6/18/14
The Market
Technical
The
indices (DJIA 16808, S&P 1941) remain impervious to the news flow, closing
up, above their 50 day moving averages and within uptrends across all time
frames: short (16045-17524, 1874-2041), intermediate (16263-20624, 1821-2621)
and long (5081-18193, 757-1974).
Volume
was down; breadth improved. The VIX fell,
finishing within very short, short and intermediate term downtrends and below
its 50 day moving average.
The
long Treasury dropped, responding, as would be expected, to the hotter than anticipated
CPI numbers. As a result it is close to
reversing its recent uptrend. It is back
below the upper boundary of its former intermediate term downtrend (not good),
below the lower boundary of its short term uptrend (really not good; though our
time and distance discipline must confirm the break) and very near to its 50
day moving average (also not good).
So the questions
before us are (1) will the time and distance discipline confirm the break of
the short term uptrend [which will occur at the close Thursday], (2) will TLT
break below its 50 day moving average and (3) on a very short term basis, will
TLT make a new lower low thereby establishing a new very short term downtrend. If the long Treasury does turn down, it would
remove the recent divergent stock/bond trading conundrum.
GLD fell,
remaining within very short term, short term and intermediate term downtrends
and below its 50 day moving average.
However, it is trading right on the upper boundary of its very short
term downtrend. A move up would then
signal that the stock, bond and gold markets were all discounting continuing
growth, higher inflation or both.
Bottom
line: the Averages continue to amaze, fighting
an overbought condition and a stream of adverse news---higher CPI (which could equal
tighter money), poor housing starts and an explosion at a major Ukrainian
pipeline---by inching higher. Further, the
bond and gold markets are close to confirming the potentially brighter economic/higher
inflation/easy Fed outlook apparently being embraced by equity investors. So they
remain on track to challenge the upper boundaries of their long term uptrends,
if not the next set of ‘round numbers’ (Dow 18,000/S&P 2000).
Our strategy remains to do nothing save taking
advantage of the current momentum to lighten up on stocks whose prices are
pushed into their Sell Half Range or whose underlying company’s fundamentals
have deteriorated.
Fundamental
Headlines
All
the economic news yesterday was from the US and it wasn’t so terrific: CPI was
hotter than anticipated and housing starts were worse. Weekly retail sales were the bright spot
though this is a secondary indicator.
Overseas,
a major energy pipeline transiting Ukraine was blown up. This on top of the breakdown in the
Russia/Ukraine talks about Gazprom sales to Ukraine
And:
On
the other hand, it appears that the (Sunni) Iraqi insurgents’ offensive may be
stalling as it moves toward Shia dominated areas (Baghdad) and the Iranians (Shias)
get involved militarily. Hopefully, this
turn will serve to ease concerns about higher oil prices.
On
the other hand:
The
above notwithstanding, most of yesterday’s media discussion was focused on
today’s FOMC meeting and the accompanying statement/Yellen news conference.
Bottom line: I
think that the CPI and housing news, while disappointing, were little more than
a reminder that the US economy is not going to shoot the moon but will continue
to struggle forward.
The big questions:
(1) is inflation really starting to pick up, (2) what will the Fed’s response
be: [a] point to the lousy housing numbers and continue mewing to investors
about remaining accommodative while insisting tapering ain’t tightening, [b] voice
concern about inflation and start sounding a bit less dovish. I think that the universe expects the former
and given past performance, I am inclined to agree. Which in turn will likely mean that ‘goldilocks’
will remain the consensus forecast and stocks will continue to advance.
That said, I will
note that with yesterday’s CPI report, year over year inflation is now at the
Fed target of 2%. Since unemployment has
already reached its target, today’s FOMC policy decision should serve as a good
test of whether the Fed has a chance of (will even attempt) successfully transitioning
to normalized monetary policy
The bad news is
that equities are priced for perfection; meaning there is little room for a
negative exogenous event or, for that matter, the hint of a doubt about the
economy or the positive unwinding of global QE.
My
bottom line is that for current prices to hold, it requires a perfect outcome
to the numerous problems facing the US and global economies AND investor
willingness to accept the compression of future potential returns into current
prices.
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.
It
is a cautionary note not to chase this rally.
The
latest from John Hussman (medium):
The
latest from David Rosenberg (medium):
The
case for owning emerging markets (short):
The
latest on the Chinese commodity re-hypothecation scandal (medium):
Investing for Survival
Revising
old financial rules:
