Archive for June, 2013

Easy Money and the Damage Done

Wednesday, June 19th, 2013

today

Today we got the first shot over the bow from the Federal Reserve that the easy money we have seen over the past few years has a termination date. It is pretty clear from the chart above (that represents today’s S&P 500 Index action) exactly when the words left Fed Chairman Bernanke’s mouth because the stock market immediately dropped 200 points.

It’s kind of late tonight so the post will be short, but I wanted to give you a heads-up on the situation and put it into perspective:

200-day

By now, you are pretty familiar with this graph. This is after the close today and it shows that once the S&P 500 Index dropped below that upper blue band (which represents the key 10% level above the 200-day moving average – the 200-day is the green line on the graph) the market has been unable to move back above. Today’s news continued the recent give-n-take between the upper blue band and the 50-day moving average (another key level).

What I am looking for tomorrow is a sign for the future direction of the market: will the market drop below the 50-day moving average and head toward the 200-day moving average or will it shrug off today’s comments by the Chairman and try to retake the 10% upper band.

Stock investors have gotten giddy with the financial heroin known as easy money through the quantitative easing program provided by the Federal Reserve that has inflated stock prices above fundamental values.

Today was the first dose of reality that the mass investing public has received – so it will be extremely interesting to see what happens.

My hope is that we pull back toward the 200-day moving average to relieve some of the excess valuations, shake out the temporary investors, and then set us up to move higher again based upon actual corporate earnings in this 2% GDP Growth economy.

As this all unfolds, I will be back with more commentary – but we will be using this as an opportunity to put some more of the cash we raised earlier this year to work in solid companies that have already corrected double digit percentages.

Good night and enjoy this from Neil Young…


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Mark

S&P 500 Fades Late in Day

Wednesday, June 5th, 2013

sp500

Just a short update tonight – the market was weak all day, but when it hit a technical support level around 1622 on the index, and that support did not hold we fell decidedly to 1608.

In the graph above, you can see the index has dropped below that critical 10% band above the 200-day moving average that I’ve written about here so often and has almost reached the 50-day moving average (another key technical level).

The two indicators on the chart that give a feel for short-term direction of the market show that this initial move is getting a bit extended – and given that we are almost at the 50-day moving average, it would not surprise me to see a bit of a rally.

There can be many causes for the current pullback – reversions to a more realistic valuation are results of, not causes of, pullbacks – but the significant increase in bond yields we have seen over the past few weeks is most likely the catalyst. Below is a graph of the big move higher:

us-10-yr

That increase in rates has caused many interest rate sensitive sectors to correct significantly – particularly the defensive areas of the market that have seen so much money flow into them: high dividend payers, utilities, REITS, pipeline companies, consumer staples. You can see the sector performance here:

screen-shot-2013-06-05-at-83350-pm

So, I would expect a bit of a rally but unless yields pull back, unless we get some majorly positive economic news, unless the Fed comes out with a statement about flooding the economy with cash or unless corporate earnings suddenly strengthen significantly, I think we are due for more downside in coming days.

I have written in earlier posts that we have been buyers of good companies whose prices pulled back before the general market pullback. If we continue to get lower prices, we will continue to be buyers at better values than cyclical highs. This doesn’t necessarily payoff immediately, but once the excesses get flushed from the system, valuation always matters.


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Mark