The Morning Call
9/18/14
The Market
Technical
The
indices (DJIA 17156, S&P 2001) had a see saw day as investors attempted to
figure out the message from the FOMC statement and Yellen’s subsequent news
conference. The S&P closed within
uptrends across all timeframes; short term (1944-2145), intermediate term
(1915-2715) and long term (771-2020); it also finished above its 50 day moving
average. The Dow closed within its short
term trading range (16331-17158), its intermediate term trading range
(15132-17158), its long term uptrend (5101-18464) and above its 50 day moving
average. However, for the second day in
a row, it challenged the upper boundaries of its short and intermediate term
trading ranges intraday but failed to hold above them.
Volume
rose; breadth deteriorated. The VIX
fell, closing within its short and intermediate term downtrends and below its
50 day moving average.
And
The
long Treasury dropped, finishing right on the closest candidate (112.5) for the
lower boundary of its newly re-set short term trading range. If TLT bounces, then I will assume this
support level marks that lower boundary.
If it continues to decline, then another candidate exists at the 109.7
level.
GLD
got whacked again. It closed within
short and intermediate term downtrends and below its 50 day moving average. It is nearing the lower boundary of its long
term trading range. Clearly, if that
level is breached, gold will have achieved a trifecta of downtrends.
Bottom line: I
would characterize yesterday as a Bugs Bunny Market with prices bouncing up and
down as investors kept re-interpreting the Fed statement and Yellen’s
subsequent comments. My impression is
that investor consensus was that the Fed statement was dovish while Yellen’s
news conference was more hawkish. In
other words, there was something for everyone.
The bond and
gold Markets clearly elected the hawkish interpretation; while stocks chose the
dovish version---sort of; which is to say, that equity prices were up but the
Dow attacked the upper boundaries of its short and intermediate term trading ranges
for the second day and failed to close above them. I said yesterday that I didn’t know which was
more important technically speaking---stocks up or failure to surmount 17158. I was hoping for clarity following the FOMC
meeting; but we didn’t get it, so I am still not sure.
If we get follow through to the upside, then
clearly momentum will remain the driving force.
However, if prices can’t penetrate 17158, then the Dow will setting up a
reverse head and shoulders formation.
Adding to the
confusion is how TLT and GLD chose to interpret the Fed statement/Yellen press
conference combo (hawkish). As you know,
it is disconcerting to me when bond investors (who I consider both more sophisticated
and more realistic than the stock guys) disagree with the stock Market. This incongruence will work itself out over
time, I just don’t know when.
Our strategy
remains to Sell stocks that are near or at their Sell Half Range or whose
underlying company’s fundamentals have deteriorated.
Dow
Theory still bullish (short):
Fundamental
Headlines
US
economic data yesterday were upbeat: mortgage and purchase applications were
both up, CPI was surprisingly tame and the second quarter US trade deficit came
in smaller than anticipated. All good
news and supportive of our forecast.
***overnight,
the ECB’s first round of liquidity injections was a failure---because no bank
wanted the money; and Japan ran its 41st monthly trade deficit with
exports declining---so much for ‘competitive’ devaluation.
However,
as you know, the big news of the day was the release of the Fed statement at
the conclusion of its meeting followed by a Yellen press conference. In judging their content as well as their interpretation,
investors were keying on three things:
(1) the
‘considerable time’ phrase which was used to describe the time between the end
of the Fed’s security purchases and the time that it started raising interest
rates. This is the phrase discussed in
yesterday’s Morning Call---the point of which was whether or not it would be
eliminated. Remaining would indicate a
dovish Fed, removal a hawkish one. That phrase stayed in the statement,
(2) the
‘significant underutilization’ phrase which was used to describe the state of employment. Remaining would indicate a dovish Fed,
removal a hawkish one. That phrase
stayed in the statement,
(3) the
Fed’s intent on the timing and magnitude of any interest rate hikes. While [a] the forecasts by individual Fed
members for rates in 2017 returned to what was termed ‘normal’ {I assume
meaning one that reflected market forces} and [b] in a separate document, the
Fed outlined ‘rules’ for how interest rates would be adjusted, the overall language
emphasized that policy would remain highly accommodative for the ‘considerable
time’ described above---which is to say, a dovish approach to increasing
interest rates.
In short, there
was no change in the dovish Fed monetary policy as formalized in its post-meeting
statement and no new anticipated future changes in policy.
Other
items of note:
(1) security
purchases were again reduced by $10 billion per month and are expected to be
terminated at the October meeting,
(2) the
new ‘rules’ for further tightening were [a] the Fed Funds rate will be used as
the primary transmission mechanism, [b] the target rate will be a range versus
a single point objective, [c] the rates on excess reserves will be used to
assist in pegging the Fed Funds rate and [d] the Fed balance sheet will remain
at a high level until after the Fed has begun interest rate increases and, once
started, will be reduced by allowing bonds to mature and not reinvesting the
proceeds. At the moment, no outright
sales are anticipated.
For those who are interested, here is a red line copy
of the statement:
In Yellen’s
subsequent news conference, the take away changed---at least for the bond
guys. The primary reason was the
individual FOMC members’ forecasts of future interest rates, which showed a
faster rise to normalized levels than in previous outlooks.
If indeed the
Fed is dovish, I repeat my thoughts from yesterday’s Morning Call. To summarize:
(1) there
is no reason to subject the US economy to any additional long term risk of
having to unwind what has been a historically unprecedented expansion of the
Fed balance sheet,
(2) since
the QE’s did little to pull the US economy out of recession, eliminating them
would have little negative impact on the economy,
(3) indeed,
the real effect of monetary tightening will be on the Markets not the economy. The monotonous discussion about the economy
notwithstanding, I think that the Fed agrees and that is delaying bringing monetary
policy to more normal levels is because it is scared shitless about the Markets’
reaction to tight money,
(4) unfortunately,
the Fed has never, ever been smart enough to transition from easy to tight
money successfully. And I doubt this
time will be any different. So the most
likely outcome will be that assets will simply become more mispriced than they
already are; and consequently when tightening does occur, the fall will be
worse than it otherwise would have been.
If the Fed is
more hawkish, then (1) I believe that it is the better alternative for our
economy, but (2) since the largest impact of a tightening monetary policy, in
my opinion, will be felt by the Market, that means the correction is coming
sooner than the stock guys expect and fortunately from a lower cliff. Although to be clear, I believe the Market is
already in nose bleed territory.
Wide
eyed faith in the central banks (medium):
Greg
Mankiw on Fed policy (short):
Subprime
is back with a vengeance (medium and today’s must read):
Bottom line: I
am no less confused about Market psychology today than I was at this time yesterday.
Certainly, the FOMC statement was
dovish. But the bond guys interpreted
Yellen’s subsequent comments as hawkish.
Which means that stocks rose on the prospect of easy money for the
foreseeable future, but bonds declined because either the Fed or the bond
market itself is going to raise rates sooner than expected. I had hoped that yesterday’s events would
provide some clarity/consensus on the direction of Fed policy; but at this moment,
alas, that is not to be.
It does appear,
at least short term, that this confusion sucked some of the QE forever euphoria
out of the stock market---witness the second failure of the Dow to close above
17158 after penetrating it intraday. Longer
term is another question.
For the moment, I
remain primarily concerned about slowing global growth but uncertain how long
the euphoria over easy money will hold investor attention before less
not more economic growth in the US becomes a reality. It will be at that point that assets start
re-pricing.
Just like all
the other bubbles (medium and today’s must read):
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.
Investing for Survival
Buy
low, Sell high (medium):
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