Tuesday, October 8, 2013

The Morning Call---The beginning of the end or another fake out?

The Morning Call

10/8/13

The Market
           
    Technical
   
            The indices (DJIA 14936, S&P 1676) were down yesterday, though they have been gyrating within a fairly tight price range for the past week.  The Dow closed within its short term trading range (14190-15550) and below its 50 day moving average.  It penetrated the lower boundary of its intermediate term uptrend (14971-19171).  Our time and distance disciplines become operative; if the DJIA remains below the lower boundary of its intermediate term uptrend though the close Thursday, the break will be confirmed.

            The S&P again finished below the lower boundary of its short term uptrend and its 50 day moving average.  You will recall that last Thursday it broke this boundary but recovered on Friday.  Under our discipline, yesterday’s close re-starts the clock on our time and distance discipline.  If the S&P trades below the lower boundary of its short term uptrend through the close on Wednesday, the break will be validated.

            Volume was up but still meager; breadth was poor.  The VIX jumped 15% but remains within a short term trading range and an intermediate term downtrend.

            The long Treasury was up slightly.  It finished within its short term trading range and its intermediate term downtrend.  The bond guys appear much less concerned about a default than the stock boys.
           
            GLD was up, but remains within a very short term, short term and intermediate term downtrend.  In addition, it is now forming the right shoulder of a head and shoulders formation---not good news for the gold bugs.

Bottom line:   the S&P is challenging its short term uptrend, the Dow is challenging its intermediate term uptrend and both are below their 50 day moving averages.   While this may be presaging a major Market retreat, in the last three years, every time stocks have been in a similar position, the bulls take over and they sprint higher. 

Whatever the outcome, given the magnitude of the current level of overvaluation (at least according to our Model), there are a lot more support levels that will have to be violated before equities become attractive for purchase.  In other words, I am not concerned that the S&P and/or the DJIA may be breaking the aforementioned support levels. 

On the other hand, if the pin action improves and one of our stocks trades into its Sell Half Range, our Portfolios will act accordingly.

            Why markets trend (short):

    Fundamental
    
      Headlines

            There was not much news to digest yesterday.  The only US datapoint was a big increase in consumer credit; unfortunately, a breakdown of the internal stats showed a decline in credit card debt (lower consumer spending) and a large rise in student debt (further inflating this bubble).

            However, investor attention remains on the shutdown/debt ceiling negotiations (or lack thereof)---and there was little progress on that front.  The institutional media spent the day reviewing the weekend talk shows and wondering if investors are being overly confident about the odds of resolutions to the two problems.  Here are some of the best thoughts that I found on the subject:

            More thoughts on the shutdown/debt ceiling crisis and how it gets resolved (medium):

            A rough schedule of maturing debt after October 17th (short):

            Goldman looks a potential Treasury strategies to handle a debt ceiling crisis (medium):

            The damage being done to the US standing in the world (medium):

            Obama: on the record (short):

            Bottom line: I have beaten this horse to death, but in short: (1) the shutdown is not a significant economic risk, (2) a government default on its debt following a stalemate on the debt ceiling could cause problems [higher interest rates, declining dollar], (3) the rhetoric notwithstanding, a stalemate is a no win strategy for the party that the electorate faults; they will read the polls and salvage what they can, (4) there is some small probability that this judgment is far too optimistic, that the shutdown/debt ceiling can’t be resolved which would likely do considerable damage to the Markets, (5) there is a larger probability that the whole process, even if it ends well, [a] will cause investors to rethink their current overly optimistic view of the Market and stocks could trade down to Fair Value {S&P 1440} and [b] will reinforce businesses and consumers unwillingness to invest and spend; and hence, doing nothing to lessen the economic headwind of a highly unreliable fiscal policy, and finally (6) given our Portfolios large cash position, neither (4) nor (5) above represent a calamity; indeed, that is the point of our Price Disciplines---sell high, but low

            More on valuation (short):

            Corporate profits and the budget deficit (short):

            Update on earnings expectations (short):

            The latest from Barry Ritholtz (4 minute video):

            The latest from John Hussman (medium):

            The latest from Paul Singer (medium):




Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973. His 40 years of investment experience includes institutional portfolio management at Scudder, Stevens and Clark and Bear Stearns. Steve's goal at Investing For Survival is to help other investors build wealth and benefit from the investing lessons he learned the hard way.

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