The Morning Call--Taper or not?

The Morning Call

12/18/13

The Market

           

    Technical

            The indices (DJIA 15875, S&P 1781) couldn’t muster any follow through from Monday’s big up day.  That means that both now have made two lower highs after selling off from the late November all time highs.  That doesn’t necessarily portend future negative pin action; but a very short term downtrend has now been established and we just need to watch it.

            Nonetheless, the Averages closed within uptrends along all major timeframes: short term (15554-20554, 1755-1909), intermediate term (15554-20554, 1657-2238) and long term (5050-17400, 728-1900)

            Volume was flat; breadth deteriorated.  The VIX rose but continues to meander within a short term trading range.  It is also in an intermediate term downtrend.

            http://www.thereformedbroker.com/2013/12/17/the-stealth-rally-in-volatility/

            The long Treasury was up but did nothing to challenge its short term trading range, its intermediate term downtrend or the construction of a head and shoulders formation.

            GLD fell and remains the sickest puppy on the block. It closed within its short and intermediate term downtrends.  The only positive is that it hasn’t broken below the lower boundary of its long term trading range.

Bottom line:  the lack of follow through in yesterday’s pin action was surprising to me; in that stocks through the preponderance of this up Market have tended bounce hard off of oversold conditions.  There is now a very short term downtrend in place and it should be respected until proven otherwise.

That said, I still think that there is a better than even chance of the indices challenging the 17400/1900 level---although I think that only the nimblest of traders should attempt to play the move.  For my part, I will continue to use any advance as an opportunity for our Portfolios to take advantage of our Sell Price Discipline.

 

            The technical significance of January (short):

            http://blog.stocktradersalmanac.com/post/As-January-Goes-So-Goes-Full-Year-2014-SPY

    Fundamental

    

     Headlines

            The trend of better US economic news continued yesterday: CPI was flat, though ex food and energy, it was a bit higher than anticipated; weekly retail sales were good and the October budget deficit was once again smaller than expected.

            Overseas, German investor confidence hit a seven year high and the EU CPI was down month over month.

            So our economic forecast (slow, below average but steady growth) remains on track.  However, just to be clear, in my opinion, there is nothing in the numbers to suggest that growth is about to accelerate.

            I am not sure how much attention investors paid to these headlines, as the FOMC meeting and today’s release of its updated policy were center stage.  If you were watching the news channels, you know that there was an endless parade of pundits opining on what the Fed will or won’t do today. 

            We will know soon enough and then we will also know how Markets react.

Bottom line: speculating on what will happen this afternoon is a waste of both your and my time.  So I leave with the thought that whatever the Fed does, it won’t change the fact that stocks are considerably overvalued one iota---although it certainly could change the Markets’ perception of valuation.

It also doesn’t change my call:   I can’t emphasize strongly enough that I believe that the key investment strategy today is to take advantage of the current high prices to sell any stock that has been a disappointment or no longer fits your investment criteria and to trim the holding of any stock that has doubled or more in price.

            More on valuation (medium):

            http://www.marketwatch.com/story/what-if-2014-is-an-average-year-2013-12-17

            And (short):

            http://pragcap.com/updating-warren-buffetts-favorite-valuation-metric

            Fear and loathing in muni land (medium and a must read if you own them):

            http://www.nakedcapitalism.com/2013/12/wolf-richter-fear-trembling-muni-land.html

            Bubble logic and Fed tapering (medium):

            http://www.nakedcapitalism.com/2013/12/bubble-logic-feds-taper-taper.html

            More from Jim Grant (2 minute video):

            http://www.zerohedge.com/news/2013-12-17/jim-grant-slams-steve-liesman-fed-can-change-how-things-look-not-what-they-are

            The latest from Marc Faber (8 minute video):

            http://www.zerohedge.com/news/2013-12-17/marc-faber-warns-fed-will-never-end-its-insane-policies

            

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.