The Morning Call
10/23/14
The Market
Technical
The indices
(DJIA 16461, S&P 1927) backed off of a very overbought condition yesterday. The DJIA remained within a short term
downtrend (15732-16823), an intermediate term trading range (15132-17158) and a
long term uptrend (5148-18484). It ended
back below its 200 day moving average.
The S&P retreated
back below the upper boundary of its new short term downtrend (1804-1933),
negating Tuesday’s break. It remained
within an intermediate term trading range (1740-2019) and a long term uptrend
(771-2020) but above its 200 day moving average.
Volume fell;
breadth deteriorated. The VIX rose 11%, finishing
within a short term uptrend and an intermediate term downtrend. It closed back above its 200 day moving
average.
The long
Treasury was up, but not enough to close back above the lower boundary of its
very short term uptrend, re-setting the trend to a trading range. It remained
within a short term uptrend, an intermediate term trading range and above its 200
day moving average.
GLD was off
slightly, ending back above the upper boundary of its newly re-set trading
range for the second day, re-setting back to a very short term uptrend. It
remained within short and intermediate term downtrends, below its 200 day
moving average but above its 50 day moving average.
Bottom line: the
S&P couldn’t hold above the upper boundary of it short term downtrend. It seems likely that it will challenge this boundary
again in the near future; but for the moment, the furious rally off last week’s
low has been stymied. In truth, the
market was so overbought, a sell off was hardly surprising.
That said, I have
noted several times that rallies in down markets can be quite vicious---the key
assumption, of course, being that we are in a down market. Admittedly, that is and will remain a very
iffy call until the Averages’ intermediate term trading ranges roll over to downtrends.
For the moment, I
will stick with the observation that there are a number of factors favoring
both sides of the issue of Market direction.
I can afford to be a bit Pollyannaish about it because valuations are so
high that I certainly would not be a buyer if the Market resumes its uptrend
nor would I be a buyer in a sell off unless it is of an order of magnitude that
we haven’t seen in five years.
I would use any rise in prices to Sell stocks
that are near or at their Sell Half Range or whose underlying company’s
fundamentals have deteriorated.
Fundamental
Headlines
There
were two US economic releases yesterday: weekly mortgage applications were up
but the more important purchase applications were down; and September CPI was a
tad hotter than expected though ex food and energy, it was in line. Neither is noteworthy or newsworthy.
Overseas,
the news was a bit more disappointing: the Bank of England left interest rates
unchanged (the only item that could be viewed as a plus); Russia and Ukraine
failed to reach an agreement on winter gas pricing (who woulda thunk?); a
report out of Europe said that eleven banks from six countries failed the ECB
stress test; and the ECB mumbled another denial that it was going to commence
purchasing corporate debt in the near future.
Apparently, some genius did the math (medium and a must read):
David Stockman on the recent QE
comments from the US and EU (medium):
http://www.zerohedge.com/news/2014-10-22/wall-street-one-sick-puppy-thanks-even-sicker-central-banks
Finally,
the Japanese trade deficit was the worst in six months (medium):
Discouraging
but it reinforces my concern regarding international economic weakness
impacting the US. But no one else seemed
to care. The hangover from Tuesday’s
euphoric rise on the promise of QEforever was enough to keep momentum to the
upside in yesterday’s early trading until the oil price got hammered and Canada
experienced (what preliminarily appears to have been) a terrorist attack.
With
respect to the family of the young Canadian soldier that lost his life, I think
that the combination of the Market being hugely overbought along with the oil
price decline were the drivers of yesterday’s sell off. In the case oil, while lower prices are undoubtedly
a boon to energy consumers, it is also perceived as a manifestation of the aforementioned
‘international economic weakness impacting the US’, i.e. weak demand for
energy. I am not ready to concede that
point (slowdown in the US economy) yet---though the evidence is mounting that
it is indeed the case.
The takeaway
here, I think, seems to be that investors are not spooked by lousy foreign economic
reports, their frequency and magnitude notwithstanding. But rather they are holding on for dear life
to the prospect that the US will escape a global economic slowdown unscathed
and only when beaten over the head with startlingly poor domestic stats are
they prepared to consider the probability that the same fate awaits the US.
***let’s see how they react to
this overnight news: China, Japan and Germany reported better than expected September
Markit flash PMI’s; the French Markit flash PMI was down as was the October Chinese
manufacturing index (five month low).
Elsewhere the rocket scientists at the IMF recommended that Japan go
ahead with its second tax hike---you know, because the first worked out so
well.
Bottom line: the
global economy continues to deteriorate.
To be clear, I don’t have a problem with other investors making the data
prove that this will lead to a US slowdown; indeed, that is the exact process
we are going through right now with our own forecast. But I have a problem
ignoring the odds of a US slowdown at a time when US stocks are priced for
perfection.
My
bottom line is that for current prices to continue 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.
The
latest from Lance Roberts (medium):
Use
valuations for expected returns not market timing (short):
Update
on this earnings season’s profit and revenue ‘beat’ rate (short):
Investing for Survival
Protecting
your bond portfolio:
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