Tuesday, October 14, 2014

The Morning Call---Ebola and the Market

The Morning Call

10/14/14

The Market
           
    Technical

            The indices (16321, S&P 1874) had another rough day.  The Dow broke below the lower boundary of its short term trading range (16331-17158).  Our time and distance discipline kicks in; if the Dow remains below 16331 through the close on Wednesday, it will re-set to a downtrend.  If finished within a very short term downtrend, an intermediate (15132-17158) term trading range and a long term uptrend (5148-18484).    It also ended below its 200 day moving average.

The S&P closed below the lower boundary of its newly re-set short term trading range (1904-2019).  If it remains below 1904 through Wednesday, the short term trend will re-set to down.  It also finished below the lower boundary of its intermediate term uptrend (1939-2730) for the third day; if it closes below 1939 today, the intermediate term trend will  re-set from up to a trading range.  It is also in a very short term downtrend, a long term uptrend (771-2020) but below its 200 day moving average.

Volume declined probably the result of the partial (Columbus Day) holiday.  Breadth was mixed but the flow of funds indicator has rolled over.  The VIX spiked again, taking it above (1) the upper boundary of the newly re-set short term trading range; if it remains there through the close Wednesday, it will re-set to an uptrend, and (2) above the upper boundary of its intermediate term downtrend; if it remains there through the close Thursday, it will re-set to a trading range. 

            And:

            And:

            The long Treasury was up, ending within very short term and short term uptrends, an intermediate term trading range and above its 50 day moving average.

            GLD rose, closing above the upper boundary of its very short term downtrend; if it finishes there today, it will re-set to a trading range.  GLD remains within short term and intermediate term downtrends and below its 50 day moving average.

Bottom line: momentum is picking up to the downside while trend lines that have been in effect for months or longer are breaking down.  Of course, our time and distance discipline is in effect on many of those trend line violations; so we can’t say that a stampede for the door has begun.  Plus stocks are now in deep oversold territory.  So some rebound seems likely however brief it may be.   We will have a much clearer picture by the end of the week. 

In the meantime, I would resist any temptation of spend cash and I would be checking all positions that are overpriced or the underlying company’s fundamentals are deteriorating as possible sale candidates if we get a bounce.
                       
            Weekly technical update from Andrew Thrasher (medium):

            For the optimists (short):

    Fundamental
 
       Headlines

            No US data reported yesterday.  We did get some (mixed) news from overseas.  Chinese August trade numbers were better than expected though car sales grew at the slowest rate in 19 months. 

            ***overnight September CPI numbers across the EU came in below expectations, many in negative territory;  October German investor confidence was reported at -3.8.

            None of this seems to have held any importance to investors as the major focus in the media yesterday was on Ebola, in particular the newly infected nurse who was caring for the first victim.  Not only did CNBC spend a large portion of its air time on the subject, there were all kinds of horror stories on the internet. 

            At the risk of sounding way too Pollyannaish, this is kind of media fright night is typical behavior when suddenly they and investors re-discover that life is not a tip toe thru the tulips and that maybe, just maybe stocks valuations might be rich relative to the underlying fundamentals.

            As most of you know, I live in Dallas.  On Saturday I was walking the State Fairgrounds with hundreds of thousands of people, drinking beer and eating corny dogs and was packed into a stadium with 85,000 plus other fans and no one gave a second thought to Ebola.  Yes, it is a concern.  Yes, there has been a learning curve in how to handle this horrible disease.  But there are a lot of people working very hard to develop the correct protocols; and, at least to date, it seems that they are doing so with reasonable success.  I think the people of Dallas feel relatively comfortable that the problem here will be well contained.  You may think that that makes us all idiots.  I don’t.

            Of course, that doesn’t mean that it will handled properly in Spain or West Africa.  But I would observe that this disease has been around for a decade, this latest outbreak has been in the news for months and months.  This is not new news.  It is just another factor that could impact global economic growth when suddenly global economic growth is no longer a given.  If it is not Ebola, it would be something else.  I am reminded of the terrible Market in 1973/74.  Inflation was soaring, growth was nonexistent, and everybody hated Nixon.  Suddenly the anchovies disappeared off the coast of Peru; and from the Market reaction, you would have thought that someone has just punched the nuclear attack button.

            I am not trying to equate missing anchovies and Ebola.  But I am observing that I have been jumping up and down from months, pointing at the likely consequences of irresponsible fiscal and monetary policies pursued by the ruling classes of the free world not to mention the increased danger to our country from the most fucked up foreign policy ever pursued by an American president and the Market was hitting new highs daily.  Now we have a couple of cases of a deadly disease that the Universe has known about for years and that is reason to punish stocks?

            I said after the last FOMC meeting that I thought something had changed.  It was investor psychology.  Maybe we have had an ‘emperor’s new clothes’ moment.  It is likely too soon to know.  But my point is, if there are reasons to be fearful, Ebola is way down on the list.

Bottom line: we get some US economic news this week that, if positive, could improve sentiment regarding a possible slowdown.  And, of course, there will be the endless flow of earnings reports which could also prove a plus.  On the other hand, the trend has been towards weaker not stronger numbers.

Perhaps more important, the technicals are dominating trading; and if the Averages keep busting through support levels, good news may not matter because the algos’ machines are programmed to sell when those levels are breached.   

So the question is, if the news is good, how much impact will that have on sentiment?  And can this break the deterioration in the technicals? 

I don’t have those answers.   And if the news is bad, they will be irrelevant.

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.

            What happened last week (medium)?

            What are the odds that we are heading for another crash (medium)?

       Investing for Survival

            Are you prepared for a sell off (medium)?

 c

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