The Morning Call
8/20/14
The Market
Technical
The
indices (DJIA 16919, S&P 1981) repaired a bit more technical damage
yesterday. The Dow is in short term
(16331-17158) and intermediate term (15132-17158) trading ranges. However, it is nearing the upper boundary of
both trends; and if it breaks above 17158, then both trends will re-set to
uptrends. The DJIA is above its 50 day
moving average and within its long term uptrend (5101-18464).
The
S&P is within a short term trading range (1814-1991). But like the Dow, it is very close to that
upper boundary which if penetrated will re-set to an uptrend. It is above its 50 day moving average and
within intermediate term (1881-2681) and long term (772-1999) uptrends.
Volume
was anemic; breadth was mixed (indicators have gone straight from oversold two
weeks ago to overbought at yesterday’s close).
The VIX confirmed the break of its very short term uptrend and remains
below its 50 day moving average and within short term and intermediate term downtrends. As I noted yesterday, this indicator is
pointing to higher stock prices.
Nevertheless, all those divergences to which I have been referring are
not going away:
And:
The
long Treasury fell, finishing within a short term uptrend, an intermediate term
trading range and above its 50 day moving average.
GLD
declined, closing within a short term trading range, an intermediate term
downtrend, a developing pennant formation and below its 50 day moving average.
Bottom line: the
indices are pushing near to their former highs (17158, 1999) which if breached
would completely reverse the recent technical damage. That has yet to occur; and until it does the
Averages are out of sync. Nevertheless,
if it does, the upper boundaries of the long term uptrends become the next
resistance level. I have opined that I
don’t see any meaningful violation of those levels. I am sticking with it.
Our strategy
remains to Sell stocks that are near or at their Sell Half Range or whose
underlying company’s fundamentals have deteriorated.
Stock
Traders’ Almanac updates its Sixth Year of Presidential Cycle chart (short):
Fundamental
Headlines
The
only mentionable news yesterday came in the form of US economic data. Most important was surprisingly strong July
housing starts---which backed up Monday’s home building confidence number and,
more significant, reflects some life in a lagging sector of the economy.
Also notable,
July CPI, both the headline as well as ex food and energy figure, came in
tame. That should keep the pressure off
the Fed to move toward raising interest rates---something that will likely make
investors feel all warm and fuzzy and is sure to be trumpeted at the upcoming
Jackson Hole conference.
Finally, weekly
retail sales was mixed; but that little bit of disappointing news was offset by
some good reports from Home Depot and TJMaxx.
This all
provided an encouraging atmosphere for investors as they anticipate the release
the FOMC minutes today and Yellen’s speech at Jackson Hole on Friday.
Bottom line: investors
continue to assume that the Fed will get it all correct, which seems to mean
that monetary policy will remain supportive of the financial markets
irrespective of the rate of progress of the economy. As you know, my mantra on this issue is that
if this assumption proves correct, it will be the first time in history. Not that it won’t; but there sufficient
evidence to warrant healthy skepticism.
There is nothing
for me to do but wait and see; and given the current lofty equity valuations, I
believe cash is of inestimable worth while I do.
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.
More
on valuation (short):
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