The Morning Call
The Market
Technical
While
the indices (DJIA 16921, S&P 1959) weren’t as wildly enthusiastic as on
Wednesday, they nonetheless eked out a gain, closing up above their 50 day
moving averages and within uptrends across all time frames: short (16045-17524,
1877-2044), intermediate (16263-20624, 1821-2621) and long (5081-18193,
757-1974).
Volume
rose slightly; breadth was mixed, though the flow of funds indicator remains
quite strong. The VIX was up
fractionally, but finished within very short term, short term and intermediate term
downtrends, below its 50 day moving average and near the lower boundary of its
long term trading range. With the
Averages hitting new highs I checked our internal indicator: in a Universe of
146 stocks, 46 were at or over their all-time highs, 30 were near but still
below and 70 were neither.
Staying
with the recent schizophrenic theme, the long Treasury got smoked yesterday,
closing below the lower boundary of its short term uptrend, below the upper boundary
of its former intermediate term downtrend, below its 50 day moving average and
is on the cusp of making a new lower low.
If TLT makes that new lower low, our ETF Portfolio will likely lighten
its current bond position.
GLD
rose 4%, finishing above the upper boundary of its very short term and short
term downtrends as well as its 50 day moving average. This move was large enough that it fulfills
the distance element of our time and distance discipline on both downtrends,
re-setting both to trading ranges.
However, I would like to see some follow through before taking any
action.
Bottom line: while the stock jockeys weren’t tiptoeing
through the tulips yesterday, the QEInfinity/the Fed has your back scenario got
great support from both the bond market (TLT breaking down) and gold market
(breaking out). All systems are go for
an assault on the upper boundaries of their long term uptrends, if not the next
set of ‘round numbers’ (Dow 18,000/S&P 2000).
Our strategy remains to do nothing save taking
advantage of the current momentum to lighten up on stocks whose prices are
pushed into their Sell Half Range or whose underlying company’s fundamentals
have deteriorated.
Fundamental
Headlines
Yesterday’s
economic data remained mixed: the June Philly Fed manufacturing index was
better than expected while the June leading economic indicators fell a tad
short of estimates. That keeps the
irregular flow of stats intact and with it our forecast for sluggish growth.
Of
course, these new numbers were barely noticed as most attention remained on
Wednesday’s FOMC meeting/Yellen news conference. I have nothing to add to my comments or
conclusions in Thursday’s Morning Call; though I will note that while Yellen
demurred on the subject of imposed ‘gates’ on the redemption of bond funds
saying that it was bailiwick of the SEC, this NY Fed paper clearly shows that
the Fed has considered the issue (medium):
Bottom line: despite
Yellen’s dismissal of inflation and a stock bubble, inflation has suddenly
found its way back into the Street lexicon and equity investors have had their faith
in not fighting the Fed confirmed. In
addition, the bond and gold markets are adding fuel to the shift in thought on
the former. Of course, it is still a bit
early to be assuming that there are major changes coming in the economy that
would justify the trend change in either bonds or gold or both.
That said, historically
rising interest rates and gold prices can be bad for stocks. Not always. And certainly given the current euphoric state
of investors psyche, that concern is not at the top of their list. Nonetheless, they are now part of a growing
list of developments that, should they worsen, would wreak havoc on a Market
priced to perfection.
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.
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