Tuesday, July 22, 2014

The Morning Call---There is no bad news, at least in investors' minds

The Morning Call

7/22/14

The Market
           
    Technical

            After an early morning selloff, the indices (DJIA 17051, S&P 1973) meandered at lower levels the rest of the day.  Nonetheless, they finished above their 50 day moving averages and within uptrends across all time frames: short (16202-17681, 1914-2080), intermediate (16593-20891, 1854-2654) and long (5083-18464, 762-1999). 

            Volume re-set to the lower levels that prevailed prior to last week’s heavy trading; breadth was poor.  The VIX rose, confirming the break of the upper boundary of its very short term downtrend.  It remains below its 50 day moving average and within short and intermediate term downtrends.

            The long Treasury was up, breaking back above the upper boundary of its short term trading range.  A finish above this level on Wednesday will confirm the break.  TLT is above its 50 day moving average and within an intermediate term trading range.

            And (short):

            GLD increased, closing above its 50 day moving average, within a short term trading range and an intermediate term downtrend.

Bottom line: as expected, last Friday the Averages regained the loses sustained on Thursday as investors realized that Israel/Gaza and the downing of MH17 were circumstances that would likely remain contained and the Fed was still there as a back stop if something untoward occurred.  Over the weekend, both situations worsened and that resulted in an early selloff.  But once again, calm returned and the ‘buy the dip’ crowd responded as it has for the last five years. 

As long as that ‘buy the dip’/’the Fed has your back’ mentality prevails, a bid will remain under the Market.  I think that the current round of negative geopolitical risks will make any advance harder than it might otherwise have been.  But at this moment, there seems little reason to assume that investor psychology is going to change.

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.

            The diverging pin action of the large versus the small cap stocks (short):

            Technical update from Andrew Thrasher (medium):

    Fundamental
 
     Headlines

            Just one US economic datapoint yesterday: the Chicago Fed National Activity Index came in below expectations.  While not alarming in and of itself, it does add to the portrait of a weakening economy painted last by a series of disappointing stats from primary indicators.   Clearly, it offers no reason to become less concerned.

            The rest of the news flow was focused on international events: the growing fatality rate in Gaza, the he said, he said back and forth over responsibility for the destruction of that civilian airliner over Ukraine and a renewal of military successes by ISIS in Iraq/Syria.

The latest on the downing of MH17 over Ukraine (medium):

                        The latest from Iraq (medium):

Bottom line: the trend of poor US economic data from last week spilled over into yesterday’s report.  It is still too soon to alter our forecast; but at some point, we need some positive stats to retain out outlook.  In the meantime, stocks are overvalued on our own optimistic scenario.  Clearly, they will be even more so if economic growth starts to slip.

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 Doug Kass (medium):

            The latest from John Hussman (medium):

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