The Market
Technical
The
indices (DJIA 17076, S&P 2002) took a breather yesterday. The S&P closed in uptrends across all
timeframes: short term (1936-2137), intermediate term (1900-2700) and long term
(762-2014). On the other hand, the Dow
remained in short (16331-17158) and intermediate (15132-17158) trading ranges
and a long term uptrend (5101-18464).
They are both above their 50 day moving average.
Volume
remains anemic; breadth declined with the tech stocks taking a hard hit. August finished as an outside up month (it
traded below the July low and closed above the July high) which historically
means a further move to the upside; that said July was an outside down month
and there was almost no follow though. The
VIX rose, but finished within short and intermediate term downtrends and below
its 50 day moving average.
Update
on sentiment (short):
The
long Treasury experienced some serious whackage. Nevertheless, its chart remains strong as TLT
closed well within its short term uptrend, intermediate term trading range and
above its 50 day moving average.
Bonds
at a triple resistance point (short):
GLD
also got dinged big time. It traded
below the lower boundary of its developing pennant formation; a close below
that boundary today will negate that pattern, thereby eliminating the one
positive in its chart. It finished
within a short term trading range, an intermediate term downtrend and below its
50 day moving average.
Bottom line: the
Averages continue to repair July’s technical damage. The S&P is completely back on an upward
track and staged an outside up month in August, hinting at further gains. The Dow still has some work to do. Plus our internal indicator has a long way to
go to be in harmony with the S&P.
In the end, I
think that the Dow will join the S&P re-setting all trends across all
timeframes to up. However, I also think
that the Averages pushing through the upper boundaries of their long term
uptrends will be a difficult if not impossible task. Remember the upper boundaries of these long
term uptrends are reflective of peak valuations established over an eighty year
period. True, prices managed to
penetrate those high is 1929, 2000 and 2007; and they may do it again. But those short periods ended badly. So if we experience another such period, I am
more than happy to remain on the sidelines and avoid the risk of not knowing
exactly when the music will stop.
Our strategy
remains to Sell stocks that are near or at their Sell Half Range or whose
underlying company’s fundamentals have deteriorated.
Fundamental
Yesterday’s
US economic data was fairly upbeat: the August Markit US manufacturing PMI came
in slightly better than anticipated, the August ISM manufacturing index was considerably
above expectations as was July construction spending. Taken by themselves, these stats suggest that
a slowdown/recession is no near term danger.
However,
overseas the numbers weren’t quite so cheery: the Markit EU August manufacturing
PMI was below forecasts. And Abe is reshuffling
his cabinet in response to poor economic data---the latest being Japanese auto
sales fell 9.1% on a year over years basis.
As you know, my concern, which has been growing of late, is that two (EU,
Japan) of our largest trading partners go into recession and drag the US in
that direction. These new datapoints don’t
assuage that worry.
***overnight,
EU services PMI fell, while Chinese services PMI soared. In addition, a cease fire was announced in
Ukraine, then it wasn’t, then it was, then it wasn’t. SNAFU.
Bottom line: our
economic numbers remain strong while those of our major trading partners
continue to deteriorate. I don’t know
how long those trends can continue to diverge before they start impacting each
other; in short, I am nervous about economic weakness in Japan and the EU affecting
our recovery. To date, the US has
shrugged it off; but I doubt that will last if there is no improvement abroad.
The geopolitical
turbulence hasn’t lessened in my absence.
Indeed, Obama seems to have decided that He is not done with the game of
chicken with Putin over Ukraine. I
continue to believe that Putin is the sure winner in this standoff; if indeed
there is a winner. In either case, I believe
the news for the US only gets worse. The
only question is how long will Obama go before accepting a loss? The longer that is, the worse it will be for
our Markets, in my opinion.
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.
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