The Morning Call
11/11/14
The Market
Technical
The indices
(DJIA 17613, S&P 2038) continued their march higher. The Dow finished within uptrends across all
time frames: short term (16053-18819), intermediate term (16053-21053) and long
term (5159-18521). It also ended above
its 50 day moving average.
The S&P
closed above the upper boundary of intermediate term trading range for the
fourth day, thereby confirming the break of that range and re-setting to an
uptrend (1684-2400). It re-set to a
short term uptrend on Friday (1834-2200).
It remains in a long term uptrend (781-2043) and above its 50 day moving
average.
Volume fell;
breadth was poor. The VIX was off again, finishing within a short term uptrend---but
right on the lower boundary of that trend---and an intermediate term
downtrend. It also ended below its 50
day moving average.
Update
on sentiment (short):
The long
Treasury declined, ending within a very short term trading range, a short term
uptrend, an intermediate term trading range and above its 50 day moving
average.
GLD reversed
Friday’s strong move up, closing below the lower boundaries of its short term,
intermediate term and long term downtrends and below its 50 day moving average.
Bottom line: the
Averages continue their relentless advance, with the indices now back in sync
to the upside across on timeframes but in the most extended overbought
condition in over a year. Clearly, the
momentum is there and the seasonal factors are quite positive; so it is pointless
for me to argue with price. Indeed,
whatever my opinion on price versus value, why would I complain when our
Portfolios are 55-60% invested in equities---save that we are not more fully
invested?
That
said, because of my opinion on price versus value, if stocks continue to move
higher, I will continue to use this rise in prices to Sell stocks that are near
or at their Sell Half Range or whose underlying company’s fundamentals have
deteriorated.
Seasonal
tailwind (short):
Sell
side consensus indicator (short):
Fundamental
Headlines
It
is going to be a very quiet week for US economic data. Nothing yesterday and nothing today.
Overseas,
the news continues disappointing.
September Italian industrial production fell 2.9%; plus the government
announced that its economy will contract in 2014. In geopolitical news, over the weekend,
Catalonians voted for independence from Spain.
***overnight,
Abe is reportedly considering delaying the second sales tax hike.
Bottom line: ‘stocks continue to levitate as a result of
(1) Japanese all in, triple down, go for the gusto, balls to wall QE---an
experiment that will not end well, (2) the hope of a milder version of QE from
the ECB---an experiment which may not even start well, given political constraints,
(3) it is a feel good time of the year---that’s great but how many multiple
points is that worth when stocks are already richly valued and (4) the
beginning of the end of the move to more concentrated government power in the
hands of our ruling class---we hope.
I have no doubt that these factors can and
likely will drive stock prices higher.
But that will happen without the benefit of basic arithmetic. Earnings, ROE, interest rates, debt to
equity, inflation, book value and many more are numeric measures of corporate
profitability and health. Yet no matter
how positively I can reasonably assume them to be, they portray significant
stock overvaluation. I have no idea what starts the process of adjusting price
to value; I just know that our Models have never been at such odds with reality
that a correction didn’t re-set what was a very considerable difference between
price and value.’
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 Barry Ridholtz (medium):
The
problem with an overcrowded trade (medium):
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