The Morning Call
The Market
Technical
The
indices (DJIA 17067, S&P 1997) took a rest yesterday. The S&P remained in uptrends across all
timeframes; short term (1936-2137), intermediate term (1990-2700) and long term
(762-2014); it also closed above its 50 day moving average. The Dow finished within its short term
trading range (16331-17158), its intermediate term trading range (15132-17158),
its long term uptrend (5101-18464) and above its 50 day moving average. The DJIA made a second failed attempt at
challenging the 17158.
Volume
rose slightly; breadth was weak. The VIX
rose, but it remains well within its short and intermediate term downtrends and
below its 50 day moving average---so it is still a positive indicator for higher
stock prices.
The
long Treasury got tagged again yesterday---seemingly somewhat counter intuitive
in the face of the lower ECB funding.
Perhaps it was anticipation of stronger economic activity in response to
those lower rates and increased QE. You
know that I have serious doubts about that outcome. In any case, it closed within its short term
uptrend, its intermediate term trading range and above its 50 day moving
average.
GLD
also fell---also counter intuitive following the lower ECB funding rates. In addition, it should have been up if the
likely result was improved EU economic activity---which suggests to me that the
negative psychological momentum that has determined the recent GLD pin action
prevails, even if the news would imply otherwise. It finished within a short term trading
range, within an intermediate term downtrend and below its 50 day moving
average.
Bottom line: I
have to admit that I was very surprised that the Averages didn’t do better
yesterday following the easier money policy statements out of the Bank of Japan
and the ECB. Likely all that means is
that the Markets had already discounted these actions despite the fact that the
ECB’s moves were larger than those anticipated in the media. So I am not reading too much into this pin
action.
It is worth
mentioning that the Dow failed for a second time to penetrate the upper
boundaries of its short and intermediate term trading ranges. That left the indices out of sync on their
short and intermediate term trends. However,
as I said yesterday, this just means that at current lofty valuation levels,
the going gets a bit tough. I continue
to believe that the Dow will regain harmony with the S&P’s move up; though I
don’t think that they will confirm a break above the upper boundaries of their
long term uptrends.
That said, the
more accommodative than anticipated stance by the Bank of Japan and the ECB
could keep the global liquidity pumps humming at full speed and that could
provide the power for a brief break above the long term uptrends, similar to
the 2000 and 2007 breaks. That just
means the ultimate retreat could be from higher, more overvalued levels.
Our strategy
remains to Sell stocks that are near or at their Sell Half Range or whose underlying
company’s fundamentals have deteriorated.
Financial
advisor sentiment at all-time high (short):
Obviously,
not a bubble (short):
Update
on sentiment (short):
With the S&P 500 hitting yet
another new all-time high today, the current bull market that began on March
9th, 2009 has crossed the 2,000 calendar day mark. For reference, a bull market
is a rally (closing basis) of at least 20% that was preceded by a drop of at least
20%. A bear market is a decline of at least 20% that was preceded by a rally of
at least 20%.
Below is a table of the historical bull markets that the
S&P 500 has experienced going back to 1928. As shown, the current bull
market now ranks 4th in terms of length. It needs to last another 244 days to
pass the third longest bull market that ran from 10/3/1974 to 11/28/1980.
The average bull market for the S&P 500 lasts 933 days
and sees a rally of 105.3%. At 2,005 days with a gain of 196.4%, the current
bull market is just about double the average both in terms of gains and length.
Fundamental
Headlines
Yesterday’s
economic stats was mixed to slightly positive: the August ADP private payroll
report was weaker than expected as was weekly jobless claims, second quarter
nonfarm productivity and unit labor costs were in line but revisions to the first
quarter numbers were absolutely horrible, the July trade deficit was better
than estimates, and the August Markit services PMI as well as the ISM
nonmanufacturing index were much better than forecast. I think that the latter two datapoints were
by far the most important of the lot.
Although I am not sure what to make of those first quarter productivity
and unit labor cost revisions. I am
working on getting some more background on those numbers before reaching a
conclusion. That aside, the data continues
to fit our forecast.
Of
course, the big news of the day were the moves by the Bank of Japan and the ECB
toward a more accommodative monetary policy, i.e. lower rates and QE to
infinity. I have made it clear that I have
my doubts about any potentially positive impact of either central banks moves
on its respective economies.
Bottom line: Japan
has been implementing QE for longer than the Fed and has seen no noticeable impact
on its economy. To assume that more QE
will produce a different outcome this time makes no sense. The ECB has some room for ease; but its
problems (overly indebted sovereigns and overly leveraged banks) won’t be
helped by more and cheaper money. If
corporations wanted to invest, money is already available and is sufficiently
inexpensive that they would already be investing. Further, more and cheaper money won’t help an
already strapped consumer. All the ECB’s
increased largess will accomplish is to make more inexpensive money available to
sovereigns to assume even more debt, to the banks to become even more leveraged
and to the carry trade to keep its game of musical chairs going.
David
Stockman on the ECB’s new policy (medium and today’s must read):
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.
The
latest from Lance Roberts (medium):
Percentage
of companies trading above book value (short):
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