The Morning Call
5/20/15
The
Market
Technical
The indices
(DJIA 18312, S&P 2127) were basically flat yesterday, with the Dow up and
the S&P down. Both closed above their
100 day moving average and their all-time highs.
Longer term, the
indices remained well within their uptrends across all timeframes: short term
(17201-20001, 2019-2998), intermediate term (17345-22473, 1823-2593 and long
term (5369-19175, 797-2135).
Volume rose
slightly; breadth remained mixed for a third---not a sign of strong upward
momentums. The VIX rose but still ended below
its 100 day moving average and the upper boundary of a very short term downtrend---both
positives for stocks. I continue to
think that at current price levels, it is attractive as portfolio insurance.
Those pesky
divergences (short):
The long
Treasury was down, finishing below its 100 day moving average and near the lower
boundary of a short term downtrend.
GLD got whacked
and closed below its 100 day moving average and the neck line of the head and
shoulders pattern. GLD continues to be
unable to get out of its own way.
Oil fell back below
the upper boundary of its recent short term trading range; while the dollar
soared back above the lower boundary of its recently broken short term uptrend.
Bottom line: everyone
appears to have taken a rest yesterday, weighing the tightening implications of
those blowout housing start and building permits numbers against the ECB ‘front
end’ loading of QE statement. The pin
action in other markets reflected this uncertainty with bonds and the dollar
seeming to point to the prospect for a stronger economy and higher rates while GLD
and oil indicating just the opposite. In
short, investors in these various asset classes continue to read the tea leaves
differently. I think that argues for
caution whichever one you might be interested in.
That said, the
indices are very close to challenging the upper boundaries of their long term
uptrends. I can’t imagine them coming
this far and not attempting an assault.
Nonetheless, I continue to believe they will be unable to successfully challenge
to any meaningful extent. On the other
hand, longer term, the trends are solidly up; so at the moment, there is little
threat of a measurable sell off.
The
long Treasury’s recent pin action continues to suggest either inflation or a
re-evaluation by investors of the sustainability and/or efficacy of QE. Both clearly run counter to the message to
the stock market. Plus the volatility in
gold, oil and the dollar only add their own version of a confused message. I have no clue what long rates are going to
do; but I worry that about the ‘why’ of what they will do.
Update
on Fed liquidity and the markets (medium):
Valuations
and the Fed model (short):
The
lament of another investor (i.e. like yours truly) that has been bearish on the
Market (medium):
Fundamental
Headlines
Yesterday’s
US economic stats were mixed: month to date retail sales softened versus last
week, but April housing sales and building permits were gangbusters
numbers. Clearly the latter are by far
the more important. It is the first
really good stats we have gotten from a key economic indicator in months. Whether this is the sign that the economic
slowdown has bottomed or is just an outlier will only be known in the
future. I will repeat what I have said
about other positive datapoints of late, we need some pluses just to keep from
having to lower our economic growth estimates for a second time.
Meanwhile,
we got our second laughable Fed economic study in as many days. You have to wonder what is prompting all this
upbeat propaganda. Surely not a coming rate
hike. (medium):
Overseas,
the UK and EU April CPI’s came in above expectations---another sign of a
stronger growth and keeping Europe as the bright spot in the international
economic picture. In addition, an ECB
executive said in a speech that the ECB intends to ‘front load’ its QE. That helped European stock markets, though I remain
a skeptic on its ultimate impact on their economies.
***overnight,
first quarter Japanese GDP was reported up much more than anticipated; the Bank
of England kept key interest rates at record lows.
The
dark spot in Europe remains how the Greek bail out end game plays out. The latest bit of negative news coming out of
Germany where Merkel is having a tough time selling a bailout in any form to
her parliament. (medium):
***overnight,
a Greek official said that his country would be unable to make the June 5 IMF
debt payment. Meanwhile the ECB met to
discuss raising the discount it places on the collateral Greek banks use for
loans.
Bottom line: yesterday’s housing numbers offered some welcome
relief from the barrage of poor economic data.
Follow through, of course, is the key; without it, all we have is an
isolated stat that could very well get revised down.
The
data and the likelihood of recession (medium):
I am a bit taken
back by the two recent Fed studies attempting to paint a smiley face on the
economy. I am not sure anyone in the
real world is believing it; the big question is do they? Because if they do, we could see higher rates
sooner than many investors think---except, of course, for the bond guys.
Yesterday’s EU
CPI numbers were encouraging (a sign of economic growth). Unlike the US data, they are part of an
improving trend. Hopefully, this will
continue; because as I noted in last week’s Closing Bell, I am clinging to a ‘muddle
through’ international economic scenario like it is the last bottle of Famous
Grouse on earth.
It won’t be long
now---until we know whether the euros can solve the Greek bail out without
blowing something up. I remain cautious
about the impact of the final outcome.
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.
Another
look at valuations (medium):
Are
art auctions a sign of the top (medium):
A
thought experiment from a bull (medium):
Strategists year end
S&P target (short):
Economics
This Week’s Data
The
growth in month to date retail chain stores sales slowed---1.8% versus last
week’s 2.1%.
Weekly
mortgage applications fell 1.5% while purchase applications were of 4.0%.
Other
More
on China’s new QE (medium):
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