The Morning Call
6/3/14
The Market
Technical
Despite
some early confusion over the ISM manufacturing number, the indices (DJIA
16743, S&P 1924) closed higher on the day.
Both remain above their 50 day moving averages and both are within
uptrends across all time frames: short (16021-17500, 1859-2026), intermediate
(16162-20519, 1805-2605) and long (5081-18193, 748-1960).
Volume
was pathetic; breadth was negative. The
VIX was up but remained within short and intermediate term downtrends and below
its 50 day moving average.
The
long Treasury declined but finished within very short term and short term
uptrends and an intermediate term trading range. It is above its 50 day moving average.
GLD
continued its fall, closing within very short term, short and intermediate term
downtrends and below its 50 day moving average.
Bottom line: the Averages continued up; the rest of the
market, not so much. Volume is
nonexistent and none of the much discussed internal divergences are
correcting. Nothing in this behavior
causes me to alter my bottom line: the indices will assault the upper
boundaries of their long term uptrends but fail to break above them.
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.
Update
on sentiment (medium):
The
current S&P rally is now 80 weeks over its 200 day moving average (short):
Who
is selling? (short):
Fundamental
Headlines
The
US economic news was basically mixed: the May Markit PMI was slightly above
expectations, the May ISM manufacturing index was a tad short of estimates and
April construction spending was disappointing.
Ditto overseas: Chinese manufacturing PMI was 0.1% better than forecasts
while the EU manufacturing PMI was 0.3% worse.
Nothing here warrants action.
The
big economic events of the week occur on:
(1) Thursday:
the ECB meets and the universe expects some easing in monetary policy. The spin is that one more central bank will then
be pumping money into the system, providing additional support for the ‘don’t
fight the [global central banks] Fed’. I
have no reason to quarrel with this easing assumption other than [a] Draghi has
done nothing but jawbone the markets to date; so what are the odds that he is also
doing it this time and [b] QE doesn’t address the EU’s main problems: sovereign
insolvency and bank overleverage.
And:
(2) Friday:
May nonfarm payrolls will be reported.
Expectations are for a slowdown in the rate of increase in job creation
and the possibility of a slight uptick in unemployment.
I have no idea
how much either of these factors are priced into stocks. Of course, in an environment where all news
is good news, it seems unlikely that either will have an adverse effect on
equities. We will know soon enough.
Speaking
of all news is good news, the EPA announced yesterday its intent on tightening
CO2 emissions from coal fired plants by another 30% (CO2 emission have already
been cut by 90%). The costs of such an
undertaking are estimated to be in the billions. That is nonproductive investment that will
ultimately be passed on to you and me.
So your cost of living just went up, billions will be spent that won’t
increase the productive capacity of the country by one dollar and lots of coal
miners will likely lose their jobs---just another costly regulation from your
not-so-friendly government. But then
everything is coming up roses.
Bottom line: it
seems useless to read the news or analyze the impact of reported events because
everything is positive (or irrelevant).
As long as this mindset prevails, any contrary analysis is
meaningless---at least to the price of stocks.
Someday this will all end either as a result of an event that hits the
Market in the mouth and can no longer be ignored or rationalized away or, more
benignly, because that last greater fool spends his last dollar to buy
stocks.
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 John Hussman (medium):
A
look at first quarter earnings (medium and a must read):
Update
on valuation:
Investing for Survival
Advantages
and disadvantages of dividend funds (medium):
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