The Morning Call
8/18/15
The
Market
Technical
The indices
(DJIA 17545, S&P 2102) started the week on an upbeat note. However, the Dow still ended [a] below its
100 and 200 day moving averages, both of which represent resistance, [b] in a
short term trading range {17385-18295}, [c] in an intermediate term trading range
{15842-18295} and [d] in a long term uptrend {5369-19175}.
The S&P did
a bit better, finishing [a] back above its 100 day moving average; if it
remains there through the close on Wednesday, it will revert back to support,
[b] as well as above the upper boundary of a very short term downtrend, [c] within
a short term trading range {2043-2135} and [d] within an intermediate term
uptrend {1886-2650} and a long term uptrend {797-2145}.
Volume fell;
breadth was mixed. The VIX was up
(another of those unusual sessions, being up on an up Market day), but remained
below its 100 day moving average and within a short term trading range, an
intermediate term downtrend and a long term trading range.
The long
Treasury remains strong, ending [a] above its 100 day moving average, now support,
[b] within short and intermediate term trading ranges and [c] above the lower
boundary of a very short term uptrend.
GLD was up, but closed
below its 100 day moving average and in short, intermediate and long term downtrends. However, it appears to be developing a short
term trading range. That is no reason to go Buy GLD, but it could potentially
be signaling that a bottom is being made.
Oil continues to
crash, finishing below its 100 day moving average and within short and
intermediate term downtrends. The dollar rose, closing right on its 100 day
moving average, which is resistance, and within short and intermediate term
trading ranges.
Bottom line: the
S&P’s pin action turned a bit more mixed yesterday. Having just re-set its 100 day moving average
from support to resistance, the boundary is now under a challenge back to the
upside. Together with the close above a
very short term downtrend, it brings the potential for some optimism back into
the technical picture. Nevertheless, there
remains a good deal of work on the part of the bulls to undo the damage that
has been done.
This is not a
technical environment in which I would be buying stocks. Indeed, any move higher in prices I believe
represents a gift to allow investors to sell.
Bonds continue
to point to no Fed rate hike and/or a weakening economy. They are receiving support from oil, which
seems to be screaming deflation. Here
too it is a too soon to make that call.
But for the first time is some time, stocks, bonds and oil are pointing
in the same direction---slowing global growth accompanied perhaps by a whiff of
deflation.
Technical
summary from Fat Pitch (medium):
The
best risk adjusted returns ever? (medium):
Does
copper portend a recession and a bear market (short)?
Fundamental
Headlines
Two
US economic datapoints were reported yesterday: one really bad---the NY Fed
manufacturing index; one OK, the August National Homebuilders index came in as
anticipated.
Overseas,
the tune was the same: one really bad---Japanese second quarter GDP fell 1.6%; one
OK, the Chinese yuan traded flat.
***overnight,
the Chinese stock market tumbled 6% as both stocks and yuan declined, but the
government chose to only support the yuan; an EU official said that Greek bank
deposits would no longer be guaranteed after 1/1/16.
Nothing
above warrants any alteration of our forecast; and nothing relieves my concerns
about the potential for a further slowdown in economic growth and/or deflation.
The
ongoing Market narrative appeared to pick up a new/old major theme yesterday---the
upcoming September Fed meeting and the likelihood of a rate increase. I
expect this horse to be beaten to death over the next couple of weeks,
especially if nothing dramatic hits the headlines.
That said, I will
repeat my mantra---QE (increased liquidity and lower interest rates) did little
to nothing to improve the US economy’s growth, so any move to extract liquidity
or raise rates is not likely to have much impact the other way. Indeed, this whole Fed gnashing of teeth routine
over whether or not a rise in rates will impact the economy is a smoke
screen. What these guys are really
worried about is that they recognize that they have once again remained too
loose for too long, that it has led to distortions in asset pricing and allocation
and that a move to tightening could precipitate a massive unwind of that asset
mispricing and misallocation. And since
the problems in China, Japan and Brazil are hitting the headlines every day, it
offers a perfect excuse to do nothing (and then continue pray for a miracle
delivery).
Bottom line: how
long investors will buy the Fed’s act is anyone’s guess. The pin action in the bond market of late
appears to suggest that the bond crowd has had enough and curtain is about to
be raised on the Wizard of Oz.
That said, even
though I spend time and ink fretting about the ill effects of Fed policy, China
devaluation, a Grexit, etc., my primary investment point for the last eighteen
months has been that stocks are extremely overvalued by almost any
measure. While political and economic events
are interesting to speculate about, they are secondary to the process of price
mean reversion except in as much as they could act as a trigger to it.
Not being a
rocket scientist, I have no way determining exactly how overvalued stocks have
become. However, I developed our Pricing Discipline so that it forces our
Portfolios to Sell stocks when those stocks reach historically high absolute and
relative valuations. Can those Sell Half
prices be exceeded? Sure. But if stocks advance another 10% then mean
revert by 50%, so what? Missing that
last 10% is meaningless unless a superior timing mechanism exists and I can
catch another 5% before prices decline. However,
I haven’t found one, nor am I aware that anyone has either.
The point is to
build a Discipline that (1) establishes a reasonable probability that profits
will taken at pricing extremes (2) relieves me of having to figure out the
timing or the trigger for mean reversion---because I know that I not smart
enough to do that anyway, even assuming that it could be done, (3) still
provides the insurance of price stability when it does occur, and (4) also establishes
a reasonable probability that cash reserves will be invested at lower prices.
In short, the
key investment thought is that stocks are extremely overvalued; the economic/political
narrative is just a search for the trigger event.
I continue to 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. They may not be available later
on.
How
much more bad news can this market take? (medium):
The
implications of debt financed stock buybacks (medium):
MLP’s
are not bonds (short):
Economics
This Week’s Data
The
August National Homebuilders index (homebuilder sentiment) came in at 61.0, in
line.
July
housing starts were up fractionally, in line.
Other
A
strong dollar and emerging market growth (medium):
China
and emerging markets (medium):
The
continuing damage wrought by the Fed (medium):
Politics
Domestic
International
The
political fallout from the Greek bailout will likely continue to stay in the
headlines (medium):
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