The Morning Call
11/5/14
The Market
Technical
The indices
(DJIA 17383, S&P 2012) had another calm day, continuing to work off an
extreme overbought condition via a sideways movement. The Dow finished above the upper boundary of
its intermediate term trading range (15132-17158) for the fourth day,
confirming the break and re-setting to an intermediate term uptrend (15979-20959). It also closed within a short term uptrend
(15959-18725), a long term uptrend (5159-18521) and above its 50 day moving
average.
The S&P
closed near the upper boundaries of its short and intermediate term trading
ranges (1820-2019, 1740-2019), within a long term uptrend (775-2032) and above
its 50 day moving average. Clearly, the
Averages are now out of sync on their short and intermediate term trends. Given the seasonal factors, I am assuming
this divergence will get resolved with the S&P trends re-setting to up.
Volume fell;
breadth worsened further. The VIX rose, finishing within a short term uptrend,
an intermediate term downtrend and above its 50 day moving average.
Those pesky
divergences keep popping up (short):
The long
Treasury rebounded, ending within a very short term trading range, a short term
uptrend, an intermediate term trading range and above its 50 day moving
average. The long end of the yield curve
continues to provide decent returns without a lot of volatility---our choices in
our new ETF portfolio are in long muni ETF’s: BKN, NPM, NAD, VMO.
GLD lifted but
remained within downtrends in the very short term, short term and intermediate
term. It closed below the lower boundary
of its long term trading range for the third day; a finish below that level
through the bell on Thursday will confirm the break and re-set the long term trend
to down. I probably don’t need to
observe that this would not be a positive sign for GLD.
Bottom line: it
is quite positive, technically speaking, for equity prices to work off their
very overbought position by the sideways movement of the last two days. That may all end today; but at the moment, it
suggests more to the upside. Of course,
the S&P needs to ‘catch up’ with the Dow (re-set to short and intermediate
term uptrends); but assuming it does, then we will be back at the point where
we must believe that the upper boundaries of the Averages long term uptrends
will be challenged.
I continue to
have serious doubts that this can be done successfully. However, the seasonal technicals are at or
near their most positive in the four year presidential cycle; so some run above
those boundaries is clearly possible.
Nevertheless if it occurs, I would use this
spike in prices to Sell stocks that are near or at their Sell Half Range or
whose underlying company’s fundamentals have deteriorated.
Will
year three of the presidential cycle repeat history this time around (medium)?
Fundamental
Headlines
Yesterday’s
US economic news remained in the uninspiring mode: weekly retail sales were
mixed, September factory orders were down but slightly less than anticipated
and the September trade deficit was larger than expected. Another day that doesn’t help the optimists.
Of
course, the elections were on everyone’s mind; and the good news is that the
ended as many had hoped (GOP sweep). Much
of the discussion has been on what the republicans would be able to do on the fiscal
front post-election. Gosh only knows
that I will be jumping for joy if we can get tax, regulatory and Obamacare
reform; so I am not trying to be a party pooper. But (1) I know how the GOP has behaved in the
past two decades [OK, the last two years of Willie J’s term, they were able to
compromise and accomplish some meaningful goals.] So I am skeptical of the strength of their
desire to reform and (2) Obama has proven time and again that He is an
ideologue. If He remains true to form
then even assuming the republicans are hell bent on reform, the power of the
veto looms large. Plus there is always
the ‘executive action’. Hope for the
best but don’t assume it.
Overseas,
the European Commission revised its GDP and inflation forecast down and its
unemployment estimate up. So the numbers
continue to drift back towards the recession scenario.
***overnight,
September EU retail sales were reported down 1.3% month over month and the
August number was revised down.
Goldman
lowers its outlook for growth in the Eurozone (medium):
The
other news out of Europe was an apparent mutiny among the central bankers
against Draghi. So far most of what I have
read suggests that it has more to do with his leadership style versus his
policy measures. We will just have to
see how this works itself out; but while on the surface there appears to be no
danger of major policy revisions, you never know what is really behind a palace
revolt until after the fact.
In
another potentially de-stabilizing move, the Saudi’s cut oil prices to the US
while raising them to other customers. Aside
from a $2 a barrel whack in oil prices, the punditry spent most of the day
focused on:
(1) why
the Saudi’s did it. Speculation centers
on [a] they are angered at the US’s move to soften relations with Iran and [b] it
was a competitive move to push prices below the breakeven of a major part of US
shale production. I would believe either
or both. In either case, it is clear
that [a] economic warfare continues to expand and [b] the US is losing
influence with one of its allies in the Middle East {if you accept the
proposition that Saudi Arabia is an ally, which I don’t},
(2) what
this means for the US economy. When oil
started its fall, consensus was that it was a great positive---a tax cut to
consumers and a cost reduction to industry.
However, [a] if prices drop below production breakeven, oil companies
invest less and employ fewer---and they have been a big source of both in the
current recovery, such as it is, and [b] if prices are declining not just
because of more supply but also because of lower demand, that could be signaling
economic slowdown. So I don’t think that unconditional jigginess
is the proper take lower oil prices.
Bottom line: the
economy shows scant signs of improvement.
Plus I don’t think that we can say for certain that a further decline in
oil prices is a plus for our economy. The
numbers from Europe were disappointing; and we don’t know what the central bank
mutiny against Draghi is going to mean for the Eurozone economy---and by the
way, it could be positive if it included fiscal and banking reform. Though I am not holding my breathe. In other words, investors still have plenty
to worry about if they so choose. But the
pin action suggests otherwise.
Until it does,
our Valuation Model will continue to portray significant stock overvaluation. I
have no idea what starts the process of adjusting price to value; I just know
that our Models have never been at such odds with reality that a correction
didn’t re-set what was a very considerable difference between price and value.
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.
Three
things keeping stocks moving up (medium):
The
latest from Lance Roberts (medium):
The
latest from Paul Singer (medium and today’s must read):
Japan:
the anatomy of a failed state (medium):
Goldman’s
‘equity bust’ model (short):
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