Thursday, November 6, 2014

The Morning Call & Subscriber Alert---At the least, the worst is over

The Morning Call

11/6/14

The Market
           
    Technical

The indices (DJIA 17484, S&P 2023) resumed their rally yesterday, though they are now back in overbought territory.  The Dow finished within uptrends across all time frames: short term (16053-18819), intermediate term (16053-21053) and long term (5159-18521).  It also ended above its 50 day moving average.

The S&P closed above the upper boundaries of its short and intermediate term trading ranges (1820-2019, 1740-2019).  A finish above 2019 on Friday will re-set the short term trend to up, above 2019 on Monday, the intermediate term will re-set to up.  It also closed within a long term uptrend (775-2032) and above its 50 day moving average.  Clearly, the S&P is now attempting to resolve the divergence in the Averages short and intermediate term trends.  Given recent momentum as well as seasonal technical factors, I am assuming that the indices’ short and intermediate term trends will re-sync to the upside.

Volume fell; breadth improved. The VIX was off 4%, finishing within a short term uptrend, an intermediate term downtrend and above its 50 day moving average.  

The long Treasury declined, 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 recent pin action continues to suggest either weak economic growth or a flight to safety or perhaps a little of both.


GLD got hammered again, closing below the lower boundaries of its very short term, short term and intermediate term downtrends as well as its long term trading range. If GLD remains below that long term trading range’s lower boundary through the bell today, it will re-set to a long term downtrend.

Bottom line: the Averages did quite well yesterday as prices rose and the S&P began its challenge to re-sync with the Dow on the upside.  As I suggested yesterday, given the current momentum as well as seasonal factors, it seems likely that the S&P will confirm its break and that both of the indices will challenge the upper boundaries of their long term uptrends. Of course, to do so would amount to only a fractional rise; so such a prediction doesn’t take a lot of courage. 

The bigger question is, if a break occurs, how far can prices run?  Given our fundamental work, the answer would be ‘not far’.  But fundamentals haven’t meant diddily in two years.  So the answer then becomes predicated on when as exogenous event snaps investors back into reality; and, by definition, that is unknowable.  Hence it appears that I will have to be satisfied with an equity exposure of 55-60% and remain patient with what today is too large a cash position.

            That said, if stocks continue to move higher, I will continue to use this 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 economy dataflow continued disappointing: weekly mortgage applications fell, though purchase applications were up, the October ADP private payroll report rose less than expected and the October ISM nonmanufacturing index was below estimates.  This week’s US stats appear to be following last week’s EU data---returning to discouraging.

            Eurozone data just keeps getting worse; this time September retail sales fell and the August number was revised down.  Clearly not good if you happen to believe that the global economies haven’t decoupled.

            ***overnight, the ECB kept interest rates unchanged.  Draghi has a news conference later---more to come.

            Of course, yesterday was a time to bask in the warm glow of victory for those who believe that the GOP will bring fiscal, regulatory responsibility back.  They might, though as I have warned, based on past performance, it shouldn’t be taken as a given.  And even if they give it the All American try, Obama didn’t sound all that willing to compromise in a press conference yesterday.  Again, I have noted His ideological inclinations; and should He remain true to form, then I think that we are in for lots of vetoes and executive actions---not fiscal, regulatory reform.


            An op-ed from Boehner and McConnell (medium):

            That said, the election results will undoubtedly have a positive impact on consumer, business and investor psychology---at least initially.  And on a longer term basis assuming that the GOP is serious about reform, we can take comfort that the worst is likely over in terms of unwanted government intervention and that a couple more years of gridlock is better than a sharp stick in the eye.
 
            Why the economy crushed the democrats and why neither party will do anything to correct the problem (short):

Bottom line: the US economy continues to stumble and Europe is even worse.    However, at the moment, it is the relief that the US is perhaps at the beginning of the end of a move to more centralized federal government power that will guide investor psychology over the near term.  To be clear, I am just as relieved as anyone else.  I just don’t see how that can improve an already historically low discount factor (high P/E).

In the end, 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.

       Subscriber Alert

            The stock price of International Business Machines (IBM-$162) has fallen below the upper boundary of its Buy Value Range.  Accordingly, it is being Added to the Dividend Growth Buy List.  No shares will be purchased at this time.

       Investing for Survival

            Understanding your real returns---post inflation and fees (short):
            http://pragcap.com/understanding-your-real-real-returns-fee-edition

No comments:

Post a Comment