The Morning Call
10/2/14
The Market
Technical
Not
a pretty day. The indices (DJIA 16801,
S&P 1946) took a shellacking. The
Dow finished within its short (16332-17158) and intermediate (15132-17158) term
trading ranges and a long term uptrend (5148-18484). It is also is in a very short term downtrend
and fell below its 50 day moving average.
The S&P broke
below the lower boundary of its short term uptrend (1965-2156). That starts the clock on our time and distance
discipline; if the S&P trades below 1965 through Friday’s close, the short
term trend will re-set to a trading range.
It remained within its intermediate term (1935-2735) uptrend, though
clearly, it is close to the lower boundary.
It is also within a long term uptrend (771-2020). Finally, it finished below its 50 day moving
average.
Volume
was flat with Tuesday’s elevated level; breadth was poor. The VIX was up, staying within a very short
term uptrend and above its 50 day moving average. Intraday, it traded through the upper boundary
of its short term downtrend but failed to hold above that level. It remained within its intermediate term downtrend.
And
(short):
The
long Treasury spiked hard, bouncing off the lower boundary of its very short
term uptrend, closing within short and intermediate term trading ranges and
above its 50 day moving average.
GLD
was up but still finished within very short term, short term and intermediate
term downtrends and below its 50 day moving average. I was a bit surprised at the small size of GLD’s
move up on a day when stocks took such a pounding.
Bottom line: stating
the obvious, the volatility remains and the schizophrenia is back---stocks
down, bonds up, gold up, commodities down, REIT’s mixed, foreign stocks down,
the dollar down.
The weakness so
obvious in other markets of late finally leaked into the S&P. That said, the break of its short term
uptrend still has to be confirmed, which won’t happen until Friday. Further, even if the S&P confirms the break
of both the short and intermediate term uptrends, it will leave it in trading
ranges; and if those ranges are similar to the DJIA ranges and they hold, then
the downside risk, technically speaking, would be limited (2-4%). Finally, after the last big down day, the ‘buy
the dippers’ returned. So for the break
of the S&P short term uptrend to have any significance, this crowd must
beat a hasty retreat---which to date simply hasn’t happened.
On the other
hand, the Markets’ internal divergences continue to grow, demonstrating that
the ‘buy the dippers’ are deserting some Market segments. Which leaves me exactly where I was
yesterday: ‘until there is a resolution
to this dichotomy of price action, it would be foolish, in my opinion, to be
making any bets of any size save continuing to pursue the strategy that we have
been following for the last year and a half: it is not too late to Sell stocks
that are near or at their Sell Half Range or whose underlying company’s
fundamentals have deteriorated.’
More
on seasonal factors impacting the market (short):
If
the Market regressed to trend (short):
Fundamental
Headlines
There
was no relief on the data front. US
stats were mostly negative: September auto sales were in line, weekly mortgage
applications fell while purchase applications were flat and the September
Market PMI, the September ISM manufacturing index and August construction
spending were all disappointing. There
was one bright spot---the September ADP private payrolls report were ahead of
estimates.
Overseas,
the news was no better. German and the
EU manufacturing PMI’s were down; and the ECB announced that it was set to buy
junk Greek and Cypriot government bonds.
***overnight,
the EU reported PPI fell 0.1%; and the ECB left interest rates unchanged.
It
is getting repetitive to say that the dataflow continues to support the growing
odds that my number one risk to the economy may become the forecast. But I just did because it is.
The
standoff in Hong Kong continues though there is no violence. I poo pooed the significance of the protests
on Tuesday. Here is a counterpoint from Mohamed
El Erian on what Hong Kong means to the global economy (medium):
Ebola
is also generating its share of headlines.
It appears that the CDC and local officials have this problem under
control. I live in Dallas and the local
news coverage here is a bit more subdued that what I saw on CNBC. So I am still not sure how much impact that
this development will have.
Bottom line: the
twin evils of lousy global economic numbers and their potential impact of US
growth and corporate profitability along with widening cracks in Market
internals pounded away at investors yesterday.
I have no idea whether or not it was enough to discourage the ‘buy the
dippers’; but clearly we are going to have a good idea soon. If they still have dry powder, then the slow
agonizing advance of recent months will likely continue. If not, then maybe we are about to be
rewarded for our patience. Whatever occurs, short term sooner or later, I
believe that those deteriorating fundamentals and overvalued assets have to be
reconciled.
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.
Investing for Survival
Risk
parity, how it works and is it good for you (medium):
No comments:
Post a Comment