While the Averages (DJIA 24527, S&P 2651) did manage to close on the upside, (1) when I heard the China trade news, I thought that the Dow would be up 500-600 points, (2) it did trade up 300+ points but couldn’t even hold that gain. That is not great pin action. They both finished below both moving averages and have set a second lower high and second lower low. I still believe that some kind of oversold rally could happen; but yesterday’s price movement suggests that those odds are going down.
Volume was flat; breadth improved. The VIX was down 1 ¼%; but its chart remains positive (bad for stocks).
The long bond was down ½ %, finishing above its 100 DMA (now support), above its 200 DMA (now support) but below the upper boundary of its short term downtrend. It needs to take out this downtrend to convince me that investors are truly shifting their outlook for interest rates (lower).
Three lessons from the bond market.
The dollar was down slightly, ending right on the lower boundary of its very short term up trend but above both MA’s and in a short term uptrend. So the chart continues to be technically strong.
GLD rose ¼ %, closing above its 100 DMA and continues to build strength.
Bottom line: my main take away from yesterday’s pin action was that stocks didn’t respond as positively to the trade data as I had expected, given the current highly volatile Market. It once again suggests a complete lack of conviction among buyers and the likelihood of more downside. Levels to watch are the October lows (25062/2601) and the February lows (23352/2536).
The long bond has run into some resistance at the upper boundary of its short term downtrend. That is not particularly surprising; but it does need to successfully challenge this level before the current move up is more than just a rally in a bear market.
The dollar continues to trade like there are dollar funding (liquidity) problems. And if you think about gold as a safety trade, then its pin action would support the notion of credit/liquidity problems are looming.
Wednesday in the charts.
Yesterday’s stats were upbeat: weekly mortgage and purchase applications were up while November CPI was in line.
Overseas, the numbers weren’t so good: EU September/October industrial production were poor.
The big news of the day was the Chinese announcement of trade concessions; the most important of which was the agreement to back off of its industrial policy that incorporated the theft/usurpation of intellectual property. This is one of those developments the importance of which can be easily over or understated. So this is my best try.
The easier one first. If false, then this is just the Chinese giving Trump an apparent win in face of his potential domestic personal problems (impeachment), maneuvering to buy time and develop ways of getting around the ‘industrial policy’ issue. The only question would be, does Trump see through it, keep the pressure on and refrain from his usual ‘this is the greatest thing since the wheel’ tweet storm.
If true, it would be a big plus for the long term secular growth rate of the economy and would buy Trump some huge ‘atta boy’ accolades. Clarifying exactly what this means will, at best, take time. Clearly, the Chines definition of industrial policy reform and our definition could worlds apart. I have said repeatedly in these pages that the Chinese are skilled negotiators and they tend to lie a lot. So it is too early to raise a victory flag. Still, if true, this would be a great achievement for the Donald.
Leaving aside the long term implications of this development, the short term cyclical effects are also a positive and much more easily determined---lowering auto tariffs, buying more soybeans, etc.---will be apparent soon and should have an impact on the cyclical growth rate of the US economy.
So at the moment, I score this a plus for the US and for Trump short term but think it wise to withhold judgment on the potential longer term benefits until real action is apparent. It would also help would revive my hope that he can deliver on his stated goal of revamping the global political/trade regime.
Now for the not so upbeat news from yesterday:
National Inquirer admits role in Trump hush money scheme.
May survives no confidence vote; but that doesn’t solve any problems.
What to expect if the government shuts down.
Fed now has a negative net worth (must read):
Bottom line: whatever happens to May, the Italians or the outcome of the food fight over funding the wall, the Chinese resuming their purchases of soybeans and oil and lowering auto tariffs is probably more important to the near term economic growth rate of the country and to Market valuation. Longer term, there is reason for hope; but that is not worth much.
And not to throw a turd in the punch bowl, let’s not forget the effects (1) on economic growth of a rising budget deficit and an irresponsibly high national debt at a time they both should be shrinking and (2) on asset liquidity of a steady decline in the Fed’s balance sheet.
***overnight, the ECB confirmed that it was ending its bond buying program.
The latest from Doug Kass (today’s must read).
Where money goes to die.
One constant in the stock market.
The stock market stopped shrinking in 2018.
News on Stocks in Our Portfolios
EOG Resources (NYSE:EOG) declares $0.22/share quarterly dividend, in line with previous.
This Week’s Data
Weekly jobless claims fell 27,000 versus expectations of 3,000 decline.
November import prices were down 1.6% versus forecasts of -1.0%; export prices were down 0.9% versus consensus of +0.1%.
Auto sales in China decline dramatically.
House passes $867 billion farm bill.
What I am reading today
Yellow fever in France.
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