The Morning Call
The Market
Technical
The
indices (DJIA 17265, S&P 2011) popped yesterday. The S&P closed within uptrends across all
timeframes; short term (1944-2145), intermediate term (1917-2717) and long term
(771-2020); it also finished above its 50 day moving average.
In its third
attempt to bust above the upper boundaries of its short (16331-17158) and intermediate
(15132-17158) term trading ranges, the Dow finally succeeded. Under out time and distance discipline, it
needs to remain above the 17158 level through the close on Monday to confirm the
break of the short term trend and through the close on Tuesday to confirm the
break of the intermediate term trend. If
that occurs then these trends will re-set to up. The DJIA remains within its long term uptrend
(5101-18464) and above its 50 day moving average.
Despite the
strong move to the upside, volume actually declined and breadth was mixed. The VIX didn’t surprise, falling 5% and
finishing within short and intermediate term downtrends and below its 50 day
moving average.
The long
Treasury inched higher, though most segments of the bond market declined. Looking at the chart, TLT seems to be holding
above the 112.7 level---the first candidate for the lower boundary of a newly
re-set short term trading range. I will
give it a couple more days; but if this level holds, I will call the new
boundaries of a short term trading range.
TLT closed within an intermediate term trading range and below its 50
day moving average.
GLD rose
slightly, but still has one of the sickest charts around. It remains within short and intermediate term
downtrends and below its 50 day moving average.
Bottom line: the
bulls had their way yesterday, pushing the Dow through the upper boundaries of
its short and intermediate term trading ranges in a meaningful way. While our time and distance discipline still
holds, the magnitude of this move suggests that these two trends will
ultimately re-set to up. That said, neither
volume nor breadth were reflective of this move. In addition, while TLT inched up on the day, bonds
in general continued to trade as if Wednesday’s Fed message carried a hawkish
tone.
Certainly,
yesterday’s pin action provided the needed follow through to indicate that
equity investors were convinced that Fed policy will remain accommodative and that
a rising stock market is still the most likely result. And,
of course, that in turn suggests that the next target is the upper boundaries
of Averages long term uptrends.
But that is
getting a bit too far ahead. For now,
the Dow needs to confirm the re-set of both the short and intermediate term
trends. After that, we will focus on the long term trends. In the meantime, stock investors must still
battle the negative psychology from the bond market as well as all those other oft
mentioned divergences.
Our strategy
remains to Sell stocks that are near or at their Sell Half Range or whose
underlying company’s fundamentals have deteriorated.
Update
on sentiment (short):
Fundamental
Headlines
Yesterday’s
US economic news was mixed: August housing starts were very disappointing, the
September Philly Fed index was reported in line and weekly jobless claims were
down much more than expected.
Unfortunately, the most important of these was the housing number;
basically because it is the only primary indicator among them. Equally unfortunate, it comes on the heels of
Monday’s just as equally discouraging industrial production report---also a
primary indicator.
While the
preponderance of data this week has been positive, two primary indicators reporting
not just negative but very negative figures has to raise concerns. Of course, it is too soon to start doubting
our forecast; but it does place the question in the back of my mind, is this
the first sign of global economic problems starting to impact the US? Clearly, investors didn’t appear worried.
The rest of the
trading day the media and pundits spent yakking about Wednesday’s FOMC
meeting/Yellen news conference, the Scottish secession vote which was going on
all day, the much anticipated Alibaba IPO pricing which was done after the
Market closed and today’s quadruple witching.
Consensus seemed to be that all those are could have some effect on
today’s trading although (1) I heard no one willing to predict the extent of
that effect from one or a combination and (2) none are likely to have much long
term impact, though if the Scottish vote is to secede, there could be some
heartburn in the banking system and the threat of further secessionist moves in
other European countries.
Scots
vote No on independence (medium):
Bottom line: the
QE euphoria returned to the stock market yesterday despite poor housing numbers
and an alternative outlook from the bond market. That force has driven equity prices for five
years, so the assumption has to be that it will continue particularly when the
Fed assured investors that the fuel for that force remains in ready supply.
Nevertheless the
headwinds are growing. We got some worrying
US economic data this week, additional weak stats from Japan and the bust of
the ECB’s first attempt at building liquidity in the EU banking system. Until these issues become sufficient to
offset the appeal of chasing yield, stocks are likely to continue to rise---which
by definition has to happen. At some
point, prices will become too expensive for even the most Pollyanna investors. I have no idea when that occurs. I do believe that the longer it takes, the
more intense will be the pain of the correction.
***overnight,
Japan downgrades its economic outlook.
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.
Lurking
beneath the taper (medium and a must read):
The
latest from Mohamed El Erian (medium):
Update
on valuation (medium):
The
latest from Lance Roberts (medium):
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