The Morning Call
10/15/14
The Market
Technical
The
indices (16315, S&P 1877) were basically flat on the day (Dow down slightly,
S&P up slightly). But it is
important to note that it was indicative of a change in the overall Market
pattern. That is for the last year, the
buy the dippers controlled the tape---any market weakness in early trading was
quickly overwhelmed by buyers. Now early
market strength is being overcome later by sellers. That clearly suggests a negative shift in
sentiment.
The
Dow remained below the lower boundary of its short term trading range
(16331-17158) for the second day. A
close below 16331 today will confirm the break and the short term trend will
re-set to down. If finished within a very short term downtrend, an intermediate
(15132-17158) term trading range and a long term uptrend (5148-18484). It also ended below its 200 day moving
average.
The S&P
closed below the lower boundary of its newly re-set short term trading range
(1904-2019) for the second day. If it
remains below 1904 at the close today, the short term trend will re-set to
down. It also finished below the lower
boundary of its intermediate term uptrend (1939-2730) for the fourth day; that
fulfills the time element of our discipline and re-sets the intermediate trend
to a trading range (1740-2019). It is
also in a very short term downtrend, a long term uptrend (771-2020) but below
its 200 day moving average.
The significance
of the 200 day moving average (short):
Volume was flat;
breadth was mixed. The VIX retreated,
falling back below the upper boundary of its intermediate term downtrend,
thereby negating the break. However, it
remained above the upper boundary of the newly re-set short term trading range
for a second day. If it closes above
that boundary today, it will re-set to an uptrend. It also ended above its 50 day moving average.
The
long Treasury continues its strong performance, closing within its very short
term and short term uptrends, its intermediate term trading range and above its
200 day moving average.
GLD
rose, closing above the upper boundary of its very short term downtrend for the
second day, re-setting to a trading range.
But it continued to trade within short and intermediate term downtrends
and below its 50 day moving average.
Bottom line: the
bounce yesterday was not that surprising in that stocks were very
oversold. What was surprising was the
late in the day selloff which resulted in the confirmation of the break of the S&P
intermediate term uptrend and left the DJIA’s short term trend in danger of
re-setting to a downtrend. This late in
the day selloff is part of a very unhealthy developing pattern. Clearly, a continuation means more downside.
I would resist
any temptation of spend cash and I would be checking all positions that are
overpriced or the underlying company’s fundamentals are deteriorating as
possible sale candidates if we get a bounce.
How oversold is
this market? (short):
Humble
Student says we are in the 7th inning of a correction (medium):
A
study of bull markets, their length and their corrections (short):
Fundamental
Headlines
Two
secondary US economic stats were released yesterday; but they were hardly
informative: the September NFIB small business optimism index was slightly
below estimates while weekly retail sales were mixed.
Overseas,
September CPI numbers across the EU came in below expectations, many in
negative territory. This is not a plus
in an environment in which the major concern is recession/deflation. In addition, October German investor
confidence was reported at -3.8. Again
not positive amidst worries of economic malaise.
Mid-day,
there was more troubling news out of Europe (short):
***overnight,
Chinese inflation was reported at a five year low; a former director of the
Bank of Japan said that it was time to taper.
Bottom line: the
only economic news yesterday was out of Europe and it was bad---keeping global
recession front and center as our major risk.
The earnings were mixed. Bonds
keep rallying; not reassuring in the midst of all the rhetoric about an
improving US economy. And gold is doing
better; also not exactly a plus.
Meanwhile, the technicals are breaking down. Most important, valuations remain well north
of Fair Value---which is not good when the fundamentals are being called into
question.
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.
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