Wednesday, October 15, 2014

The Morning Call--A pretty pathetic bounce from major oversold territory

The Morning Call

10/15/14

The Market
           
    Technical

            The indices (16315, S&P 1877) were basically flat on the day (Dow down slightly, S&P up slightly).  But it is important to note that it was indicative of a change in the overall Market pattern.  That is for the last year, the buy the dippers controlled the tape---any market weakness in early trading was quickly overwhelmed by buyers.  Now early market strength is being overcome later by sellers.  That clearly suggests a negative shift in sentiment.

            The Dow remained below the lower boundary of its short term trading range (16331-17158) for the second day.  A close below 16331 today will confirm the break and the short term trend will re-set to down. 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) for the second day.  If it remains below 1904 at the close today, 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 fourth day; that fulfills the time element of our discipline and re-sets the intermediate trend to a trading range (1740-2019).  It is also in a very short term downtrend, a long term uptrend (771-2020) but below its 200 day moving average.

The significance of the 200 day moving average (short):

Volume was flat; breadth was mixed.  The VIX retreated, falling back below the upper boundary of its intermediate term downtrend, thereby negating the break.  However, it remained above the upper boundary of the newly re-set short term trading range for a second day.  If it closes above that boundary today, it will re-set to an uptrend.  It also ended above its 50 day moving average.   

            The long Treasury continues its strong performance, closing within its very short term and short term uptrends, its intermediate term trading range and above its 200 day moving average.

            GLD rose, closing above the upper boundary of its very short term downtrend for the second day, re-setting to a trading range.  But it continued to trade within short and intermediate term downtrends and below its 50 day moving average.    

Bottom line: the bounce yesterday was not that surprising in that stocks were very oversold.  What was surprising was the late in the day selloff which resulted in the confirmation of the break of the S&P intermediate term uptrend and left the DJIA’s short term trend in danger of re-setting to a downtrend.  This late in the day selloff is part of a very unhealthy developing pattern.  Clearly, a continuation means more downside.

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.
           
How oversold is this market? (short):

            Humble Student says we are in the 7th inning of a correction (medium):

            A study of bull markets, their length and their corrections (short):

    Fundamental
    
       Headlines

            Two secondary US economic stats were released yesterday; but they were hardly informative: the September NFIB small business optimism index was slightly below estimates while weekly retail sales were mixed. 

            Overseas, September CPI numbers across the EU came in below expectations, many in negative territory.  This is not a plus in an environment in which the major concern is recession/deflation.  In addition, October German investor confidence was reported at -3.8.  Again not positive amidst worries of economic malaise.

            Mid-day, there was more troubling news out of Europe (short):

            ***overnight, Chinese inflation was reported at a five year low; a former director of the Bank of Japan said that it was time to taper.

Bottom line: the only economic news yesterday was out of Europe and it was bad---keeping global recession front and center as our major risk.  The earnings were mixed.  Bonds keep rallying; not reassuring in the midst of all the rhetoric about an improving US economy.  And gold is doing better; also not exactly a plus.  Meanwhile, the technicals are breaking down.  Most important, valuations remain well north of Fair Value---which is not good when the fundamentals are being called into question.

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.
         

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