The Morning Call
The Market
Technical
The
indices (DJIA 17652, S&P 2039) continued to consolidate from a decreasing
overbought condition. Both closed within
uptrends across all timeframes: short term (16053-18810, 1841-2207),
intermediate term (16053-20153, 1692-2408) and long term (5159-18521,
781-2043). They are also finished above
their 50 day moving averages.
Volume
rose; breadth somewhat disturbingly fell noticeably. The VIX also up again, this time by over
5%. It bounced off the lower boundary of
its short term uptrend but stayed within its intermediate term downtrend and
below its 50 day moving average. The lousy
breadth and rising VIX are at odds with a flattish consolidating stock
Market---something we need to watch short term.
The
long Treasury increased in price, finishing within a very short term trading
range, a short term uptrend and an intermediate term trading range and above
its 50 day moving average.
GLD
rose, remaining within downtrends across all time frames and below its 50 day
moving average.
And:
Bottom line: the
Averages continued to quietly working off their overbought condition, though
the poor breadth and rising VIX suggest more negative pin action than is apparent
with just the indices. That is not
necessarily a bad thing---consolidating an overbought Market would generally
involve such things; but the inconsistency is something to which to pay
attention. Of course, it could be a
reflection that the indices (at least the S&P) are very close to the upper boundaries of their long term uptrends; and that should pose some stiff resistance whether or
not they are ultimately broken.
However,
if stocks continue to move higher, I will 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.
Thanksgiving
and the Santa Claus rally (short):
Fundamental
Headlines
Yesterday’s
US economic news was mixed. Weekly
jobless claims were up more than anticipated, while the October federal deficit
was lower than expected---the latter being a big plus in my book.
Overseas,
the ECB lowered its forecast for EU GDP growth and inflation for the entire
period 2014-2016. Chinese October fixed asset investments, retail sales and
industrial production all missed expectations on the downside. Reinforcing a bleak international economic
outlook and the risk that sooner or later, the US will feel the effect.
***overnight,
France and Germany reported positive third quarter GDP numbers. Germany was up 0.1%, avoiding by a short hair
an official movement into recession.
Worth
mentioning is the pin action in oil which suffered more severe whackage
yesterday. I have no idea where the
crossover point is, but there is one in which the positive created by lower
prices to consumer and industry is offset by losses in employment and weakening
corporate financial structures resulting from decreased drilling activity
(remember the energy industry has been a major contributor to job growth and
cap ex spending).
Finally,
true to His ideological form, Obama will apparently impose immigration reform
via executive action as early as next week.
Clearly, He has no intent is working with congress. That likely insures gridlock (which is not
terrible) and lots of entertaining partisan theatrics for the six o’clock news
over the next two years. Unfortunately,
it does nothing for fiscal, regulatory and tax reform.
Bottom line: the
economic data and geopolitical events provide little reason to justify current
equity valuations. The one datapoint on
which one can hang a bullish argument is rising corporate profits which, to be
sure, is a significant component in the valuation equation. However, even computed on forward earnings
estimates, stocks are not cheap. And when
one considers that (1) cost savings via reduced employment and earnings per
share increases via accounting gimmickry [borrowing cheap money and buy back
shares] have finite lives and (2) profits as a percent of GDP are at historical
highs in a stat that is one of the most mean reverting measures in economics, it
seems only a matter of time until this final slat gets kicked from under the
optimists.
In the meantime,
as long as profits appear to be improving and nothing occurs to alter that perception,
the Market will likely have an upside bias.
Until that happens, our strategy will remain the same---when a stock’s
price moves into its Sell Half Range, our Portfolios will act accordingly.
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.
No comments:
Post a Comment