Friday, September 5, 2014

The Morning Call--Nothing has changed except the risk level

The Morning Call

9/5/14
The Market
           
    Technical

            The indices (DJIA 17067, S&P 1997) took a rest yesterday.  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.  The DJIA made a second failed attempt at challenging the 17158.

            Volume rose slightly; breadth was weak.  The VIX rose, but it remains well within its short and intermediate term downtrends and below its 50 day moving average---so it is still a positive indicator for higher stock prices.

            The long Treasury got tagged again yesterday---seemingly somewhat counter intuitive in the face of the lower ECB funding.  Perhaps it was anticipation of stronger economic activity in response to those lower rates and increased QE.  You know that I have serious doubts about that outcome.  In any case, it closed within its short term uptrend, its intermediate term trading range and above its 50 day moving average.

            GLD also fell---also counter intuitive following the lower ECB funding rates.  In addition, it should have been up if the likely result was improved EU economic activity---which suggests to me that the negative psychological momentum that has determined the recent GLD pin action prevails, even if the news would imply otherwise.  It finished within a short term trading range, within an intermediate term downtrend and below its 50 day moving average.

Bottom line: I have to admit that I was very surprised that the Averages didn’t do better yesterday following the easier money policy statements out of the Bank of Japan and the ECB.  Likely all that means is that the Markets had already discounted these actions despite the fact that the ECB’s moves were larger than those anticipated in the media.  So I am not reading too much into this pin action.

It is worth mentioning that the Dow failed for a second time to penetrate the upper boundaries of its short and intermediate term trading ranges.  That left the indices out of sync on their short and intermediate term trends.  However, as I said yesterday, this just means that at current lofty valuation levels, the going gets a bit tough.  I continue to believe that the Dow will regain harmony with the S&P’s move up; though I don’t think that they will confirm a break above the upper boundaries of their long term uptrends.

That said, the more accommodative than anticipated stance by the Bank of Japan and the ECB could keep the global liquidity pumps humming at full speed and that could provide the power for a brief break above the long term uptrends, similar to the 2000 and 2007 breaks.  That just means the ultimate retreat could be from higher, more overvalued levels.

Our strategy remains to Sell stocks that are near or at their Sell Half Range or whose underlying company’s fundamentals have deteriorated.
           
            Financial advisor sentiment at all-time high (short):

            Obviously, not a bubble (short):

            Update on sentiment (short):
Some interesting data out of Bespoke Investment on this amazing rally.
With the S&P 500 hitting yet another new all-time high today, the current bull market that began on March 9th, 2009 has crossed the 2,000 calendar day mark. For reference, a bull market is a rally (closing basis) of at least 20% that was preceded by a drop of at least 20%. A bear market is a decline of at least 20% that was preceded by a rally of at least 20%.
Below is a table of the historical bull markets that the S&P 500 has experienced going back to 1928. As shown, the current bull market now ranks 4th in terms of length. It needs to last another 244 days to pass the third longest bull market that ran from 10/3/1974 to 11/28/1980.
The average bull market for the S&P 500 lasts 933 days and sees a rally of 105.3%. At 2,005 days with a gain of 196.4%, the current bull market is just about double the average both in terms of gains and length.
     Bespoke Bespoke2

    Fundamental
    
     Headlines

            Yesterday’s economic stats was mixed to slightly positive: the August ADP private payroll report was weaker than expected as was weekly jobless claims, second quarter nonfarm productivity and unit labor costs were in line but revisions to the first quarter numbers were absolutely horrible, the July trade deficit was better than estimates, and the August Markit services PMI as well as the ISM nonmanufacturing index were much better than forecast.  I think that the latter two datapoints were by far the most important of the lot.  Although I am not sure what to make of those first quarter productivity and unit labor cost revisions.  I am working on getting some more background on those numbers before reaching a conclusion.  That aside, the data continues to fit our forecast.

            Of course, the big news of the day were the moves by the Bank of Japan and the ECB toward a more accommodative monetary policy, i.e. lower rates and QE to infinity.  I have made it clear that I have my doubts about any potentially positive impact of either central banks moves on its respective economies. 

Bottom line: Japan has been implementing QE for longer than the Fed and has seen no noticeable impact on its economy.  To assume that more QE will produce a different outcome this time makes no sense.  The ECB has some room for ease; but its problems (overly indebted sovereigns and overly leveraged banks) won’t be helped by more and cheaper money.  If corporations wanted to invest, money is already available and is sufficiently inexpensive that they would already be investing.  Further, more and cheaper money won’t help an already strapped consumer.  All the ECB’s increased largess will accomplish is to make more inexpensive money available to sovereigns to assume even more debt, to the banks to become even more leveraged and to the carry trade to keep its game of musical chairs going.

            David Stockman on the ECB’s new policy (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.

            The latest from Lance Roberts (medium):

            Percentage of companies trading above book value (short):

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