Wednesday, September 3, 2014

The Morning Call--the EU and Japan keep getting worse


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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