The Morning Call
12/10/14
The Market
Technical
The
indices (DJIA 17801, S&P 2059) were on a roller coaster yesterday, staging
a late in the day rebound from a steep early decline---pretty positive pin
action I thought. But they ended within
uptrends across all timeframes: short term (16180-18930, 1866-2230),
intermediate term (16157-21122, 1709-2425) and long term (5360-18860,
782-2071).
Volume
inched higher; breadth was mixed. The
VIX rose, closing within a short term trading range, an intermediate term downtrend
but back above its 50 day moving average.
Overbought
versus oversold (medium):
The
Hindenburg Omen (medium):
The
long Treasury was up. That confirmed the
break above the upper boundary of its very short term trading range and re-sets
the very short term trend to up. It
remained within a short term uptrend. Although
it broke above the upper boundary of its intermediate term trading range intraday,
it finished within that range---though very close to its upper boundary. It remained above its 50 day moving average.
And
(short):
And
the direction of interest rates from Lance Roberts (medium):
GLD
advanced nicely, ending above the upper boundary of its short term downtrend. If it remains there through the close on
Thursday, that break will be confirmed and the trend will re-set to a trading
range. It continued to trade above the
lower boundary of its former long term trading range and its 50 day moving average,
but remains within its intermediate term downtrend. Clearly, if the short term downtrend is
broken, the weight of evidence will start to shift towards the odds that GLD
has made a bottom.
Bottom line: stocks’
bounce off a +200 point decline in the Dow yesterday morning demonstrates clearly
(at least to me) that the ‘buy the dip’ crowd is alive and well. There was enough lousy fundamental data (see
below) to warrant a Market shellacking; but investors seemingly continued to
gloss over bad news. It is also a sign
that another challenge of the S&P’s upper boundary of its long term uptrend
is likely to occur sooner rather than later.
TLT re-set its
very short term trading range to up and is very close to challenging its intermediate
term trading range, leaving open the question, is the US about to slip into
recession or is it still attracting money as a safe haven? GLD’s stronger performance also raises
questions about the Markets may be anticipating; although (1) it is yet to be confirmed
that a bottom has been made and (2) there is much that is incongruous with the
pin action in TLT. Safe haven seems to
be best scenario to explain both.
Fundamental
Headlines
Yesterday’s
US economic news provided little value added: the November small business
optimism index was better than estimate, weekly retail sales were mixed and
October wholesale inventories were ahead of forecast but sales were below
consensus.
The
big economic news came from overseas: October German trade data was
disappointing and October UK manufacturing output and industrial production
were down. What got everyone’s attention
were (1) the decision by the Bank of China to tighten the margin requirements
on stocks and high yield bonds and (2) a move by the large Chinese banks to
raise rates on time deposits. That led
to a huge decline in the Shanghai Composite.
That spilled over into the European markets which were further impacted
by a 10% fall in the Greek bourse. And
that put early pressure on our Markets.
Forgetting
the Market reaction, what is notable is that the steps taken in the Chinese financial
system, would seemingly turn on its head last week’s story that the Chinese
were joining the QE parade. But right on
schedule (at least for the hope and change crowd), overnight, China reported lower
than expected CPI which prompted investors to again anticipate (pray for)
monetary easing (see below). Not that
either of yesterday’s steps preclude the Chinese central bank from adding
reserves to the banking system. But it at
least suggests that a Chinese version of QE will likely look nothing like our
own or the Japanese variety and could mean that last week’s announcement was
just propaganda.
Of
course, the global central bankers couldn’t let the thought of money tightening
linger for too long, so a member of the ECB Board let the world know that this
time, really and truly, cross my heart and hope to die QE was absolutely for
sure a done deal in
Europe (right). That along with a rally in oil prices got
investors tip toeing through the tulips again.
***overnight,
Japanese consumer confidence declined (who woulda thunk), the IMF identified a
$15 billion shortfall in Ukraine’s
current budget which would be on top of the latest projections for a $17
billion loan, Iran forecasted oil at $40 a barrel, the US congress agreed on a
$1.1 trillion FY2015 budget (roughly flat with 2014) plus this from the dream
weavers:
(1) Ukraine
invites in Russian ‘specialists’ to help ‘de-escalate’ the conflict.
(2) China
CPI up less than expected, prompting investor euphoria in anticipation of
monetary easing,
Bottom line: there
is no shortage of potential scenarios that could end this drunken money induced
binge that the Markets have been on---and a surprising monetary tightening buy
a major central bank would qualify nicely.
However, judging by yesterday’s pin action, the investors just are not yet
ready to accept the divergence between price and value and/or to consider the likelihood
of any one of a number of exogenous events that could rip their lungs out.
David Stockman
points to another potential negative scenario (medium and today’s must read):
And the impact
of declining oil prices on corporate profits (medium):
Someday it will
happen; and the wider the aforementioned divergence, the more painful will be
the mean reversion process. In the
meantime, the buyers are in control and all I can do is Sell them our
Portfolios’ stocks were they bid them to absurd levels.
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.
Analyzing
current earnings and earnings forecast (medium and a must read):
The
latest from John Hussman (medium/long):
Subscriber Alert
The
price of Oneok Partners LP (OKS) has fallen below the lower boundary of its Buy
Value Range. Hence, it is being Removed
from the High Yield Buy List. The price
remains above its Stop Loss price, so the High Yield Portfolio will continue to
Hold OKS.
Investing for Survival (bonus)
Beware
of ETF’ with leveraged loan risk (medium):
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