseas,
Japan reported that its July trade deficit widened yet again. I am not sure how long the Japanese
electorate will put up with the failed policies of their government; but at
some point, there has to be either a turnaround or a movement to correct those
policies. In the meantime, it is not
great news for US companies with exposure to Japan.
***overnight. Speaking of a turnaround, the Japanese July
PMI surged to a five month high. However,
that was offset by a lousy Chinese PMI.
Of
course, the high point of the day was the release of the minutes of the latest
FOMC meeting which I would characterize as more hawkish than the statement
immediately following that meeting. The
primary reason seems to be that the improvement in the labor markets has an increasing
number of Fed members wanting to start to raise interest rates sooner than
previously implied.
Summary
of FOMC minutes
Fed
mouthpiece, Hilsenrath’s take (medium):
What
is important about Jackson Hole (medium)?
Bottom line: as I
noted above, I was surprised that the more hawkish tone to the Fed minutes didn’t
cause more heartburn for investors than it did.
Perhaps it is what I suggested yesterday, i.e. that investors have unbridled
faith that the Fed will get its policy right irrespective of the rate of progress
of the economy---hence any policy move will be the correct one.
‘As you know, my mantra on this issue is
that if this assumption proves correct, it will be the first time in
history. Not that it won’t; but there
sufficient evidence to warrant healthy skepticism.
Or as Citi
suggests, perhaps investors believe that Yellen’s Jackson Hole speech will be
uber dovish and negate the impact of the FOMC minutes.
There is nothing for me to do but wait and
see; and given the current lofty equity valuations, I believe cash is of
inestimable worth while I do.’
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.
Does
it matter is stocks are currently not is a 2000 type bubble? (medium):
Another
thought on current valuation (medium):
CAPE
and math (medium and a good read):
Investing for Survival from Warren
Buffett
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