Tuesday, November 11, 2014

The Morning Call---The Dow and S&P re-sync to the upside

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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