The Morning Call
10/9/14
The Market
Technical
With
more prescience that I deserve credit for, I said yesterday ‘It could be that yesterday (Tuesday) represented some sort of emotional climax’. The
indices (DJIA 16994, S&P 1968) exploded yesterday, negating a number of
technical breakdowns on Tuesday. Still
the Dow finished within its short (16332-17158) and intermediate (15132-17158)
term trading ranges and a long term uptrend (5148-18484). It finished above the upper boundary of a
very short term downtrend; if it closes above it today, then that trend break will
be confirmed. It also ended above its 50
day moving average.
The S&P
finished within a short term trading range (1904-2019). It closed back above the lower boundary of
its intermediate term uptrend (1939-2730), negating Tuesday’s break. Like the Dow, it closed above the upper boundary
of its very short term downtrend; the break will also be confirmed at the final
bell today. It is also in a long term
uptrend (771-2020) but below its 50 day moving average.
Volume was up (a
good sign); breadth broadened. The VIX
fell, finishing back below the upper boundary of its short term downtrend,
negating that break. It closed within a
very short term uptrend, over its 50 day moving average and within an
intermediate term downtrend.
And:
Counterpoint
(short):
The
long Treasury moved up, remaining above the upper boundary of its short term trading
range for the second day. It ended
within a very short term uptrend, above its 50 day moving average and within an
intermediate term trading range.
GLD
rose but stayed within very short term, short term and intermediate term downtrends
and below its 50 day moving average.
Bottom line: we
know that stocks were modestly oversold at the close Tuesday and we know that
there was a lot of short covering yesterday.
The question is, how much of that propelled yesterday’s pin action and
how much of the rise was a function of a major sentiment change among investors. As always, follow through is extremely
important. The problem since mid-September
has been the oft mentioned schizophrenia in which follow through to big down or
up days have been limited; and, indeed, more often than not those big up/down
days have been trailed by a move in the opposite direction. So at this moment, technically speaking, I have
no clue what happens next. However, our
strategy hasn’t changed---use strength to Sell stocks that are near or at their
Sell Half Range or whose underlying company’s fundamentals have deteriorated.
Historical
Market performance in October (short):
Very
interesting study on the follow through after a big down day is followed by a
big up day (short):
Fundamental
Headlines
Only
one economic stat was released yesterday and it was a secondary indicator:
weekly mortgage and purchase applications were up.
Nothing
from the international arena.
None
of that mattered because the minutes from the last FOMC meeting were released,
the language was much more dovish than investors expected and. As noted above,
stocks went into a Titan III formation.
Here are the minutes preceded by a summary:
Here
is Fed whisperer Hilsenrath’s analysis:
What
does this all mean?
(1) any
rate hike will come later than has to date been expected. So any pain that the US economy and/or
markets are destined to suffer has likely been postponed---unless or until such
time that Markets decide that the Fed’s venture into uncharted monetary policy waters
will ultimately end badly and they take control of interest rates into their
own hands.
To be sure given
the global economic slowdown and the growing probability of it spilling over
into the US economy, I can see how the Fed could reason that tightening too
fast will only exacerbate the effect of a worldwide decline. On the other hand, our economy has been and is
struggling and all that cheap money the Fed foisted on the financial system
didn’t do diddily to change that. So not
raising rates [staying easy longer] as fast as some thought is not apt to have
much effect on our economy. But as
always, it has had an impact on the Markets---witness yesterday’s pin action. How much longer investors will buy into a policy
that doesn’t promote higher national income or corporate profitability but
pushes up asset prices instead is beyond me.
But one day this nonsense will end.
(2) the
minutes also expressed FOMC concern about a strong dollar. The reasoning being that a strong dollar makes
US exports more expensive, which serves to curb exports which would then aggravate
any slowdown. But if the initial concern
about a US slowdown is a function of a slowing global economy, then won’t a
weaker dollar worsen the very economies about which the FOMC is worried in the first
place? Plus, whether the Fed raises
rates or not, the US is still the cleanest dirty shirt which means the dollar
will remain a safe haven; and if the global economy weakens more than it would
if the dollar stayed strong, then the dollar becomes an even safer haven. In other words, if I am correct, any attempt
to weaken the dollar will only lead to more strength.
Bottom line: if
there was any thought that the Markets might have grown skeptical of endlessly
free money, yesterday took care of that notion.
Unfortunately, nothing implied by the FOMC statement does anything to
lessen the number one risk to our forecast.
Indeed, if the Fed is successful in driving the dollar down and
improving the US balance of payment, it will only make economic conditions in Europe,
Japan and China worse. Sort of reminds
me of something that the Bank of Japan would do---and that is not a
compliment. On the other hand, it may
buy some time for the Markets.
Certainly, yesterday bears witness to that. That said, the Fed’s action does nothing to
alter our economic forecast and may only intensify the yawning gap between
value and price.
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 Doug Kass (medium):
The
latest from Barry Ritholtz (medium):
Investing for Survival
Will
rising rates hurt REIT’s (short):
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