The Morning Call
6/3/15
The
Market
Technical
After a fairly
volatile day, the indices (DJIA 18011, S&P 2109) closed down slightly. Both finished above their 100 day moving
average, but below their former all-time highs.
On a very short term basis, they
both are in narrowing pennant patterns formed by their 100 day moving and the
lower boundary of a very short term uptrend on the downside and the upper
boundary of a very short term downtrend on the upside. I mention these as signs of the narrow
trading range that the Averages have been in for some time, which I noted
yesterday as illustrating the lack of conviction of both bulls and bears.
Longer term, the
Averages remained well within their uptrends across all timeframes: short term
(17299-20104, 2030-3009), intermediate term (17445-22593, 1832-2600) and long
term (5369-19175, 797-2138).
Volume fell and breadth
was mixed. The VIX was up slightly. It is still below its 100 day moving average
and the upper boundary of its very short term downtrend, but getting ever
closer---a potential negative for stocks if it breaks above those trends.
The long
Treasury had another bad day, finishing below its 100 day moving average and
within a short term downtrend and also below that minor resistance level I
pointed to earlier and back below the upper boundary of that recently negated
very short term downtrend.
GLD was up fractionally---continuing
to do nothing and ending below its 100 day moving average and the neck line of
the head and shoulders pattern. Oil rose
again, closing above the upper boundary of its short term trading range. This is the second assault on this
boundary. If it remains above that level
through the close on Thursday, the short term trend will re-set to an
uptrend.
The dollar fell,
closing below its 100 day moving average and within the developing pennant
formation that I noted yesterday.
Bottom line: the
Market remains directionless both on a very short term basis (trapped between
their 100 day moving averages and their former all-time highs) and within a
trading range dating back to mid-February.
While I think that the up/down volume and other divergences suggest that
this stalemate will be resolved to the downside, I have to recognize that I am
influenced by my own fundamental view of the equity valuation.
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.
That aside, if I define the upside as the upper boundaries of the
indices’ long term uptrends and the downside as the lower boundaries of the
indices’ short term uptrend, the risk/reward is not positive.
Full
year Market performance in past pre-election years in which the January to May
performance was flat (short):
Fundamental
Headlines
Yesterday’s
US economic data was mixed, with major misses in both directions: April factory
orders were very weak while May light vehicle sales was a blowout number. Bringing up the rear, was month to date
retail chain store sales which were slightly ahead of last week’s reading. Mixed, of course, is still mixed. But I would observe that (1) on the one hand,
the factory orders number is less current than May car sales, (2) on the other
hand, I have dwelled repeatedly on the parallel today of auto sales/financing
to home sales/financing in 2007.
On
the global front,
(1)
the Reserve Bank of India lowered rates for the third
time this year even though the country’s first quarter output production was
up. So QE remains alive and well and
every central bank’s favorite policy,
(2)
speaking of which, China doubled down on its latest QE
strategy, sending Chinese stocks into the stratosphere,
(3)
EU inflation rose 0.3%---doesn’t sound like much, but
it is the first positive inflation reading in some time. That news along with the uneven improvement
in the EU economic stats of late is suggesting that Draghi’s QE is
working. And that is likely
correct. Which may have you wondering,
how do I reconcile QE working in the EU with all that hot tongue I have been
laying QE in general? First remember,
the ECB had been following a policy of monetary austerity until last year. So the current EU QE is the equivalent of our
own Fed’s QEI which I have noted numerous time had a positive impact on the
economy. It was QEII, III and IV that
misallocated capital, encouraged rampant speculation and grew the carry
trade. Much like the Japanese version of
QE though admittedly not as extreme. The
point here being that the current EU QE is likely having an effect on the
European economy and once improvement is substantiated, the ECB needs to unwind
its QE rather than following in the misguided footsteps of the US and Japanese
central banks.
Is ECB QE starting to appear in
the data? (short):
(4)
the Greek bailout dilemma continued to hold investor
attention. Monday night the Troika met,
blew off the latest Greek bail out proposals and decided to write the plan
itself. It has heretofore shunned that
approach because it didn’t want to appear to be forcing terms upon the Greeks
from on-high. But given the Greek
unwillingness to recognize reality, it took that step and it appears that it
will be presented as ‘take it or leave it’.
Now what? I am laughing to myself
as I write this because I have no idea how to assess an endgame to this
clusterf**k. That said, risks remain, so
caution is in order.
Greece appears ready
to sign pipeline deal with Gazprom (medium):
And surprise,
surprise, Greece says that it won’t make Friday’s repayment of an IMF loan (short):
***overnight,
the ECB left interest rates unchanged, the OECD lowered its global growth
outlook, first quarter Australian GDP came in better than expected and another large
Chinese company defaulted.
Bottom line: the
economic data continues mixed this week which is an upgrade from the last
nineteen; and as I have noted, we need it.
That said, I would caution against getting too jiggy over the May new
car sales because there is a lot on subprime lending incorporated in that
number. On the other hand, the bond
market has had a couple of rough days (bond prices down, yields up) which
suggests that the bond guys are looking for economic improvement.
While somewhat
erratic, the economic stats out of the EU seem to be on an upward trend. That is a plus. However, the trend in liquidity infusions
from central banks (India, China) are growing.
While that may help our ‘muddling through’ scenario in the short run, it
raises the risk of more beggar thy neighbor devaluations and the overleveraging
of sovereign financial systems longer term.
That said, even
if the US economy is well on its way to regaining 2-3% real growth, even if the
historically unprecedented global QE does not lead to disaster and even if the
euros manage to prevent Greece from defaulting, stocks are still overvalued.
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.
Where
the power sits within the Fed (medium):
A
bubble on thin ice (medium):
Today’s
stock buybacks are a distortion (medium):
And
a brief history of what happens in the aftermath (medium):
http://www.nakedcapitalism.com/2015/06/wolf-richter-last-two-times-this-happened-stocks-crashed.html
Update
on valuation:
Economics
This Week’s Data
Month
to date retail chain store sales rose fractionally from last week.
April
factory orders fell 0.4% versus expectations of -0.1%.
May
light vehicle sales came in around 17.7 million units, an outstanding reading.
Weekly mortgage
applications fell 7.6%, while purchase applications declined 3.0%.
The
May ADP private payrolls report showed job growth of 32,000, in line.
The
second quarter US trade deficit was $40.9 billion versus expectations of $44
billion.
Other
Politics
Domestic
Must watch video
by George Will on today’s college education (5 minutes):
And the Arthur
Ashe Courage Award goes to, drumroll…………
International War Against Radical
Islam
Obama’s
options on Iran (short):
No comments:
Post a Comment