Thursday, May 1, 2014

The Morning Call---The bond guys apparently don't agree

The Morning Call

5/1/14

The Market
           
    Technical

The indices (DJIA 16580, S&P 1883) fought off some bad news both here and abroad, finishing the day on the plus side.  Both remained above their 50 day moving averages.  The Dow negated its developing head and shoulders formation while the S&P did not. 

The S&P closed within uptrends across all timeframes: short (1822-1999), intermediate (1776-2576) and long (739-1910).  The Dow remains within short (15330-16601) and intermediate (14696-16601) term trading ranges (though clearly it is nearing the upper boundary of its short and intermediate term trading ranges) and a long term uptrend (5055-17405).  They continue out of sync in their short and intermediate term trends. 

            Volume was up (again breaking the recent pattern); breadth improved.  The VIX fell, closing within its short term trading range, its intermediate term downtrend and below its 50 days moving average.  A check of our internal indicator shows that in a 153 stock Universe, 40 stocks were at, near or above the comparable S&P level; 113 weren’t.  This is more negative than our last reading.

            The long Treasury was up---continuing its somewhat mystifying behavior in the face of the Fed’s optimistic forecast and move for additional tapering.   It is in a short term uptrend, above its 50 day moving average and within an intermediate term downtrend.

            GLD was down.  It remains within short and intermediate term downtrends and below its 50 day moving average.

Bottom line: as I thought, the stock investors accepted the Fed’s major miss on first quarter GDP growth, its assurance that its second quarter expectations are (really and truly) on target and its intent to continue tapering all as good news and tip toed through the tulips yesterday---while ignoring some rough news from overseas.  Somewhat worrisome is that (1) bond and gold investors are disagreeing with the stock jockeys and (2) the internal divergences are growing as prices move up.

 It sure looks like s that the developing head and shoulders pattern is going to be negated, the Dow will penetrate the upper boundaries of its short and intermediate term trading ranges and the Averages will assault the upper boundaries of their long term uptrends---although I still believe that the many current internal Market divergences (which includes our own internal indicator) will act as a governor on the pace of advance as well as the Averages ability to penetrate those long term upper boundaries. 

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.

            Is risk tolerance waning? (short):

            Update on NYSE margin debt (medium):

            Update on sentiment (short):

    Fundamental
    
     Headlines

            Yesterday’s dataflow was mixed.  In the US, weekly mortgage and purchase applications fell, first quarter GDP missed expectations dramatically and the April ADP private payroll report was better than anticipated. 

As usual the FOMC meeting/statement commanded the most attention.  The press release following its meeting was upbeat---despite the fact that the Fed’s first quarter GDP growth forecast was a total bust---it was the weather’s fault.  Nothing to see here.  Move along.  Nonetheless, the Fed sees the economy continuing to improve; enough so, that it added another $10 billion a month reduction to tapering. 

Good for them.  Ignoring for the moment the Fed’s unwarranted confidence in its own forecasts (witness Q1), as you know, I am 100% behind the tapering.  Indeed, if the Fed stopped all purchase transactions today, I would be very happy.   As you also know, I don’t think that it would precipitate much economic heartburn because QE (except QEI) hasn’t done diddily to improve economy. All it has done is reward the banksters while distorting asset pricing and robbing savers.  The problem is I believe that if the Fed stays at it, sooner or later, tapering will impact the Markets and not to the positive.

But back to the issue of confidence in the Fed’s forecast; as I noted above, I am confused as to why the bond guys don’t share the stocks guys’ enthusiasm for it.  As you know, the bond market is broader and deeper than the equity market and has a better history of price discovery.  I am not saying that a recession looms; I am saying that the bond market’s current behavior is supporting our own sluggish growth forecast and is yet another divergence in the Market.  

            And from the Fed’s mouthpiece, Jon Hilsenrath (medium):

            Overseas, the stats were not so hot: German retail sales were off a record amount, UK inflation was up a little---certainly not as much as Draghi would hope---and Japanese PMI was down---so much money, so little affect.

            ***overnight, Chinese and UK PMI edged up; the Chinese yuan continued to drop.

            Meanwhile, it is anything but quiet on the eastern front.  Latest from Ukraine:

Bottom line: the rose colored glasses are still on.  The upward price momentum of stocks is about the only thing that matters.  Certainly, it appears that no one wants to price in the current risks that exist in Fed policy, fiscal policy and internationally.  That’s OK; it has happened before.  Despite the cognitive dissonance in generates for me, I am somewhat consoled by the fact that despite taking profits in stocks that have hit their Sell Half Range and eliminating those that declining fundamentals, our Portfolios are still 50-60% invested.  Clearly they are not advancing as rapidly as they would be if 100% invested.  But (1) taking profits is all part of a successful long term strategy and (2) our Portfolios are in great shape when, as and if the shit hits the fan.

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 latest from Bill Gross (medium):


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