The Morning Call
11/6/14
The Market
Technical
The indices
(DJIA 17484, S&P 2023) resumed their rally yesterday, though they are now
back in overbought territory. 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 boundaries of its short and intermediate term trading ranges
(1820-2019, 1740-2019). A finish above
2019 on Friday will re-set the short term trend to up, above 2019 on Monday,
the intermediate term will re-set to up.
It also closed within a long term uptrend (775-2032) and above its 50
day moving average. Clearly, the S&P
is now attempting to resolve the divergence in the Averages short and
intermediate term trends. Given recent momentum
as well as seasonal technical factors, I am assuming that the indices’ short
and intermediate term trends will re-sync to the upside.
Volume fell;
breadth improved. The VIX was off 4%, finishing within a short term uptrend, an
intermediate term downtrend and above its 50 day moving average.
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. The recent pin action continues
to suggest either weak economic growth or a flight to safety or perhaps a
little of both.
GLD got hammered
again, closing below the lower boundaries of its very short term, short term
and intermediate term downtrends as well as its long term trading range. If GLD
remains below that long term trading range’s lower boundary through the bell today,
it will re-set to a long term downtrend.
Bottom line: the
Averages did quite well yesterday as prices rose and the S&P began its
challenge to re-sync with the Dow on the upside. As I suggested yesterday, given the current
momentum as well as seasonal factors, it seems likely that the S&P will
confirm its break and that both of the indices will challenge the upper boundaries
of their long term uptrends. Of course, to do so would amount to only a
fractional rise; so such a prediction doesn’t take a lot of courage.
The bigger
question is, if a break occurs, how far can prices run? Given our fundamental work, the answer would
be ‘not far’. But fundamentals haven’t
meant diddily in two years. So the
answer then becomes predicated on when as exogenous event snaps investors back
into reality; and, by definition, that is unknowable. Hence it appears that I will have to be satisfied
with an equity exposure of 55-60% and remain patient with what today is too
large a cash position.
That
said, 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.
Fundamental
Headlines
The
US economy dataflow continued disappointing: weekly mortgage applications fell,
though purchase applications were up, the October ADP private payroll report
rose less than expected and the October ISM nonmanufacturing index was below
estimates. This week’s US stats appear
to be following last week’s EU data---returning to discouraging.
Eurozone
data just keeps getting worse; this time September retail sales fell and the
August number was revised down. Clearly
not good if you happen to believe that the global economies haven’t decoupled.
***overnight,
the ECB kept interest rates unchanged.
Draghi has a news conference later---more to come.
Of
course, yesterday was a time to bask in the warm glow of victory for those who
believe that the GOP will bring fiscal, regulatory responsibility back. They might, though as I have warned, based on
past performance, it shouldn’t be taken as a given. And even if they give it the All American try,
Obama didn’t sound all that willing to compromise in a press conference
yesterday. Again, I have noted His ideological
inclinations; and should He remain true to form, then I think that we are in
for lots of vetoes and executive actions---not fiscal, regulatory reform.
An
op-ed from Boehner and McConnell (medium):
That
said, the election results will undoubtedly have a positive impact on consumer,
business and investor psychology---at least initially. And on a longer term basis assuming that the
GOP is serious about reform, we can take comfort that the worst is likely over
in terms of unwanted government intervention and that a couple more years of
gridlock is better than a sharp stick in the eye.
Why
the economy crushed the democrats and why neither party will do anything to
correct the problem (short):
Bottom line: the
US economy continues to stumble and Europe is even worse. However,
at the moment, it is the relief that the US is perhaps at the beginning of the
end of a move to more centralized federal government power that will guide
investor psychology over the near term.
To be clear, I am just as relieved as anyone else. I just don’t see how that can improve an
already historically low discount factor (high P/E).
In the end, our
Valuation Model will continue to 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.
Subscriber Alert
The
stock price of International Business Machines (IBM-$162) has fallen below the
upper boundary of its Buy Value Range.
Accordingly, it is being Added to the Dividend Growth Buy List. No shares will be purchased at this time.
Investing for Survival
Understanding
your real returns---post inflation and fees (short):
http://pragcap.com/understanding-your-real-real-returns-fee-edition
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