Thursday, April 24, 2014

The Morning Call---When all news is good news, don't argue

The Morning Call

4/24/14

The Market
           
    Technical

After lifting well into overbought territory, the indices (DJIA 16501, S&P 1875) took a breather yesterday.  Both remained above their 50 day moving average and the last lower high (16484, 1873).  This was a very docile performance given the magnitude of its overbought condition and suggests a decent bid under the Market.  The S&P closed within uptrends across all timeframes: short (1813-1990), intermediate (1770-2570) and long (739-1910).  The Dow remains within short (15330-16601) and intermediate (14696-16601) term trading ranges and a long term uptrend (5055-17405).  They continue out of sync in their short and intermediate term trends; but clearly the Dow remains close to the upper boundary of its short/intermediate term trading range (s).

Volume was down slightly; breadth deteriorated.  The VIX rose fractionally, finishing within its short term trading range, its intermediate term downtrend and below its 50 day moving average.

The long Treasury rose, closing within a short term uptrend, above its 50 day moving average and within an intermediate term downtrend.  As a reminder, the very positive recent pin action of TLT suggests deflation/recession or a flight to safety (Ukraine).

GLD continues to trade dreadfully.  It remains in short and intermediate term downtrends and below its 50 day moving average.  

Bottom line:  I think yesterday’s mild pullback from a very overbought condition and in the face of lousy economic numbers both here and abroad was a positive tell on the Market; that is, there is still buying momentum though the internal data suggests that that investors are focusing on fewer and fewer stocks.  While the Averages still need to bust through their former all-time highs (16601/1898), the odds seem to favor an assault on the upper boundaries of their long term uptrends.  Nevertheless, if the current Market divergences keep growing, I think that the indices will be unable to break above those levels.

Meanwhile, we have a trendless Market; so there is really not much to do save using any price strength that pushes one of our stocks into its Sell Half Range and to act accordingly.

            Sell in May and go away (short):

            Close to a Dow Theory buy signal (short):

            Update on sentiment (short):

    Fundamental
    
       Headlines

            Yesterday’s US economic news was mostly negative: weekly mortgage and purchase applications were down, the April Markit PMI was disappointing and March new home sales were absolutely terrible.  They clearly don’t support our outlook; but this was one day’s data, so nothing to be concerned about for the time being.

            Overseas, the EU April PMI rose but Chinese manufacturing fell.  In addition, concerns continue to rise about the Chinese real estate market.

            Meanwhile, no lessening in the tensions in Ukraine:

                ***overnight, the ECB promised asset purchases (again) if necessary, the Chinese yuan fell (again) and fighting broke out in Ukraine (again).

                And:

Bottom line: economic and political events seem to have no impact on investor psychology.  Good news, bad news; it is all the same.  Momentum is up; and there is no point in arguing.  Certainly, the continuing sluggish improvement in the US economy helps; but it is facing some pretty stiff headwinds both domestically (the politicians, the bureaucrats and the Fed) and internationally (China, Japan, the EU, Ukraine). 

The Market faces an added hurdle: a terrible risk (Fair Value, as calculated by our Model)/reward (upper boundaries of the Averages long term uptrends) equation. 

My bottom line is that for current prices to hold, it requires a perfect outcome to the numerous problems facing the US and global economies AND investor willingness to accept the compression of future potential returns into current prices.

 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.

            Bear in mind, this is not a recommendation to run for the hills.  Our Portfolios are still 55-60% invested and their cash position is a function of individual stocks either hitting their Sell Half Prices or their underlying company failing to meet the requisite minimum financial criteria needed for inclusion in our Universe.
        
            It is a cautionary note not to chase this rally.
               
            The Fed’s disastrous monetary policy and those who benefit/suffer (medium):

            Where the consensus stands (medium and today’s must read):






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.


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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