Thursday, November 13, 2014

The Morning Call---US subpar growth, recession in Europe = higher stock prices?

The Morning Call

11/13/14

The Market
           
    Technical

            The indices (DJIA 176123, S&P 2038) continued to consolidate from their very overbought condition---clearly the sideways movement over time being preferable to a price decline.  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 was back to former levels (still low); breadth was flat.  The VIX rose again, ending within a short term uptrend and an intermediate term downtrend and below its 50 day moving average.

            The long Treasury fell 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 backed off, ending within downtrends across all time frames and below its 50 day moving average.

Bottom line: the Averages rested again, calmly working off an overbought condition.  Add in the recently re-established upside momentum of the indices along with the seasonal bias and investor/electorate anticipation of a more positive political environment and it seems likely that the path of least resistance for stock prices will remain up.   The one caveat is an exogenous event that focuses investor attention of value versus price momentum. 

            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

            Yesterday’s US economic news was basically trendless: weekly mortgage applications were down but purchase applications were up; weekly retail sales were mixed; September wholesale inventories grew more than expected but sales rose at a slower pace; and the NFIB small business optimism index was marginally higher than estimates.  While providing little guidance on direction, that lack of guidance itself tells us something, to wit, the economy may be improving but it continues to be a struggle to do so.

            Overseas, it was more of the same, that is, bad news.  The Bank of England revised down its 2015 estimates for growth and inflation in the EU. 

            ***overnight, the ECB lowered its forecast for 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.

Bottom line: the facts on the ground continue to point to a subpar growth rate in the US, the threat of recession in both Europe and Japan and a less than stable global geopolitical environment.  Meanwhile, US equities valuations are discounting growth and prosperity for as far as the eye can see.  How long this disconnect can last is anyone’s guess.  Gosh only knows it has existed for more than a year; and it is likely to continue as long as conditions appear to be improving and some event or series of events alters that  perception.  Until that occurs, 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.

            Why the stock market is detached from the economy (medium):

            Stock returns after periods of above average performance.  While this is a great commercial for a ‘buy and hold’ strategy extending over a long period of time, it only calculates return on the assumption of an entry point at the beginning of any listed timeframe and it fails to make a comparison to a ‘buy low, sell high’ strategy.

            The latest from John Mauldin (long):

            More on valuation (medium):

       Investing for Survival

            Be alert to year-end tax selling opportunities (medium):


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