Wednesday, October 1, 2014

The Morning Call---The growing dychotomy in the Markets

The Morning Call

10/1/14

The Market
           
    Technical

            The indices (DJIA 17042, S&P 1972) drifted lower yesterday. The Dow finished within its short (16332-17158) and intermediate (15132-17158) term trading ranges, a long term uptrend (5148-18484) and above its 50 day moving average.  Intraday, it rose and touched the upper boundary of the very short term downtrend that I mentioned in yesterday’s Morning Call, but failed to penetrate it and fell back.

The S&P ended within uptrends across all time: short term (1965-2156), intermediate term (1935-2735) and long term (771-2020).  Like the Dow intraday, it touched the upper boundary of a very short term downtrend and retreated.  It also fell below its 50 day moving average.

Volume rose while breadth was poor.  The VIX was up again, staying within a very short term uptrend and above its 50 day moving average.  It inched closer to the upper boundary of its short term downtrend and remained well within an intermediate term downtrend.

            The long Treasury declined, finishing within short term and intermediate term trading ranges and right on the lower boundary of its newly formed very short term uptrend.  It remained above its 50 day moving average.

            GLD continues to pounded, closing within a very short term, short term and intermediate term downtrends and below its 50 day moving average.

Bottom line: the volatility remained but the schizophrenia took a break because almost everything was down---stocks down, bonds down, gold down, commodities down, REIT’s down, foreign stocks down; but the dollar was up. 

The major Averages are holding on to their primary trends though virtually everything else is breaking short and/or intermediate term trends.  As I keep saying, these divergences can resolve themselves either by the weak entities strengthening or the strong weakening.  The only problem is that the list of weak performers keeps growing while the strong ones are shrinking. 

That said, 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. 

            The latest from Stock Traders’ Almanac (short):

    Fundamental
    
       Headlines

            Yesterday was not a good one for headlines of any kind.  US economic data was disappointing---weekly retail sales were mixed, the July Case Shiller home price index was below expectations as were September Chicago PMI and the September index of consumer sentiment.

            International stats were no better: Japanese household spending and industrial production were well below estimates, Chinese industrial production was less than anticipated and the EU CPI was the lowest in five years.

            ***overnight German and EU PMI scored losses; and Draghi announced plans to buy junk rated Greek and Cypriot bonds---oh, yeh, this is going to end well.

            None of this makes me feel any better about our forecast.  As you know, my primary concern has been a weak global economy infecting our own; and we got numbers supporting both yesterday.  And just to be clear, weak foreign economies aren’t the only thing that can impact US data---a strong dollar plays merry hell with corporate profits--- remember, roughly one half of US corporate profits come from overseas.

            Finally, we got a wild card news event after the close---the first Ebola case in the US was reported.  I don’t know how this will be received by investors; but the good news is that I won’t have to wait long to find out.  We will know by the close today.

Bottom line: yesterday’s data fed my concerns about the global economy and its potential impact on our own.  The only thing giving me hope right now is that we got a couple of upbeat primary indicators in the last week that offset a string of really lousy ones.   Hope, of course, is not an investment strategy; and as long as we keep getting poor numbers, it is not even a realistic sentiment.

The other thing that is bothersome is the chaos in the Markets right now.  Yes, all appears well if one only looks at the major indices.  But digging deeper, a number of markets are getting crushed; and even worse, there seems to be no single logical economic/political scenario that explains the sum of all this action.  The only thing that makes sense to me is that investors in general are starting to run for the exit for no reason other than risk reduction.   Since I am more worried about mispriced assets than I am about the economy, this only makes me that much more skittish.    

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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