The Morning Call
7/9/14
The Market
Technical
The indices
(DJIA 16906, S&P 1963) got smacked yesterday. Not enough to do any technical
damage; so the assumption remains that the momentum is to the upside. The
Averages closed above their 50 day moving averages and within uptrends across
all time frames: short (16168-17647, 1901-2068), intermediate (16422-20781,
1843-2643) and long (5083-18464, 762-1999).
Volume
inched higher; breadth was lack luster.
The VIX rose, finishing above the upper boundary of its very short term downtrend. A close above that boundary today will confirm
the break. In the meantime, it remains
within short and intermediate term downtrends and below its 50 day moving
average.
The
level of short selling is declining (medium):
The
long Treasury had another strong up day.
It closed within short and intermediate term trading ranges and above
its 50 day moving average. In addition,
it is nearing the upper boundary of a very short term downtrend. If it fails to push through that boundary, it
will set a third lower high which would strengthen that downtrend. If it does break above it, then it is setting
up to test the upper boundary of its short term trading range.
GLD
inched higher for a second day, remaining above its 50 day moving average and
within a short term trading range and an intermediate term downtrend.
Bottom line:
yesterday’s pelting of stocks is not unusual, given last week’s advance
(consolidation). On the other hand, with
the Averages’ proximity to their all-time highs, a battle over valuation is also
not surprising.
I have opined
that while I think that the indices will challenge the upper boundaries of
their long term uptrends, they are not likely to confirm any penetration. The recent confusing pin action in bonds and
gold supports that notion.
That said, it takes
a lot more than a couple of down days to break a trend as powerful as the
current one.
As far as stocks are concerned, 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.
Two
out of three low volatility ramps end in a decline (short):
Fundamentals
Headlines
Yesterday’s
US economic news consisted of two secondary indicators: weekly retail sales
were mixed while the June small business optimism index was below estimates. While nobody likes disappointing data, two
minor indicators are certainly not enough to move the needle on any forecast.
Overseas,
the UK factory output and German industrial production were below expectations. Those stats are a bit more important in that
they are primary indicators and they come from two of the strongest economies
in Europe---strongest being a relative term.
Alcoa
kicked off the earnings season with a beat.
At the moment, expectations for second quarter are sanguine and no one
seems to be anticipating any surprises.
So it is probably reasonable to assume that the upcoming weeks will be
filled with good news and countless pretexts for higher prices.
Finally,
remember that the minutes from the last FOMC meeting will be released today; so
we could have a moment of joy or angst this afternoon depending on how they
read.
Bottom
line: equities (as defined by the S&P) are overvalued (as defined by our
Model). But nothing has occurred that
forces investors to re-examine the assumptions that have driven prices from
Fair Value to the current elevated state.
Until we get that event, momentum will remain to the upside. To be sure, there are numerous divergences
that suggest some distress in the bowels of the Market; but that means nothing
until the investors get hit between the eyes with a two by four.
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 Marc Faber:
The case for
stocks being reasonably valued (short):
It
is not different this time (medium):
More
on valuation (medium):
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