The Morning Call
9/4/14
The Market
Technical
The
indices (DJIA 17078, S&P 2000) turned in a mixed performance yesterday (Dow
up, S&P down). The S&P remained
in uptrends across all timeframes; short term (1936-2137), intermediate term
(1990-2700) and long term (762-2014); it also closed above its 50 day moving
average. The Dow finished 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. I should note that intraday,
the DJIA traded up to the upper boundaries of those trading ranges and sold
off.
Volume
was flat; breadth declined. The VIX rose
fractionally, closing within short and intermediate term downtrends and below
its 50 day moving average.
The
long Treasury bounced back strongly, finishing within its short term uptrend, intermediate
term trading range and above its 50 day moving average.
GLD
bounced but not sufficiently to regain the lower boundary of its developing
pennant formation and thereby negated that pattern. It remains within its short term and
intermediate term downtrends and below its 50 day moving average. This is a sick puppy.
Bottom line: the
Averages didn’t do much yesterday. Part
of the reason was confusion at the beginning of the day over events in Ukraine
(cease fire, no cease fire) and the rest was mostly waiting to see the results
of meetings of both the Bank of Japan and the ECB overnight. That left the indices out of sync on their
short and intermediate term trends. And
as I noted above, the Dow attacked its all-time high and failed.
None of this
means that the Averages won’t challenge the upper boundaries of their long term
uptrends; it just means that at current lofty valuation levels, the going gets
a bit tough. Nonetheless, while I continue
to believe that the Dow will regain harmony with the S&P’s move up, I don’t
think that they will confirm a break above the upper boundaries of their long
term uptrends.
Our strategy
remains to Sell stocks that are near or at their Sell Half Range or whose
underlying company’s fundamentals have deteriorated.
Contrarians
are starting to like this market (medium):
September
is the weakest time of the year for stocks (short):
Counterpoint
(short):
Fundamental
Headlines
Yesterday’s
US economic news was mixed to positive: weekly mortgage applications were up,
purchase applications were down; weekly retail sales were mixed; July factory
orders were quite strong though, ex transportation equipment, they were off;
August vehicle sales were well over expectations. Finally, the most recent Fed Beige Book read
pretty much as anticipated. So if global
economic events are going to slip over into the US, it hasn’t started yet.
Internationally,
the EU service PMI fell while the Chinese service PMI was well ahead of
estimates. However, other factors impacted
investor sentiment yesterday:
(1) the continuing confusion/turmoil
in Ukraine. Investors woke up yesterday
to the news that Ukraine and Russia had reached a cease fire agreement,
everyone got jiggy, then the Russians said nyet. This is part of an ongoing pattern; yet
investors bite every time there is good news.
I remain of the opinion that this conflict will be over when Putin
decides it is over; and he is not going to do that until he gets what he wants---most
likely enough of eastern Ukraine that gives him territorial continuity with
Crimea,
(2) the Bank of Japan and ECB met
last night. Many pundits are expecting
QE news from both. If that occurs then
stocks are likely to continue higher.
After all QE is fungible---it doesn’t matter who is pumping money into
the global banking system, it just matters that someone big is pumping.
Bottom line: yesterday’s
economic numbers and the turbulence in Ukraine were all part of the existing
investment mosaic; that is, there was nothing new. The Japanese and EU central bank meeting
could bring something new. The economies
of both are a mess. So investor
expectations are that the bankers are sure to do more QE. In the case of Japanese I am not sure exactly
what difference in results that investors are anticipating, since its monetary
policy is already ‘all in’---what does going more ‘all in’ accomplish?
The ECB does
have more room for maneuver; that is, it has carried on a rather tight monetary
policy relative to the rest of the globe for some time. Of course, it needed to do that given the
extraordinary magnitude of its sovereigns’ debts and their financial systems’
leverage. Pumping more money into the
banks simply creates the risk of more leverage and more debt, unless that money
gets put to productive uses. Given the
state of the EU economy, that hasn’t happened; and if the US and Japan are any
guide, it isn’t likely to happen. Hence,
any new money will simply go into the global carry trade---great for the big
banks, hedge funds and algos. Not good
if you are worried that this already crowded trade will only get more so.
***overnight,
they did it. The Bank of Japan stuck to
its upbeat economic forecast and planned monetary stimulus; the ECB cut rates
on three of its biggest lending facilities and announced QE.
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.
Sam
Zell joins the chorus of the concerned (medium):
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