The Morning Call
The Market
Technical
The
indices (DJIA 17195, S&P 1994) put in a strong performance as a follow
through to Wednesday’s Fed meeting. The
Dow busted through the upper boundary of its short (15857-17158) and
intermediate (15132-17158) term trading ranges.
If it closes above 17158 next Tuesday, the short term trading range will
re-set to an uptrend; if it finishes above that level on Wednesday, the
intermediate term trend will re-set to up.
It also ended within a long term uptrend (5148-18484) and above its 50
day moving average.
The S&P
closed within a short term trading range (1820-2019), an intermediate term
trading range (1740-2019), a long term uptrend (771-2020) and above its 50 day
moving average.
Volume was up
slightly; breadth improved but not as much as one might expect given the pin
action. But the Market remains dramatically overbought. The VIX fell, finishing
within a short term uptrend, an intermediate term downtrend and above its 50
day moving average.
Update
on sentiment (short):
The long
Treasury rose for a second day in a row (notwithstanding no more QE and an assumed
improvement in the economy), closing within a very short term trading range, a
short term uptrend, an intermediate term trading range and above its 50 day
moving average.
GLD plunged for
a second day, confirming the break of the lower boundary of a very short term
trading range and re-setting to a downtrend.
It joins short and intermediate term downtrends and below its 50 day
moving average.
Bottom line: the
pin action remains somewhat surprising to me.
Though there are a number of factors that could explain it. First, the Market has gotten extremely
overbought. It is also true that
November starts the best six months of the year. It also starts the holiday season which
traditionally has an upward bias. Plus,
investors are responding to the polls that look bleaker by the day for the democrats.
This push to
upside will likely only have a lasting impact if it can reverse many of the
divergences which exist in the Market’s internal structure. I am not suggesting that it won’t happen; it
just hasn’t yet and until it does, this rally has be viewed with some suspicion.
NYSE margin debt
back near highs (medium):
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
The
US economic news yesterday consisted of weekly jobless claims which were up
slightly more than anticipated and the initial third quarter GDP numbers which
were much better than expected---even though it was down from the second
quarter reading. Nonetheless, it is this
stat that got investors’ juices going (QE is over, but the US is growing faster
than forecast) and helped push prices up
There
was also the usual analysis of the ending of QE:
Goodbye
QE (medium):
RIP
(medium):
Overseas,
German regional CPI’s were almost all negative, suggesting deflation. And a second round of negotiations between
Russia and Ukraine on winter gas prices ended in failure. Not surprising, but no one cared.
***Overnight
(1) the Bank of
Japan tripled down on QE, announcing not only a step in the size of its
securities’ purchases. It also lowered
its forecast for Japanese GDP growth. Hmmmmmmmm.
This reminds of a good friend of mine that had a bunion. The remedy he used was a liquid that
instructed ‘two drops once a day’.
Thinking that if two drops were good, four or five would be great, he created
a hole in his foot the size of a quarter.
(2)
Italy reported rising unemployment,
(3) Putin tells
the world [especially the US] the rules of international negotiation have
changed.
(4) finally,
Russia and Ukraine reached an agreement on the price of winter gas sales. But so far I can’t find the terms of this
agreement.
The
other thing that occurred was some mudslinging between the US and Israel. The ill feelings apparently stem from US
policy towards Iran which seems to be headed in the direction of accepting Iran
as a nuclear power. Given Israel’s
perception that this represents an existential threat, it is not surprising
that emotions are a bit frayed. Figuring
out how this resolves itself is beyond my pay grade; but it seems like an issue
that could pose a problem to stability in the Middle East.
Bottom line: if the
last two days Market action are reflective of how asset prices are going to
respond to the ending of QE, then I better start quickly with the mea culpa. Certainly, I have been wrong within this
limited timeframe; and it may be that this will be one of my worse ‘swing and a
miss’.
Of course, it
may be that it is not the end of US QE that marks the beginning of asset
re-pricing but the end of global QE. As
noted above, the Japanese have tripled down on their ‘all in’ QEInfinity. That will keep the liquidity pumps running
full steam and provide at least some support for asset prices.
Further,
investors seem to think that the ECB is near a new QE policy of its own. That, however, may be wishful thinking---at
least according to Morgan Stanley and Goldman
So it may be
that we are just in the final throes of QE; and as long as there is someone out
there spewing free money into the system, asset prices will hold.
So I am going to
give it a bit more time before declaring myself an idiot. It may not matter; but you never know. In the meantime, I have already started playing
with plugging more upbeat assumptions in our Economic Model. The problem is, as I have reported on past
occasions when I did the same, that the growth rates necessary to get
valuations close the current level have to be historically unprecedented, for
periods historically unprecedented with interest rates remaining at very low
rates for an extended period of time; and the probability of that happening has
to at virtually 100%.
You can see the
dilemma. Perhaps it is not the end of US
QE that precipitates a realignment in values---so on that call I may have been
wrong. But there may be another trigger
that to date, I haven’t figured out.
Meanwhile, I can’t make the valuation numbers work except on what
appears to me to be very unrealistic positive assumptions.
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.
No comments:
Post a Comment