Tuesday, October 7, 2014

The Morning Call---No letup in the stream of lousy international economic data

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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