The Morning Call
1/9/15
The Market
Technical
The indices
(DJIA 17907, S&P 2062) soared yesterday, blowing through their 50 day
moving averages and closing within uptrends across all timeframes: short term
(16372-19172, 1889-2251), intermediate term (16372-21541, 1727-2343) and long
term (5369-18860, 783-2083).
Volume
was up; but breadth was mixed. The VIX
dropped 12%, finishing above its 50 day moving average and within its short
term trading range and intermediate term downtrend.
The
long Treasury was off again but continues in uptrends across all
timeframes.
The
race to negative yields (medium):
GLD
was also down, ending right on the lower boundary of its very short term
uptrend and within a short term trading range and an intermediate term
downtrend.
Bottom line: when
I said yesterday ‘barring a Titan III shot’ the first five days of January
would be down, little did I know that we would indeed get that moon shot. As it turns out, both the Averages closed up
in that five day timeframe. Hence, we now
have a positive early year technical indicator to support all those uptrends
the indices are in. In addition, this latest
sinking spell ended on a higher low---which is a plus and suggests that our focus
shift back to well defined resistance levels: the former (unsuccessfully
challenged) highs (17998, 2080) and the existing upper boundaries of the Averages
long term uptrends. Of course, at current levels they are close to
those levels, especially the S&P; so I don’t think it is a time to be
getting jiggy. Rather caution makes
sense with prices near not only all time highs but also the upper boundaries of
long term trends.
Stock
Traders’ Almanac on the First Five Day of January indicator (short):
Fundamental
Nothing
really earth shaking in yesterday’s generally upbeat US economic news: weekly
jobless claims were down a bit more than expected, December retail chain store
sales were healthy and November consumer credit rose less than anticipated with
credit card debt down.
Overseas,
German factory orders were down.
***overnight,
China reported December CPI up, PPI down and lowered its estimate of 2014
growth. The Baltic Dry Index hit an all-time
low. In the EU, German November industrial
production fell 0.1%, the ECB said that it is studying a E500 billion bond
buying program but as usual gave no details (more Draghi jawboning?) and the leader
of the German opposition party said that Merkel’s willingness to let Greece
exit the Eurozone is ‘playing with fire’.
The
most talked about factor of the day was comments made by a Fed member in a
Wednesday night speech in which he opined that a rise in interest rates would
be cataclysmic. Following the soft, easy
dialogue from the minutes of the FOMC’s December meeting, that was all
investors needed to kick in the afterburners.
Not
that this is all positive for the economy because there is little evidence out
there to suggest that it is. But it is a
plus for speculators, hedge funds and the carry trader who can borrow money
cheaply and use it to chase asset prices up (the Titan III formation).
Bottom line: I
am not worried about the US economy. I
am worried about the ongoing divergence of asset price valuation from a
sluggish but gradually improving economy.
It makes no sense to me for prices to rise as a faster rate than the
underlying fundamentals ad infinitum. The
question is, when do these trends mean revert?
I clearly don’t have a clue; otherwise the Market would have rolled over
long ago. But that is not an argument
that there will be no mean reversion; it is an argument that I don’t know how
to determine the timing. It also leaves
open the risk that the wider the divergence between price and value becomes,
the more painful the mean reversion process.
The only
solution that I have that is reasonable viable (for me) is to allow our Price
Discipline as it applies to individual stocks to be the model. That is, when the price of an individual
stock reaches a historically wide divergence from the fundamentals of the
underlying company, half the position is Sold.
Selling half is my way of hedging for a miscalculation of the price/value
spread; but forces me to take money off the table. However, I would note that when the number of
divergences grow the point where our Portfolios are 40-50% in cash (as they are
now), it suggests that the risk of mean reversion for the overall Market is
significant.
Speaking of
fundamental divergences: comparing GAAP and non GAAP earnings (medium and a
must read):
I don’t want to
be heavily invested when investors suddenly experience a mean reversion
epiphany. Remember there is only one ‘first
guy out the door’.
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.
Investing for Survival
Thoughts
on a ‘buy and hold’ strategy (medium):
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