The Morning Call
6/2/15
The
Market
Technical
The indices
(DJIA 18040, S&P 2111) lifted modestly yesterday. Both closed above their 100 day moving
average, but below their former all-time highs.
Longer term, the
Averages remained well within their uptrends across all timeframes: short term
(17293-20098, 2030-3009), intermediate term (17438-22566, 1830-2597 and long
term (5369-19175, 797-2138).
Volume fell but breadth
improved. The VIX was up slightly---a
little unusual on an up Market day. It
ended below its 100 day moving average and the upper boundary of its very short
term downtrend, but is nearing both---a potential negative for stocks if it
breaks above those trends.
Another
divergence (short):
Counterpoint:
The long
Treasury had bad day on heavy volume, finishing below its 100 day moving
average and within a short term downtrend.
GLD was down slightly,
ending below its 100 day moving average and the neck line of the head and
shoulders pattern. Oil rose closing very
near the upper boundary of its short term trading range. The dollar was up but appears to be
developing a pennant formation (a series of lower highs accompanied by a series
of higher lows). The penetration of one
of these boundaries typically leads to a move in the direction of the break.
Bottom line: there
remains a lack of conviction among Market participants with neither side
willing to press its case. Yesterday, the temerity was demonstrated by the
bulls as the US economic data seemed paint the kind of goldilocks scenario that
has had them wee weeing in their pants of late.
Also weighing on the downside: (1) volume has tended to expand on the
down days and shrink on the up days and (2) the number of divergences continues
to grow. I still believe that the Averages have come too far not to challenge
the upper boundaries of their long term uptrends but I also think that any
further advance will be limited to the rate of ascent of those boundaries.
Ten
bearish and one bullish chart (short):
A
counterpoint on current risk of high margin debt (short):
Fundamental
Headlines
Yesterday
was a big data day: April personal income was above expectations while personal
spending was below; the May Markit PMI, May ISM manufacturing index and April
construction spending were all above estimates. So we have for the second week
in row started off with a very upbeat day of stats. I will note that the positive reports beat
forecasts narrowly while the negative releases were big misses. Nonetheless, a good day is still a good day;
and yesterday’s numbers help give me comfort that I won’t have to lower our
forecast for a second time.
Overseas,
the May EU and Chinese PMI’s came in slightly above consensus. Following poor data from both last week, this
gives support to our international ‘muddling through’ scenario.
***overnight,
EU inflation rose 0.3%; the Reserve Bank of India lowered rates for the third time
this year even though the country’s first quarter output production was up; and
China doubles down on its latest QE strategy (medium):
Greece
remained center stage, the Greeks having missed a self-imposed deadline for a
new and improved financial plan to allow additional bailout funds, earning it some well-deserved raspberries from their
negotiating counterparts. The Troika is
actually meeting as this is being written to plan their next move.
***overnight,
apparently the Troika has decided to write the terms of the bailout agreement for
Greece and present it on a take it or leave it basis. It reportedly contains concessions by both
sides. (medium):
Bottom line: the
economic data appears to be starting to trend more positively, which it
absolutely had to do to avoid raising the specter of recession. Whether this improvement can be sufficient to
return the promise of economic growth to Street expectations of a 2%+ rate is
something entirely different. Not that
it can’t/won’t happen. It just seems
unlikely to me.
Likewise,
yesterday’s positive EU/Chinese PMI reports were welcome; especially from
Europe because we had the improvement thing going for us and then it took a hit
last week. If the trend to better
numbers continues that helps our ‘muddling through’ scenario.
That said equity
valuations as measured by our Valuation Model are stretched, meaning that any
disappointment in US economic/corporate profit growth or international economic
growth or some event that could negatively impact either (Grexit, oil supply
disruption) could potentially throw a monkey wrench in Street Models and induce
heartburn in the securities markets.
Even if nothing
untoward occurs, current stock prices are incorporating so much future return,
the likelihood of achieving meaningful returns over the next ten years is not
very high.
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.
The
liquidity time bomb (Nouriel Roubini) (medium):
High
valuations test the bullish case (medium):
M&A
deals and volume; notice the last time we saw activity at current levels
(short):
More
on IPO volume (short):
The
latest from John Hussman (medium):
Investing for Survival
Beware
of you emotional intelligence (medium):
Economics
This Week’s Data
April
personal income rose 0.4% versus expectations of up 0.3%; personal spending was
flat versus estimates of up 0.2%.
The
May Markit PMI came in at 54.0 versus forecasts of 53.8.
The
May ISM manufacturing index was reported at 52.8 versus consensus of 51.8.
April
construction spending was up 2.2% versus an anticipated rise of 0.7%.
Other
Politics
Domestic
In case you missed
this one: TSA failed to detect 95% of prohibited devices worn by investigation
team (medium):
International War Against Radical Islam
Saudi
Arabia is no friend of the US (medium):
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