The Morning Call
The Market
Technical
The
indices (DJIA 16009, S&P 1795) resumed their move up, with the Dow
breaching 16000 but the S&P falling short of 1800. Both remained within uptrends across all time
frames: short term (15339-20339, 1724-1878), intermediate term (15339-20339,
1635-2217) and long term (5015-17000, 728-1850).
Volume
fell; breadth improved. The VIX was down
6%, again nearing the lower boundary of its short term trading range (a
penetration would be a plus for stocks).
It ended within its intermediate term downtrend. In addition, it looks like the second
‘outside’ down day experienced earlier in the week will suffer the same fate as
the first, i.e. worthlessness.
The
long Treasury rose slightly, finishing with its short term trading range and
intermediate term downtrend.
GLD
(119.94) was off, closing within its short term downtrend and on the lower
boundary of its intermediate term downtrend.
It is once again nearing the lower boundary of its long term trading
range (114.43) ---a break of which would be very negative for GLD.
Bottom
line: the assault on 16000/1800 is on
again with the Dow managing to close above 16000 and the S&P falling
short. The technical question is, will
this assault be successful? Certainly,
there is no reason to doubt momentum. In
addition, the chorus of bears is growing predicting that stocks will experience
a blow off top before rolling over. I
wonder about their motivation; but whatever, it is, the consensus seems to be
for more upside.
I continue to
believe that the upper boundaries of the Averages long term uptrends are the
most logical upside objectives, especially with stocks so overvalued
fundamentally. That is not much reward
to chase if the downside risk is Fair Value (S&P 1430).
So my
recommendation continues to be to take advantage of the current high prices and
any additional move to the upside to sell any stock that has been a
disappointment and to trim the holding of any stock that has doubled or more in
price.
If one of our
stocks trades into its Sell Half
Range
Market
at record spread to analysts’ expectations (short):
Chart
of the day (short):
An
historical review of Market performance in December (short):
Update
on sentiment (short):
Fundamental
Headlines
Yesterday’s
US economic news was mostly positive: weekly jobless claims fell more than
anticipated, October PPI was tame and the November Markit PMI
reading was above consensus.
The only
negative number was the November Philly Fed manufacturing index. But of course, investors in this ‘bad news is
good news’ environment chose to positively interpret that along with some lousy
industrial production stats from the EU and a poor Chinese flash PMI
and resume the attack on 16000/1800.
In political
news, Yellen’s nomination for Fed chief received the approval of the senate banking
committee and will be sent to the full senate for a vote.
The other item
worth mentioning is that senate democrats voted to end the rule requiring a 60
vote majority for cloture on nominations of judicial and executive
nominations. This ends a rule that, as a
conservative, I valued because it was a curb on legislative activism (he who
governs least, governs best). While it
is true that it only applies to nominations, it is a short step to include all
votes in the senate. So for those who
think that an improvement in fiscal policy is one of the keys to getting our
economic house in order, this is bad news.
To be clear, I believe that this change in the legislative process will
be just a detrimental to political/social/economic policy if the conservatives
are in the majority. It is not good for
our democracy whoever is in the majority.
Bottom line:
none of the above stats alter the assumptions in either of our Models. So I remain stuck in an environment in which
stocks are considerably overvalued. I
can point to multiple scenarios in which stocks return to Fair Value, not the
least of which is a painful transition from easy to tight money brought by either
increasingly cynical investors, a tightening Chinese central bank or a bungling
by the Fed.
That said, I
remain on the wrong side of this trade.
But as much as I challenge my own assumptions, I can’t come up with a
logical scenario that values the S&P at 1800. As a corollary, our Valuation Model has many
stocks valued at or above their Sell Half
Range
So as an
investor not a trader, my long term strategy calls for me to sit on my hands
until valuations return to normalcy.
More
on QE and the damage that it has done (long but a must read):
Sternlicht
on the QE melt up (4 minute video):
QE
for as far as the eyes can see (medium):
The
latest from Doug Kass (medium):
Five
themes for the next five years (medium):
The
yield curve and ‘bubbles’ (medium):
Investing for Survival
Five
numbers you need to know before paying 2014 taxes (medium):
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