Thursday, January 16, 2014

The Morning Call---S&P makes a new high. Will it follow through?

The Morning Call

1/16/14
The Market
           
    Technical

            The bulls held sway again yesterday as the indices (DJIA 16481, S&P 1848) continued their move up (the S&P making an all time high), closing within major uptrends across all timeframes: short term (15776-20776, 1789-1942), intermediate term (15776-20776, 1684-2265) and long term (5050-17400, 728-1900).

            Volume was up slightly; breadth was mixed.  The VIX was unchanged, leaving it near the lower boundary of its short term trading range and within its intermediate term downtrend.

            More weak technical indicators:

            And:

            The long Treasury was off fractionally, finishing within a short term trading range and an intermediate term downtrend.

            GLD traded down, finishing within short and intermediate term downtrends.  It needs more follow through from the double bottom and penetration of the very short term downtrend before I will ready to make a commitment.

Bottom line:  the Averages are fighting to make new highs (S&P si, Dow nada) despite the divergences that I keep documenting.  Of course, there is no hard rule  about how long those divergences exist before the indices and stocks as a whole are back in sync.  However, there is precedent that they don’t go on forever.  Sooner or later, the Averages decline or the rest of the Market rallies.  Given the current significant overvaluation (as computed by our Model), my money is on the former.

However, until the bears can develop any kind of sustained momentum, my underlying assumption for this Market remains that it is going higher.   As you know, my current target is the upper boundaries of the Averages long term uptrends (17400/1900).

However, if one of our stocks trades into its Sell Half Range, our Portfolios will act accordingly.

            Update on sentiment (short):

    Fundamental
    
     Headlines

            Yesterday’s US economic news was generally upbeat: both mortgage and purchase applications were up; the January NY Fed manufacturing index came in well above expectations; while December PPI was in line.   The only negative stat was PPI, ex food and energy, which was much hotter than anticipated.      This data does nothing to disturb our forecast. 

            The Fed released its most recent edition of its Beige Book which read largely as did its predecessor---the economy improving at a slow but steady pace.

            One data point from overseas: German real GDP slowed slightly.  Since Germany is the bell cow of EU economic recovery, that is not exactly great news.  However, it is a single number and most of the data flow in recent weeks have been positive.  So I am treating this as an outlier until or if more weak data emerges.

Bottom line:  the economy continues to track our forecast.  Fiscal policy is more confusing than it is terrible, though it still has the potential to be just that.  Monetary policy is the most likely source of future trouble should the Fed bungle the transition to tighter money---on which it has a 100% track record of failure.

However, even if I make the most positive assumptions within reason on the economy and all facets of government policy, I still can’t get equity valuations close to current levels.  Hence, I believe that we are faced with either a prolonged period of Market stagnation or a correction.   Either way, 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.

            Great bull/bear debate on market valuation (4 minute video):

            Stocks versus commodities (short):

            More on valuation (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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