Wednesday, December 4, 2013

The Morning Call--A rare three day pause

The Morning Call

12/4/13

The Market
           
    Technical

            The indices (DJIA 15914, S&P 1795) continued to work off an overbought condition yesterday. It was the third down day in a row---pretty unusual of late.  On the other hand, the decline has been mild at worse; so clearly there is no sign of panic in the Market.  The Averages remained within uptrends across all time frames: short term (15426-20426, 1736-1860), intermediate term (15426-20426, 1646-2227) and long term (5015-17000, 728-1850).

            Volume rose; breadth was mixed.  The VIX rose but not nearly as much as I would have expected given the magnitude of move down.  It finished within its short term trading range and its intermediate term downtrend.

            The long Treasury was up, closing within its short term trading range and intermediate term downtrend.

            GLD bounced modestly but remained within short and intermediate term downtrends and is still hovering around the lower boundary of its long term trading range.

Bottom line:  the Averages busted back below the psychologically important 16000/1800 levels.  Now the question is follow through.  At the moment, I think that the pin action reflects consolidation from an overbought condition.

So it still seems reasonable to assume that there is at least an even chance of another leg up, despite the growing divergences.  My most likely upside targets are the upper boundaries of the Averages long term uptrends (17400/1900).  Of course, if that is the case and the downside is simply Fair Value (11575/1436), then the risk reward from current levels is not all that attractive.

As a longer term investor, I think that the risk/reward ratio (17400/1900 up; 11575/1436 down) is an invitation to lose money.  I would, however, take advantage of the current high prices to sell any stock that has been a disappointment and to trim the holding of any stock that has doubled or more in price.

            December sentiment survey (medium):

            Cash on the sidelines (short):

            Which twin has the Toni? (short)

    Fundamental
    
     Headlines

            Yesterday’s US economic news was mediocre: weekly retail sales were mixed, though apparently Cyber Monday proved a good day.  Light vehicle sales were better than expected; however, there was some evidence of channel stuffing by GM.  Only one EU datapoint: Spanish unemployment fell---but remember the recent exposure of data falsification by the Spanish government.  Nothing really market moving here.

            ***overnight the EU and Chinese services PMI were below estimates.

            Not much out of the political class either, other than (1) the monotonous back and forth between Obama, insisting that Obamacare is progressing to its goals, and most everyone else citing plenty of cognitive dissonance---who cares, this thing will implode on its own, (2) the endless speculation about [a] when tapering will start and [b] what the Market reaction will be when it does---I think it is less relevant when tapering starts than when the Markets have a belly full of QEInfinity, and (3) Detroit is eligible for bankruptcy and pensions aren’t exempt---look for lots of fireworks over the pension issue and, if the unions lose, more cities and states lining up to bust the unions, just like what happened in industry.

Bottom line: at current price levels, stocks (as measured by the S&P) are considerably overvalued (as measured by our Valuation Model).  That said, this condition is likely to exist until either (1) there is some technical blow off that sucks the last guys on the sidelines into equities or (2) a negative exogenous event occurs that slaps investors in the face with reality. 

So as an investor not a trader, my long term strategy calls for me to sit on my hands until valuations return to normalcy.

            The latest from John Hussman (medium):

            The CIO of Buffett’s GenRe speaks out (medium and a must read):

            The end of trust (medium/long but today’s must read):

            Four steps for 2014 (short):




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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