Thursday, January 22, 2015

The Morning Call---Draghi delivers at last

The Morning Call


The Market

The huge intraday swings continue; but still the indices (DJIA 17515, S&P 2022), closed up only modestly and remained within uptrends across all timeframes: short term (16443-19215, 1905-2886), intermediate term (16464-21619, 1732-2446) and long term (5369-18860, 783-2083). 

The Averages finished back above the lower boundary of those pennant formations, suggesting that last Wednesday/Thursday’s plunge was a false flag.  In addition, the S&P closed right on the upper boundary of its pennant pattern.  If that barrier is successfully breached it makes moot the question over whether the lower boundary was effectively broken. 

            Volume fell; breadth improved.  The VIX was down, remaining within a very short term uptrend, a short term trading range, an intermediate term downtrend and above its 50 day moving average. 
            The long Treasury took a hit, ending on the lower boundary of its a very short term uptrend, back below the upper boundary of its short term uptrend above the upper boundary of its intermediate term uptrends, within its long term uptrend and above its 50 day moving average.  The much needed consolidation of TLT seems to have begun.

            GLD rose again, closing in a very short term uptrend, a short term uptrend and above the upper boundary of its intermediate term downtrend for the fourth day.  Under our time and distance discipline, the intermediate term trend re-sets to a trading range.  This chart looks more and more like a bottom.  However, while it certainly appears that a bottom has been made, the winning streak GLD has been long enough with sufficient magnitude that some consolidation seems almost inevitable.  When that occurs, our Portfolios will likely start to nibble.

Bottom line:  this volatility is giving me a headache.  Last year’s relative stability made trend tracking reasonably easy.  However, if the Market is entering into a period of wider swings, it may take a longer time or greater distance parameters in our discipline to confirm a trend ‘break’.   At the moment, the most important observation is that the indices are in uptrends across all timeframes.  Until one of these trends is successfully violated, the current volatility makes confident assertions about the very short term trend difficult and of limited technical significance. 

On the other hand, GLD has busted trends in two timeframes, making it likely that a change in direction in gold has occurred.  However, I want to see some consolidation and a test of the newly re-set trends before re-establishing a position.


            Yesterday’s US economic news was mixed:  weekly mortgage applications were up but purchase applications were down, December housing starts were up but building permits were down and weekly retail sales were up.  I don’t think these stats do anything to alter our forecast.

            Though falling lumber prices can’t be a great sign for housing (short):

            There was a lot of media time and space dedicated to Obama’s state of the union address.   However given its lack of import on future policy, it deserves to be ignored---which I will.

            We also made it through a day without a negative earnings report/guidance from a major player.  Noise or a change in trend?    

Once again though investor attention was focused overseas and in particular on today’s ECB meeting and its widely anticipated QE announcement.  In fact, during the day, the WSJ reported that the new program would entail the ECB buying E50 billion in bonds each month over the next two years.  That pumped up Market enthusiasm; though it seems likely that the response to the QE news would be in yesterday’s pin action not today’s. 

***Draghi just announced the ECB’s new program that involves the purchase of E60 billion of investment grade debt per month through September 2016 and it left interest rates unchanged.  So on the surface, this appears to be a larger asset purchase program than rumored yesterday.  However, the purchase program includes two other programs already in existence, so the net new purchases will be less than E60 billion.

Former BIS chief discusses ECB QE (medium and a must read):


(1)   the Bank of Canada climbed on the QE wagon (short):

(2)    the Bank of Japan announced that it would hold off expanding QE further, even though it reduced its inflation outlook.  Since the primary goal of the Japanese QE was to get inflation up, it leaves me scratching my head---unless the Japanese have finally figured out that QE was doing zero, zilch, nada to raise inflation or more importantly the country’s level of economic activity.   Now that is a scary thought,

(3)   and the Greek election draws ever closer,

                 ECB turns a cold shoulder to Greece (4 minute video):

                The Greek bail out programs are not working and here is why (medium):

            ***overnight in other news China injects $8 billion into its banking system.

Bottom line:  we now have the new Draghi plan though not all the details.  In any case, he has at last put his money where his mouth has been.  That said, the question is, will it work?  Based the US and Japan’s experience, it seems not bloody likely.  However, even if we get the best outcome that we can hope for---meaning Europe avoiding a recession and just muddling through at a lesser growth rate than the US---that is the assumption plugged into our Models.  In short, we have the best case scenario in our Valuation Model and stocks are still extremely overvalued.
            Asset allocation among top money managers (medium):

       Investing for Survival

            Leverage can kill (short):

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      News on Stocks in Our Portfolios

   This Week’s Data

            Weekly jobless claims fell 10,000 versus expectation of down 16,000.


            Bank lending surges (medium):



Gross disparities in achievement (short):


            Three cheers for democratic senator Robert Menendez (2 minute video and a must watch):

            The latest from Ukraine (medium):

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