The Morning Call
The Market
Technical
The
indices (DJIA 15467, S&P 1797) remained in limbo yesterday, closing down
fractionally. They remained within
uptrends across all time frames: short term (15299-20299, 1721-1875),
intermediate term (15299-20299, 1633-2215) and long term (5015-17000,
728-1850).
Volume
fell; breadth was weak. The VIX rose,
putting additional distance between itself and the lower boundary of its short
term trading range. It continues to
trade within its intermediate term downtrend.
The
long Treasury fell, but is still meandering in a short term trading range. It also finished within an intermediate term
downtrend.
GLD
inched up slightly, but closed again below the point of the recently formed
pennant formation---keeping the prospect of further declines alive. It remains within a short and intermediate
term downtrends.
Bottom
line: the Averages continued to rest
following their unsuccessful assault on 16000/1800. A second attempt seems likely. Most investors are assuming that the
16000/1800 will be breached and that the trend will remain up. It would be foolish to bet against that
outcome; though the continuing internal divergences, the repeat of an ‘outside’
down day and the sorry reading of our internal indicator suggests to me that
any bet with it should be made cautiously and with tight stops. But as a reminder that (trying to trade the
Market to the upside) is not my recommendation.
Indeed, I would
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
Dow
adjusted for inflation (short):
A
look at stock performance in mid term years following strong post election
years (short):
The
S&P and copper this year (short):
Fundamental
Headlines
The
only US
economic news yesterday was weekly retail sales which were positive; though as
a secondary indicator, these numbers are not going to change anyone’s forecast.
On the other
hand, the international news was not so hot: (1) the Chinese central bank
announced that it will exit currency intervention and remove the ceiling on
bank deposit rates. As might be
expected, interest rates responded by increasing. and (2) the OECD lowered is
estimated global economic growth rate.
Cumulatively, they put some mild downward pressure on prices early; and
in the absence of any other news, held psychological sway for the rest of the
day.
***over night,
rates are spiking in China
Bottom line: the assumptions in our Economic and
Valuation Models remain on track, including those of an over easy Fed that
bungles the transition from easy to tight money and a half assed solution to
our fiscal problems. Of particular
concern to me is the former which I worry will end far worse than is reflected
in our Model.
On
that subject, Chicago Fed chief Evans said yesterday that QE could last until
early 2015. Of course, he is only one
man. But that kind of mentality is what
drives my concern that QE will last longer and grow the Fed balance sheet
larger making the great unwind uglier than currently assumed in our Model.
And in a speech
last night, Bernanke said that rates would remain low ‘well after’ unemployment
hit 6.5%.
I remain confident in the Fair Values
generated by our Valuation Model; hence, stocks are overvalued. Of course, there is some likelihood that they
can get even more overvalued if the large number of underperforming money
managers choose to chase potential higher returns through year end.
This doesn’t mean that stocks are a value;
it means that catching up is an economic necessity for those trailing money
managers. It may also mean that by the
end of December, a Chevy Market could be carrying not a Cadillac, but a
Mercedes price.
Overly
optimistic earnings estimates are in jeopardy (medium):
The
distributional effects of QE (short and a must read):
More
from Jeremy Grantham (medium):
The
latest from Jim Rogers (long but a must read):
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