The Morning Call
The Market
Technical
The indices
(DJIA 17719, S&P 2052) moved higher yesterday, leaving them within uptrends
across all timeframes: short term (16082-18828, 1851-2215), intermediate term
(16053-20153, 1697-2413) and long term (5159-18521, 783-2062). They are also finished above their 50 day
moving averages. The pin action followed
the blueprint of the last year---early morning sell off bringing in the ‘buy
the dip’ crowd and finishing up on the day.
So appears that the driving force in this uptrend is alive and well.
Volume was flat;
breadth improved. The VIX fell, closing
within a short term uptrend, an intermediate term downtrend and remained on its
50 day moving average.
Update
on sentiment (short):
The long Treasury
rose, remaining within a very narrow short term trading range, a short term
uptrend, an intermediate term trading range and above its 50 day moving
average.
GLD was up. It ended back above the lower boundary of its
former long term trading range for the second time. So the battle over this price level
continues. As I have noted, how this
tension gets resolved may determine where the bottom is in the current downtrend
and will likely indicate near term price direction. Meanwhile, it finished within short,
intermediate and long term downtrends and below its 50 day moving average.
Bottom line: the
Averages rallied yesterday as domestic economic data improved while the US
political environment grows more hostile and global measures were abysmal,
indicating that the positive bias/uptrend remains intact. However, the question that I have posed and
still needs an answer, is how will the S&P (2052) handle the upper boundary
of its long term uptrend (2062)? I
believe that it is the key technical factor at this time; and how it gets
resolved will likely determine S&P price movement over the short term and
perhaps even longer.
Stock
performance in December (short):
Fundamental
Headlines
It
was a full day for US economic data which weighed to the plus side: the sole
negative was the November Markit PMI which joined the rest of the world’s poor
performance; the October CPI and ex food and energy numbers were mixed; and
weekly jobless claims, the Philly Fed manufacturing index, October existing
home sales and October leading economic indicators were all positive. The good news is that many of these measures
are primary indicators continuing the trend back to a mixed to positive
dataflow and providing more support to our current forecast.
Clouding
the picture somewhat was the ongoing debate as to just how much confusion and
uncertainty were apparent in the FOMC minutes released Wednesday.
Mohamed El Erian
on the FOMC minutes (medium):
Scott
Gannis on the FOMC minutes (medium):
Overseas,
the news wasn’t quite so jolly with UK grocery store sales falling for the
first time in 20 years, Chinese and EU November PMI’s down across the board (including
Germany), and EU consumer confidence plunging (-11.6) to nine month lows. Finally, the European Commission is
considering fining France for failure to reduce its budget deficit---more
evidence of the turmoil within EU policy making circles. All this clearly portrays why global recession
is the number one risk to our economy.
***overnight,
China cut its benchmark interest rate, Draghi said that the ECB is ‘ready to
expand’ its asset purchase program---both sure to thrill the easy money, hedge
fund, carry trade, yield chasing crowd. The
EU reported inflation at +0.4% versus its 2.0% target.
The
other subject commanding investor attention was Obama’s speech last night on
His executive order on immigration. I
don’t want to get too deep in the weeds on politics; but (1) most of what Obama
proposed I think makes sense---assuming the measures on border security,
deportation of criminals and liberalizing the statutes that apply to highly
educated/entrepreneurial applicants are more than boilerplate, (2) however, how
He did is unconstitutional by His own admission, (3) hence, it is a very
slippery slope to initiate good policy using unconstitutional means. Yes, the first time [like now] may seem
justifiable; but how soon will it be when we reach the point that not so good
policy can be successfully dictated by unconstitutional means?
That said and forgetting
the appropriateness of the policy measure, this step is clearly a thumb in the
eye of the GOP which sets the stage for an acrimonious next two years. Unfortunately aside from the entertainment
value of the vitriol we are apt to see, nothing is likely going to get done on budget,
tax and regulatory reform for another two years, at least; and that is a big
negative.
Obama
in His own words on immigration (8 minute video and a must watch):
Bottom line: the
US economy appears to be back on its prior sluggish, below average secular
growth rate---‘growth rate’ being the operative words. That helps expectations for earnings growth
and a higher dollar which it turn contributes to investor optimism.
Regrettably, the
rest of the world shows no sign of halting its economic decline, much less stabilizing---there
are now three of the world’s largest 10 economies
officially in recession (Japan, Brazil, Italy).
In addition, the current pissing contest between the EC and France over
its 2015 budget is indicative of the lack of policy consensus within the
EU---not a good sign that agreement can be reached on future policy
decisions/moves.
All other things
being equal, it would appear that the pluses and minuses may be in some sort of
balance and, hence, provide a modest incentive to accumulate cash only to the
most pessimistic investor. However, all
things aren’t equal. Specifically, there
currently exists a really poor equity price/value equation which sooner or
later will likely be rectified. And given
the magnitude of the downside when, as and if it does occur, it seems
reasonable to me that portfolio protection makes sense.
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.
Is
this market on borrowed time (medium)?
Thoughts
of an investment manager ‘riding the wave’ (medium and a must read):
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