8/22/13
The Market
Technical
The
indices (DJIA 17039, S&P 1992) continued their winning streak. The Dow closed within short (16331-17158) and
intermediate (15132-17158) term trading ranges, though it keeps inching its way
toward the upper boundaries of those trading ranges. It remained above its 50 day moving average
and within a long term uptrend (5101-18464).
The
S&P broke above the upper boundary of its short term trading range. Under our Time and Distance discipline, if it
remains above 1991 through the close next Monday, the break will be confirmed
and the short term trend will re-set to the upside. It finished above its 50 day moving average
and within intermediate (1881-2681) and long (752-1999) term uptrends.
Volume
was up slightly; breadth remains mixed.
The VIX fell, closing within short and intermediate term downtrends and
below its 50 day moving average. With
the S&P breaking above an all-time high, I checked our internal indicator
at yesterday’s close, in a 146 stock Universe, 50 are at or above their all-time
highs, 96 are not---reflecting the unusually sluggish breadth indicators.
The
long Treasury rose, finishing within a short term uptrend, an intermediate term
trading range and above its 50 day moving average.
GLD
got whacked, ending within a short term downtrend, an intermediate term
downtrend, at the lower boundary of the building pennant formation (a break
below this trend line would only add to the negativity of GLD’s chart) and
below its 50 day moving average.
Bottom line: the
Dow moved closer to the upper boundaries of its short and intermediate term
trading ranges; while the S&P broke above the upper boundary of its short
term trading range. A close above that
level on Monday would re-set the short term trend to up. In the meantime, the Averages are out of sync,
the short term technical indicators are stretched into overbought territory and
those oft mentioned divergences persist---not the least of which is our
internal indicator.
Nevertheless,
the upward momentum is there; and barring a surprise from Yellen today, the
indices are likely to re-set to up across all timeframes; though I continue to
believe that the Averages will be unable to confirm a breach above the upper
boundaries of their long term uptrends.
Our strategy
remains to Sell stocks that are near or at their Sell Half Range or whose
underlying company’s fundamentals have deteriorated.
Fundamental
Headlines
We
got more good US economic news yesterday: weekly jobless claims, the August
Philly Fed manufacturing index, July existing home sales and July leading
economic indicators all came in better than anticipated. Certainly, it reinforces our forecast for the
US economy.
There
was also some good international economic news with Japan reporting a five
month high PMI number. Unfortunately, it
was offset by a poor Chinese PMI. My
concerns remain that global economic weakness could ultimately be one burden too
much for the US economy to bear and push it into a no growth or negative growth
environment. That said, there are no cracks in the system yet; so we hope for
an EU and/or Japanese pick up in economic activity.
All
that said, the media pundits spent yesterday speculating on just how dovish or
hawkish Yellen’s comments might be in her speech this morning and what Draghi will
say in an address midafternoon.
Bottom line: regardless
of what Yellen or Draghi say, they are not going to change the disparity
between current prices and our own calculations of Fair Value. They can mew to the Markets and make most
investors even more comfortable with the idea that the central banks will have their
backs into infinity. That could set up
an attack by the indices on the upper boundaries of the Averages long term uptrends,
widening even further that spread between prices and value.
But in the
underbelly of the Market, there is a lot of dissent as I have enumerated the
multiple divergences and posted the results of our internal indicator. Sooner or later those variances have to be
reconciled---maybe not today or tomorrow and maybe the resolution is that other
stocks catch up with the Averages, as unlikely as I think that is. But the higher prices go, the more the
valuation discrepancy gets stretched; and just like a rubber band, I have no
way of determining when it will break.
But it will break.
Of course, there
is always some small chance that Yellen will say the right thing, to wit, the
Fed needs to pick up the pace of its exit from its overly expansive monetary
policy. But she probably won’t because
she knows that she will have created an emperor’s new clothes moment for the
Markets---and is largely for them that QE was implemented.
So I think that
this merry-go-round will continue until some exogenous event monkey wrench gets
stuck in the gears and QE policy comes unwound all by itself because no one is
listening to the music.
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.
Currently,
Warren Buffett likes cash (medium and a must read):
Returns
will likely go lower (medium):
The
latest from Lance Roberts (medium and today’s must read):
http://www.advisorperspectives.com/dshort/guest/Lance-Roberts-140821-3-Things.php
