The Morning Call
The Market
Technical
The
indices (DJIA 15628, S&P 1706) smoked everything is sight yesterday. The Dow blew through the upper boundary of
its short term trading range, re-starting the clock on the time element of our
time and distance discipline. The
S&P closed within its short term uptrend (1601-1762) and above the former
upper boundary of its short term trading range (1687).
Both of the
Averages finished within their intermediate term (14498-19498, 1538-2126) and
long term uptrends (4918-17000, 715-1800).
Volume actually
dropped though breadth improved. The VIX
declined but remained with its short term trading range and its intermediate
term downtrend.
GLD fell,
confirming the break of its very short term uptrend (not good) while finishing
within its short and intermediate term downtrends.
Bottom line: the
bulls were out in force yesterday and, at the end of the day, left the
impression that a new moon shot may be in the offing---even though the lower
volume raises nagging doubt. If the Dow
closes above 15550 though the end of
trading Monday, the break of its short term trading range will be confirmed.
While the
Averages will be out of sync through Monday, the magnitude of yesterday’s
advance returns our focus to the upside; to wit, the upper boundaries of the
short (16000, 1762), intermediate (19498, 2126) and long term (17000, 1800)
uptrends.
As I noted
before, assuming 16000/1762. 17000/1800 are the likely upside technical limits,
there is not all that much reward left when compared to the technical downsides
S&P 1601, 1538, 715).
Intra
stock correlations are declining Medium):
Fundamental
Headlines
Yesterday
was a gangbusters day economic data-wise, both here and abroad. In the US ,
weekly jobless claims were down, the July Market PMI
reading was up more than expected as was the July ISM manufacturing index. The only disappointing stat was June
construction spending which was weaker than forecast.
Overseas,
the Chinese and Eurozone PMI were improved
and the ECB left interest rates unchanged.
Meanwhile
on the political front, Boehner admitted that there would be no appropriations
bill by the end of September indicating the Washington
remains as paralyzed as ever.
Equity
investors clearly loved the above; and frankly, I agree. While this week’s economic data has by no
means been all upbeat, the primary indicators showed the kind of strength that
supports an environment of economic growth.
In addition, worse things can happen than gridlock in DC.
However,
the issue remains, is good news good news (an improving economy) or bad news
(the end of Fed easing) and visa versa.
Yesterday was a clear indication that good news is good news, implying
that there is no worry about the end of QEInfinity. However, I am not going to rely on one day’s
pin action to provide the answer (1) because it is too short a time frame and
(2) I don’t think that the prevailing confusion on Fed policy gets clarified in
just one day.
That
said, a one day read of the tea leaves is that equity investors love a strong
economy even if it means higher interest rates (which we got yesterday) and a
more hawkish Fed. Of course that
followed a day (Wednesday) in which the Fed was more dovish and interest rates
rose.
I
had sought to cut through investor confusion over Fed policy by concentrating
more on interest rates than all the speculation around what the Fed was going
to do and why. But Wednesday and
Thursday’s inverse pin action of the stock and bond markets suggest that
investors are just as confused about the implications of higher interest rates
as anything else.
Bottom
line: the only way that I can explain yesterday’s Market performance is that
investors believe that (1) the economy is getting stronger, (2) it is only
logical that interest rates will to up as a result, (3) and the Fed will either
err by delaying any tightening, even in the face of a better economy or if it
does tighten, if will have a marginal impact on interest rates.
Let
me say, that I know that I am on the wrong side of this trade at the
moment. But I can’t help but have a problem
with (3) above. To be sure, it may, in
fact, happen exactly as outlined. But I
think that it makes no sense to have no downside protection (cash) when (1) Fed policy is in uncharted
waters and it has historically never been successful in transitioning from easy
to tight money and (2) much of the appeal of stocks has been a superior yield to
bonds and that all seems to be changing.
When
our stocks’ prices are pushed into historically absolute and relative high
valuations, our Portfolios will continue to lighten up on those holdings.
http://www.zerohedge.com/news/2013-08-02/smartest-money-has-two-words-advice-sell-now-and-doing-just
Assuming
the Dow confirms its break to the upside, anyone wanting to push out on the
risk curve may consider a good multi asset class ETF (IYLD) or a high yield US
dividend ETF (SPHD) which would be a less risky way to participate; the Russell
2000 ETF (IWO) would be the more risky alternative. A purchase of any of these alternatives
should be accompanied by very tight stops.
Update
on valuations (short):
Why
everyone hates this market (medium):
Advice
for underperforming money managers (like moi):
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