The Morning Call
The Market
Technical
IN
COMING!! Unless you are Rip Van Winkle,
you know that the indices (DJIA 16945, S&P 1965) suffered some serious
whackage yesterday. In the process, it
clarified the confusion over the Dow’s back and forth around 17158 (upper boundary
of its short and intermediate term trading range). As confused as it makes me appear, I am once
again switching my call on the DJIA’s short term trend---it’s now back at a
trading range (16332-17158). It remains
within its intermediate term trading range (15132-17158) and long term uptrend
(5148-18484). It also finished right on
its 50 day moving average.
The S&P
remained in uptrends across all time frames: short term (1955-2146),
intermediate term (1922-2722) and long term (771-20200; however, it closed
below its 50 day moving average.
Volume was up;
breadth poor. The Market is in extremely
oversold territory. The VIX was up 18%,
but still ended within short and intermediate term downtrends. It is back above
its 50 day moving average.
Net free credit
at dangerously low level (short and must read):
Update on
sentiment (short):
The long
Treasury spiked, finishing within short and intermediate term trading ranges
and above its 50 day moving average.
GLD rose
slightly but remained within very short term, short term and intermediate term
downtrends and below its 50 day moving average.
Gold, the dollar
and the Market (short):
Bottom line: although
yesterday’s pin action left little doubt about investor sentiment, I don’t
think that negates the recent overall pattern of schizophrenia. After all, given the volatility of the last
couple of days, I wouldn’t be surprised if the Averages rebounded 1-2% today. Barring that, we did get a little clarity in
the Dow trends---short term back to a trading range; intermediate term in a trading
range.
At this point,
the big question is, will the ‘buy the dippers’ show up? If they
do, then direction will likely remain to the upside though the rate of change
appears to have declined noticeably. If
not, well, then maybe we get some meaningful price adjustment. However, that is getting way ahead of
ourselves. The job now is to await the
arrival of the buyers or the magnitude of the initial follow through to the
downside.
Our strategy
remains to Sell stocks that are near or at their Sell Half Range or whose
underlying company’s fundamentals have deteriorated.
The Market’s
historical performance in October (short):
Fundamental
Headlines
Talk
about a rough day for news. US economic
data got us started on a sour note: August durable goods---disappointing; the
September Markit services PMI---disappointing; the Kansas City Fed manufacturing
index---disappointing; and the silver lining of the day, weekly jobless claims
up just not as much as expected.
Clearly, these stats, especially the durable goods number, did nothing
to lessen my concerns about a slowing global economy beginning to impact our own.
After
that, it was a downhill slide:
(1) in
a speech in Rome, the Dallas Fed chief made a very negative comment on the
level of risk that now exists in high yield bonds,
(2) then
Russia delivered a one-two bunch,
[a] first it
announced that in retaliation for the EU re-selling Russian gas to Ukraine, it was
considering cutting off all gas to the EU.
Oh, darn. (medium)
[b] then, it
threatened freezing foreign assets is response to the Italians seizing a couple
of villas of one of Putin’s buddies (short)
***overnight,
German consumer confidence came in lower than anticipated; and Japanese CPI was
less than expected, more evidence that QE isn’t working (it is supposed to
increase inflation).
I
said last week that I thought that we would soon be looking at Ukraine in the rear
view mirror. Clearly, that was a bit
premature. Equally clear is that Putin
is reminding all the players that there is a price to pay for fucking with
Russia---however small the transgression.
Think of his response to the Italians confiscating his buddy’s house and
our own response to Mexico which has held for over six months a US citizen who
took a wrong turn and accidentally ended up there. My point is that as long as the West keeps
poking Putin in the eye, the risk of a negative geopolitical event remains.
Bottom line: the
good news was… well, there was no good news.
The bad news was that our forecast got punched again with a lousy
primary economic datapoint; in this case, August durable goods orders---which
was followed by some equally disappointing secondary stats. The question in my mind is why this weighed
as heavily on investors’ minds especially after the very upbeat QEInfinity news
from China and Japan on Wednesday?
The answer that I
would like have is that investors have finally figured this scam out. QE does nothing for economic progress; it
simply assists the mispricing of assets.
Maybe the Fisher speech was an emperor’s new clothes moment; but there
have been so many prior more obvious moments, that it seems unlikely.
As always, there
is possibility that yesterday was just one of those random days when the Market
internals worked to push prices lower.
However, I come
back to a point that I have made several times: the investment environment has
changed since the FOMC meeting.
QEInfinity is no longer being viewed as a plus by the gold, commodities,
Treasuries and real estate (REIT’s) markets.
I postulate that it could be reflective of the gradual realization that
the global economy is slowing irrespective of QE and that is bad news for the
US expansion. So far, the evidence
fits. But much more needs to occur
before it can be confirmed.
As I said Tuesday,
I don’t see how the US economy can continue to stand tall in the face of
weakening global economic activity and unfriendly government
monetary/fiscal/regulatory policy.
Sooner or later, I believe that some number, some incident is going to
pop the balloon of overvaluation. I am
clueless as to which one it will be. But
the yellow light is flashing.
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.
More
on valuation (short):
More
on internal divergences (short):
http://www.advisorperspectives.com/commentaries/gavekal_092514.php
