The Morning Call
10/22/14
The Market
Technical
Clearly the
bulls are alive and well. The indices
(DJIA 16614, S&P 1941) soared yesterday.
The DJIA remained within a short term downtrend (15754-16834), an
intermediate term trading range (15132-17158) and a long term uptrend
(5148-18484). It did end above its 200
day moving average but below its 50 day moving average.
The S&P blew
through its 200 day moving average and the resistance level marked by the lower
boundary of its former short term trading range---a clear sign of buying
strength. It also finished above the
upper boundary of its new short term downtrend (1805-1937); a close above 1937
through Thursday will re-set the short term trend back to a trading range. It remained within an intermediate term
trading range (1740-2019) and a long term uptrend (771-2020).
Volume rose
slightly; breadth improved. The VIX plunged
13%, but finished within a short term uptrend and an intermediate term
downtrend. It closed back below its 200 day
moving average but remains above its 50 day moving average.
The long
Treasury declined, closing back below the lower boundary of its very short term
uptrend. If it ends there today, the
trend will re-set to a trading range. It remained within a short term uptrend,
an intermediate term trading range and above its 50 day moving average.
GLD rallied again
and ended above the upper boundary of a newly re-set very short term trading
range. A close above this level today
will re-set the trend back to up. It
remained within short and intermediate term downtrends and right on its 50 day
moving average.
Bottom line: the
S&P trashed those two aforementioned resistance levels, clearly a plus for
the bulls. Any follow through to break
the recently re-set short term downtrend will go a long way to wipe out last
week’s negative sentiment. Some of those
numerous pesky divergences are also correcting---though to be clear they are
still negative, just not as negative as before.
On the other hand, stocks went from way oversold to way overbought in
two days---not atypical of rallies in down markets.
But in the final analysis, the fundamentals
haven’t changed and equities are still outrageously priced. So our strategy remains to do nothing. I would use any rise in prices to Sell stocks
that are near or at their Sell Half Range or whose underlying company’s
fundamentals have deteriorated.
Fundamental
Headlines
Yesterday’s
economic news was mixed to upbeat. In
the US, weekly retail sales were mixed but September existing home sales
advanced nicely. Overseas, the Chinese
third quarter GDP came in ahead of expectations though it was lower than the
second quarter report.
***overnight,
the Bank of England left interest rates unchanged; Russia and Ukraine failed to
reach an agreement on winter gas pricing (surprise, surprise); a report out of
Europe said that eleven banks from six countries failed the ECB stress test;
and this:
The
big news of the day was quote from an unnamed ECB official that said that the
ECB would commence purchasing corporate debt in the near future. The thought of more QE was more simply than
investors could stand; so they pushed stocks up, up and away.
Somewhat
confusing to me was that another quote later in the day, which raised major
questions about the veracity of the original comment, was completely ignored in
the mad ‘risk on’ scramble (***reiterated overnight).
We
will have to see how this plays out; but a firm repudiation for a high ECB
official may not be all that well received.
Bottom line: the
dream that more QE will keep the chase for performance alive and well for yet
another month or two clearly remains as intoxicating as ever. While I thought last week that the Market had
finally called ‘bullshit’ on central bank money printing, clearly I was
wrong. That said, nothing about the end
results of this tragic experiment has changed. The European economy is weak and getting
weaker. Japan’s economy is a wreck. The growth rate of the Chinese economy is
slowing. These problems are largely a
result of not bad monetary but poor fiscal policies; and there are no signs
that those will be corrected.
To be sure, hope springs eternal in the
US. The polls are telling us that the
GOP is going to sweep the coming elections; and conventional wisdom would have
us believe that the GOP is more fiscally responsible than the dems. Regrettably, that is a fiction judged on GOP
actions in the last two decades.
Furthermore, Obama still has the use of a veto; and given His
unwillingness to even work with democrats, I don’t see any kind of compromise
on fiscal reform even assuming that the republicans try. Yes, a stalemate may keep the restraints on
spending---and that is better than a sharp stick in the eye. But fiscal reform here involves more than
just spending. It includes taxes and the
regulatory environment.
Finally, the geopolitical
hurdles in Ukraine and Iraq/Syria are unresolved. And the S&P closed last night a mere 3.8%
off its all-time/overpriced high.
My
bottom line is that for current prices to continue 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.
More
unintended consequences of Fed policy (short):
Uncharted
waters (medium):
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