Thursday, September 11, 2014

The Morning Call & Subscriber Alert---The pin action in the bond market remains the story

The Morning Call

9/11/14

The Market
           
    Technical

            The indices (DJIA 17068, S&P 1995) rebounded yesterday.  The S&P remained in uptrends across all timeframes; short term (1941-2142), intermediate term (1904-2704) 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. 

            Volume rose, though it is still at anemic levels; breadth improved.  The VIX fell, closing back below its 50 day moving average---a slight plus for stocks.  It remained in short and intermediate term downtrends.

            The long Treasury declined, finishing below the lower boundary of its short term uptrend.  Under our time and distance discipline, if it trades under that trend line through the close on Friday, TLT will confirm the break and re-set to a trading range.  It remained within its intermediate term trading range and above its 50 day moving average.

 So TLT appears to be joining other technically weak segments of the fixed income market. 

            A look at the charts of the two year and five year notes (short):

            This pin action makes no sense if investors are worried about (1) global recession or (2) a significant geopolitical event [Russia/Ukraine or ISIS].  Poor performance of gold backs that up.  What would drive both gold and bond prices down (yields up)? 

Fears of a Fed interest rate hike seems like the most logical explanation; and indeed the media/pundits debated all day long about a potential change in Fed language (i.e. moving forward the timing of an interest rate hike) at its meeting in October.

Could be; although my thinking was that the sluggish economic data flow from the rest of the world would give the Fed pause because of the potential spill over effect on the US economy.  Don’t get me wrong.  If the Fed starts raising interest rates sooner than expected, I am good with that.  I just wouldn’t expect it given Yellen’s dovish proclivities. 

In any case, the pin action in the bond market is causing some confusion, calling into question the global QE forever thesis among the stock guys.  I don’t know how this works out; and that has the yellow Market light flashing.

As I noted above, GLD was down (again).  It is very near the lower boundary of its short term trading range, is well within an intermediate term downtrend and is below its 50 day moving average.

Bottom line: the Averages bounced back yesterday from a modestly oversold condition, showing us that the bid under the Market remains firm.  Despite a growing number of divergences, the facts that the Averages remain out of sync and the Dow has been unable to successfully challenge the upper boundaries of its short and intermediate term trading ranges, this momentum seems strong enough to push the DJIA through the upper boundaries of its short and intermediate term trading ranges.  The only thing that could prevent that from happening being that the bond market is indeed starting to discount something untoward that the rest of us just aren’t seeing.

That aside, it seems likely that the indices will attack the upper boundaries of their long term uptrends but with even odds at best that this challenge will be successful.

Our strategy remains to Sell stocks that are near or at their Sell Half Range or whose underlying company’s fundamentals have deteriorated.
           
    Fundamental
 
     Headlines

            Yesterday’s US economic data were slightly negative:  weekly mortgage and purchase applications were down and wholesale inventories fell.  The bright spot being that wholesale sales increased.  Not great news but nothing damaging to our forecast.

            As I noted above, there was a lively discussion in the media about a potential change in Fed language (policy) viz a viz tightening at the upcoming FOMC meeting in October.  What spawned the debate were comments by CNBC economist Steve Leisman.  I have never considered him a great Fed policy forecaster; so I am not sure how much credence to afford it.  Certainly the bond market acted there was a high probability that this might occur.  For the moment, I am on the sidelines on this issue.

            The rest of the news flow consisted of more hand wringing over the Russia/EU/Ukraine conflict/sanctions and the possible Scottish secession from the UK.  Here is the latest:

More on the potential consequences of Scottish secession (medium):

            And (medium):

`           Russian retaliation to EU sanctions begins (medium):

                        Plus:

            ***overnight, Chinese PPI and CPI came in below expectations.

Bottom line: the buyers were back yesterday as they have been for the last four years; so my scenario of the Dow re-setting its short and intermediate term trends to up and both indices challenging the upper boundaries of their long term uptrends appears to be on track.  That said, I am confused about the current pin action in the bond market; and I think that it could be portending a potentially negative exogenous event---the operative word being ‘confused’. 

Of course, our Portfolios are set for a sell off.  So being confused is not the same thing as being worried about the integrity of our Portfolios’ principle.

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.

                What is happening with Dr. Copper? (medium):

       Subscriber Alert

            As part of our ongoing research process, our holdings in the oil industry were reviewed this week.  Two of our holdings: (1) Murphy Oil (MUR) in the Dividend Growth Portfolio and (2) Holly Frontier (FTO) in the Aggressive Growth Portfolio failed to meet the minimum fundamental criteria for inclusion in their respective Universes.  Accordingly, both companies are being Removed from those Universes and both stocks will be Sold at the Market open.

            In addition, our ETF Portfolio will Sell roughly 10% of its long bond position.

       Investing for Survival

            Great 11 minute video with Howard Marks discussing market risk.

No comments:

Post a Comment