The Morning Call
I apologize for the recent intermittent
Closing Bells; but I am doing it again. Saturday
is the OU/Texas game. It is an 11am start.
So at the time I would be writing the Closing Bell, I will be having a
Bloody Mary (s) and riding a bus to the game.
Have a great weekend. See you on
Monday.
The Market
Technical
Schizophrenia
rules supreme as the indices (DJIA 16659, S&P 1928) did another dramatic
about face and plunged yesterday. The Dow
remained within its short (16332-17158) and intermediate (15132-17158) term
trading ranges and a long term uptrend (5148-18484). It finished back below the upper boundary of
a very short term downtrend, negating Wednesday’s break. It also ended below its 50 day moving
average.
The S&P
finished within a short term trading range (1904-2019). It closed again below the lower boundary of
its intermediate term uptrend (1939-2730) which re-starts (for a second time in
three days) our time and distance discipline.
If it remains below that lower boundary though the close on Tuesday, the
intermediate term trend will re-set to a trading range. It also finished back below the upper
boundary of its very short term downtrend, negating Wednesday’s break. It is also in a long term uptrend (771-2020)
but below its 50 day moving average.
Volume
dropped; breadth was terrible. The VIX
soared 24%, ending within a very short term uptrend and above its 50 day moving
average. It also closed back above the
upper boundary of its short term downtrend.
Our time and distance discipline starts; if it remains above the short
term downtrend though the close Monday, the short term trend will re-set to a
trading range. It finished within an
intermediate term downtrend.
The
long Treasury fell, ending right on (1) the upper boundary of its short term
trading range. Yesterday was the final
day of our time and distance confirmation process [of a break out of its short
term trading range]. But since TLT
failed to close above that upper boundary, the time element is extending for an
extra day and (2) the lower boundary of its very short term uptrend. Nothing is violated by such an occurrence;
but clearly with TLT resting on the two trend lines [one an upper boundary, one
a lower boundary], any move is going to impact TLT trends. It finished above its 50 day moving average
and within an intermediate term trading range.
GLD
rose but remained within very short term, short term and intermediate term downtrends
and below its 50 day moving average.
Bottom line: I
asked the rhetorical question in yesterday’s Morning Call, how much of Wednesday’s
moonshot was a result of huge short covering in a very oversold Market versus a
major sentiment change among investors. The
Market provided a vicious but clear response.
I also observed that ‘the problem since
mid-September has been the oft mentioned schizophrenia in which follow through
to big down or up days have been limited; and, indeed, more often than not
those big up/down days have been trailed by a move in the opposite direction.’ While a reasonable thought, unfortunately its
implication suggests that confusion and schizophrenia dominate investor
sentiment and, hence, is of no value in anticipating the next Market move.
That said, if we
step back and ignore the day to day volatility, we can draw some
conclusions. First, the Dow stopped
going up a month ago; now the S&P has stopped going up on a short term
basis and is threating to extend the time horizon on a flat trajectory. Second, for all the volatility, it has been
more pronounced on the downside for the Averages---hence the very short term downtrend. Third, we know that other sectors of the
stock market are performing even worse. So
at this moment, technically speaking, we know that stocks have ceased to
advance and we know that the risk of trading ranges turning into downtrends is
rising.
For our strategy,
it may mean that our patience maybe close to being rewarded. It does mean that
the opportunity is fading to use strength to Sell stocks that are near or at
their Sell Half Range or whose underlying company’s fundamentals have
deteriorated.
The
October effect (short):
Fundamental
Headlines
There
were two US economic releases yesterday: weekly jobless claims were slightly
better than anticipated and wholesale inventories were up more than expected
but largely due to a fall in wholesale sales (that’s bad news). Both are secondary indicators.
Overseas,
August German exports plunged 5.8%---yet another lousy number from Europe’s
largest economy. Clearly another brick
in the wall of a potential EU recession.
***overnight,
August Italian industrial production was up 0.3% which was less than estimates;
while French industrial production was flat.
But
the big news was from the ECB. In a
public statement, Draghi basically said that in the absence of fiscal reforms
from the members of the EU, his ability to do ‘whatever was necessary’ was limited. Judging by the Market’s reaction, investors were
horrified; but, as you probably guessed, I thought that he was simply stating
the obvious.
The EU’s problem,
as I have said far too often, is overleveraged banks and overly indebted
sovereigns. Pumping more money into a financial
system (Draghi’s equivalent of doing ‘whatever is necessary’) so that already
overleveraged banks can buy more bonds from already overly indebted sovereigns
never made any sense. All it would do is
scare the shit out of already traumatized companies and consumers who would
hunker down even further and exacerbate an already floundering economy.
EU
inflation expectations/ECB impotency:
And
the French respond immediately in a way I sure didn’t expect (medium):
Bottom line: Draghi’s
statement really threw the QEInfinity dream weavers for a loop. Here Janet et al had seemingly backed off of
an anticipated monetary tightening (however wuzzy it may have been), then Mario
says that EU QEInfinity isn’t possible.
Oh the horrors of it all.
Unfortunately, no
EU QE means nothing is likely to halt the EU’s slide into recession because no
one believes that fiscal change has a snowball’s chance in hell of
occurring. Of course for the last two
years, I have not believed that easier Fed or ECB monetary policies would do
anything to improve the economic outlook for the US or EU. Instead of hanging tough and forcing their
respective political classes to get off their dead asses and enact the fiscal
policies that could lead to economic improvement, they chose to try to pump up
economic activity with limited tools that in the end only made our collective
economies’ emergence from historically below average growth rate environments
not just more difficult but very likely a lot more painful. I appreciate that they wanted to try; but
all they have done is make a bad situation worse.
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.
One
theory on the reason for the selloff (medium):
Pricing
in geopolitical risk (medium):
An
in depth chart review of global financial markets (medium):
Update
on the Buffett valuation indicator (medium):
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