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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