The Morning Call
6/24/16
The
Market
Technical
The indices
(DJIA 18011, S&P 2113) did a moonshot yesterday as investors decided that
the UK would remain in the EU (Oooops). Volume was up but remained low. Breadth improved. The VIX sank 18%---all those investors that
were hedging themselves on Wednesday apparently unwound those trades. However, it closed above its 100 day moving average
and well above the lower boundary of its short term trading range.
The Dow closed
[a] above its rising 100 day moving average, now support, [b] above its rising 200
day moving average, now support, [c] within a short term trading range
{17498-18726}, [c] in an intermediate term trading range {15842-18295} and [d]
in a long term uptrend {5541-19413}.
The S&P
finished [a] above its rising 100 day moving average, now support, [b] above
its rising 200 day moving average, now support, [c] above the upper boundary of
its short term trading range {2037-2110};
if it remains there through the close next Monday, it will reset to an uptrend,
[d] in an intermediate term trading range {1867-2134} and [e] in a long term
uptrend {830-2218}.
The long
Treasury fell 1%, pushing below a key Fibonacci level---which is a bit
concerning. Nonetheless, it remained above
its 100 day moving average and within very short term, short, intermediate and
long term uptrends.
GLD (120.1) was down,
continuing its recent erratic behavior.
The good news is that it remains above its 100 day moving average.
Bottom line: the
S&P is back challenging the upper boundary of its short term trading range;
clearly a sign that the bulls are flexing their muscles. However, there is still a lot to overcome to
assume that there much upside from here: (1) the DJIA has to reset its short
term trading range to an uptrend, (2) both indices have to reset their intermediate
term trading ranges and (3) once that is done, both will be nearing the upper
boundaries of the long term uptrends which should be formidable
resistance. This is not to say that none
of this will occur; indeed I have opined that my assumption is that momentum is
up until the short term trading ranges are broken to the downside. I am just pointing out how much resistance
lies nearby.
Fundamental
Headlines
Lots
of data was reported yesterday: weekly jobless claims declined and the June
Markit flash manufacturing PMI was fractionally higher while the May leading
economic indicators, the May Chicago national activity index and May new home
sales were disappointing. Not good,
especially with two negative primary indicators (leading economic indicators
and new home sales).
Overseas,
only one release in what has been a very slow week for international data: the
June Japanese Markit flash PMI came in flat with May’s report.
As
of last night, I had my analysis written on the UK remaining in the EU. The bottom line of which was that it wasn’t
as positive as the Market seemed to think because: ‘the EU economy remains on the verge of recession if not already in one. Draghi is chasing Japan down the QE/ZIRP
rabbit hole. The fiscal/regulatory
structural problems have not gone away. Greece is still a basket case. Spain and Italy are not doing that well. The immigration issue is not going away; and
it could get worse if the level of terror doesn’t subside.’
That
is now all irrelevant. First, let’s
focus on the fundamentals. My bottom
line is, how can it be negative when a country retakes its sovereignty? Remember, I have of late noted the multiple
challenges to the policies of the central banks. Brexit is a huge step two in the recognition
that the political class has made a total mess of our world. In the long term, the UK will be much better
off for the decision it has made.
Indeed, I think the EU will be better off because hopefully other
countries will follow suit, kick out the current regime and find a more
practical way of dealing with one another.
Not that there will be anarchy; just a rethinking of how the
intercountry relationships will work.
All
of the doomsday predictions I believe are hyperbole. We know that the global banking system is
well prepared for the eventuality, so I see no Lehman Brothers kind of
financial collapse. Further, I suspect
that if the eurocrats have already started working on a plan to detach the UK
from the EU with a minimum of bloodshed.
And if they haven’t, they have two years before the separation actually
occurs. So they can piss and moan for a
while and still have plenty of time to minimize any pain or disruption.
What
about the Market? Well, as I write this
the Dow is off 500 points. But I would
emphasize something that I have been repeating for the last 18 months---the
Market is overvalued, at some point in time investors are going to figure that
out and react accordingly. That has
nothing to do with the underlying fundamentals.
If this is our ‘emperor’s new clothes’ moment, so be it. Our portfolios own 50% cash for exactly this
reason. To be sure, this may not even be
the exogenous event that drives stock prices back to fair value. But if it is, this will be the great buying opportunity
for which we have been patiently waiting.
Bottom line: at
first plush, the Market seems to have decided that the Brexit is major negative---which
may be true for the Market. But it is a plus for the UK. Hopefully, it is the first step in throwing
our all the ‘trust me, we know what is best for you’ bureaucrats that are
responsible for the global economic malaise in the first place. Hopefully, Draghi, Yellen and Abe will be
among the first to go.
That said, this
could be the trigger that returns equity valuations to more reasonable
levels. If so, good for us.
My
thought for the day: yesterday I received an inquiry about the performance of
our Dividend Growth Portfolio. In
response, I sent a chart showing its performance along with comparative stats
on the DJIA and S&P. As required by
regulations, I am required to include the caveat that ‘past performance is no
guarantee of future results’.
I am not complaining about this rule;
indeed, I think it a good one. The
problem is that investors routinely ignore it just as smokers disregard the same
type warning on every pack: ‘Caution,
cigarettes can be harmful to your health’---and with equally disastrous results.
How many ads do you see on CNBC
or read in the financial press, extolling the virtue of this or that fund/fund
manager, hyping the record and followed by the rapid talker or tiny print that
you can’t read with a microscope, mentioning the past performance is no
guarantee of future results. And how
many times have you bought the hype and discovered later that the warning was
right.
Here are the results of three
studies:
(1)
a performance measurement company did a study in which
it concluded that if a fund only achieved average performance for ten years, it
would be in the 10% top performing funds for that ten year period.
(2)
it was shown that a fund with an above average performance
for a given year was more likely to underperform than over perform in the
subsequent year [can you say mean reversion?].
(3)
a fund’s performance is more accurately predicted by
its expense ratio [a familiar theme] than its prior performance.
In short, chasing performance
is a nonoptimal strategy.
Investing for Survival
Why
the next decade will foil many financial plans
News on Stocks in Our Portfolios
Economics
This Week’s Data
The
May leading economic indicators fell 0.2% versus expectations of a 0.2%
increase.
The
June Markit manufacturing flash PMI came in at 51.4 versus forecasts of 51.0.
May
new home sales declined 6.3% versus estimates of an 8.7% decrease; however, April’s
number was revised down 5.3%.
May
durable goods fell 2.2% versus consensus of -0.7%; ex transportation, they were
down 0.3% versus expectations of 0.0%.
Other
Politics
Quote
of the day (short):
Domestic
Government,
arrogant ignorance and the power of incentives (medium):
Political
instability (short):
International War Against Radical
Islam
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