The Morning Call
10/7/14
The Market
Technical
The
indices (DJIA 16991, S&P 1964) continued to rest yesterday; though the pin
action---up early on then a sell off the rest of the day is not a positive
pattern. The Dow finished within its short (16332-17158) and intermediate
(15132-17158) term trading ranges and a long term uptrend (5148-18484). It finished right on the upper boundary of a
very short term downtrend and above its 50 day moving average.
The S&P
finished below the lower boundary of its short term uptrend (1973-2164) for the
fourth day. I am re-setting it to a
short term trading range (1925-2019; however, since it is still hanging around
the lower boundary of that short term uptrend, there is some probability that
this could be a false flag. It remained
within its intermediate term (1935-2735) uptrend and a long term uptrend
(771-2020). Like the Dow, it closed
right on the upper boundary of its very short term downtrend; but it is below
its 50 day moving average.
Volume declined;
breadth was negative. The VIX rose,
finishing within its very short term uptrend and above its 50 day moving
average. It is also within short and
intermediate term downtrends.
Update
on sentiment (short):
The
developing head and shoulders pattern in small cap indices (medium):
The
long Treasury rose, closing within a very short term uptrend, above its 50 day moving
average and within short and intermediate term trading ranges.
GLD
bounced off the lower boundary of its long term trading range; however, it
remained within very short term, short term and intermediate term downtrends
and below its 50 day moving average. I
am watching how GLD trades relative to the upper boundary of its very short
term downtrend and the lower boundary of its long term trading range. A break of one of these two trend lines ought
to give us a signal on price direction.
Bottom line: the
S&P appears to have broken its short term uptrend; although there hasn’t
been a convincing follow through to the downside. So this might be a head fake. I continue to think that how this index
trades around the lower boundary of that short term uptrend will provide some
guidance on direction.
With confusion
and schizophrenia now defining the pin action, I believe this makes for a
dangerous market to take any action save for the most skilled and nimble
trader. Our strategy remains: ‘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.’
Fundamental
Headlines
There
was virtually no economic data yesterday; and there will be almost no data for
the rest of the week. We did get the
August German industrial orders number which was down sharply.
***overnight,
German industrial production fell 4%, the biggest decline since 2009; the Bank
of Japan reiterated its QEInfinity policy while simultaneously lowering its
expectations for factory output (now what was that definition of insanity again?);
and this update on the Chinese economy:
Investors
appear to be awaiting the start of third quarter earnings season and the
release of the latest FOMC minutes (Wednesday) while enjoying a day with low
volatility.
Bank
of America’s estimate of third quarter earnings (short):
Bottom line: a
quiet day. Nonetheless, the sole
datapoint we received supported the ‘EU recession’ thesis. That leaves investors facing the untenable
investment equation: deteriorating fundamentals and overvalued assets.
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.
The
latest from John Hussman (medium):
US
versus foreign stocks (short):
Investing for Survival
When
things go wrong (medium):
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