The Morning Call
9/10/14
The Market
Technical
The
indices (DJIA 17013, S&P 1988) were off yesterday; but no technical damage
was done. 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 slightly; breadth was negative. The
VIX jumped. While it closed well within
its short and intermediate term downtrends, it ended above the 50 day moving
average. I am not going to read a lot
into that trend break for the time being.
It will take some serious follow through to the upside as well as a hint
that the short and intermediate downtrends are going to be challenged before it
carries much meaning.
The
long Treasury slipped again but finished within its short term uptrend and intermediate
term trading range as well as above its 50 day moving average. That said, other sectors of the US fixed
income market as well as foreign debt markets are getting whacked. I am a little unsure of the ‘why’ of this
divergence. A possible explanation would
be that the Treasury is still acting as a safe haven while global inflation
expectations or geopolitical risks are rising.
I am not saying that is the reason; I am saying that I am not sure but
it is a possible cause; and more important, I would like more information.
GLD
was up but remained within its short term trading range, its intermediate term downtrend
and below its 50 day moving average.
Bottom line: while
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, I don’t think it likely that yesterday’s pin action is any kind of precursor
to dramatically lower prices. After all,
stocks have been on a one month run; so it is time for a rest.
I do think it possible
that the odd bond market behavior of the last two days may be anticipating some
negative sequence of events. But it is
way too soon to even know what that negative sequence of events may be or if
indeed this pin action means anything.
So I am sticking
with my outlook: (1) the Dow breaks above 17158 and re-sets to short and
intermediate term uptrends, (2) both of the Averages have a difficult, and
perhaps an impossible, time successfully challenging the upper boundaries of their
long term uptrends, (3) with some probability that they do break above those
barriers but not by much.
Our strategy
remains to Sell stocks that are near or at their Sell Half Range or whose
underlying company’s fundamentals have deteriorated.
Stock
buybacks fell significantly in the second quarter (short):
Fundamental
Headlines
There
was very little US economic news yesterday: the NFIB small business optimism
index came in roughly as anticipated and weekly retail sales were a plus. These datapoints support our forecast, but
not by much.
Aside
from low level nagging worries about the EU/Russian sanctions standoff and discomfort
over a Scottish secession from the UK, there were few headlines from overseas. However, the media chatter was focused on these
two situations; so that may be the excuse used to account for yesterday’s sell
off.
Here
are the more important discussions of the above that I saw:
More
on the UK/Scottish secession problem (medium):
The
latest on the EU sanctions against Russia (short):
And
Russia’s response (medium):
***overnight, France announced
that this fiscal year’s budget deficit would considerably exceed EU guidelines.
Bottom line: there
was nothing new out there that would have spawned yesterday’s selloff. That said, given the present high valuation
level of equities, it shouldn’t take much to cause worse. But, as you well know, I have been beating
that horse long enough to know that fundamentals are of secondary importance
right now. The only thing that counts is
investors’ seemingly unassailable belief that prices are going higher. Somewhere out there is an event, a number,
something that will change this attitude.
But until it occurs, the ‘buy the dippers’ will simply use days like
yesterday to up their equity positions.
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.
If you think
CAPE lacks as a valuation metric, try another (short):
Everyone
screws up (short):
Update
on macro markets risk index (short):
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