Wednesday, May 20, 2015

The Morning Call---Housing starts: a change in trend or an outlier?

The Morning Call


The Market

The indices (DJIA 18312, S&P 2127) were basically flat yesterday, with the Dow up and the S&P down.  Both closed above their 100 day moving average and their all-time highs. 
Longer term, the indices remained well within their uptrends across all timeframes: short term (17201-20001, 2019-2998), intermediate term (17345-22473, 1823-2593 and long term (5369-19175, 797-2135).  

Volume rose slightly; breadth remained mixed for a third---not a sign of strong upward momentums.  The VIX rose but still ended below its 100 day moving average and the upper boundary of a very short term downtrend---both positives for stocks.  I continue to think that at current price levels, it is attractive as portfolio insurance.

Those pesky divergences (short):

The long Treasury was down, finishing below its 100 day moving average and near the lower boundary of a short term downtrend.

GLD got whacked and closed below its 100 day moving average and the neck line of the head and shoulders pattern.  GLD continues to be unable to get out of its own way.

Oil fell back below the upper boundary of its recent short term trading range; while the dollar soared back above the lower boundary of its recently broken short term uptrend.

Bottom line: everyone appears to have taken a rest yesterday, weighing the tightening implications of those blowout housing start and building permits numbers against the ECB ‘front end’ loading of QE statement.  The pin action in other markets reflected this uncertainty with bonds and the dollar seeming to point to the prospect for a stronger economy and higher rates while GLD and oil indicating just the opposite.  In short, investors in these various asset classes continue to read the tea leaves differently.  I think that argues for caution whichever one you might be interested in.

That said, the indices are very close to challenging the upper boundaries of their long term uptrends.  I can’t imagine them coming this far and not attempting an assault.  Nonetheless, I continue to believe they will be unable to successfully challenge to any meaningful extent.  On the other hand, longer term, the trends are solidly up; so at the moment, there is little threat of a measurable sell off.
            The long Treasury’s recent pin action continues to suggest either inflation or a re-evaluation by investors of the sustainability and/or efficacy of QE.  Both clearly run counter to the message to the stock market.  Plus the volatility in gold, oil and the dollar only add their own version of a confused message.  I have no clue what long rates are going to do; but I worry that about the ‘why’ of what they will do.
            Update on Fed liquidity and the markets (medium):

            Valuations and the Fed model (short):

            The lament of another investor (i.e. like yours truly) that has been bearish on the Market (medium):


            Yesterday’s US economic stats were mixed: month to date retail sales softened versus last week, but April housing sales and building permits were gangbusters numbers.  Clearly the latter are by far the more important.  It is the first really good stats we have gotten from a key economic indicator in months.  Whether this is the sign that the economic slowdown has bottomed or is just an outlier will only be known in the future.  I will repeat what I have said about other positive datapoints of late, we need some pluses just to keep from having to lower our economic growth estimates for a second time.

            Meanwhile, we got our second laughable Fed economic study in as many days.  You have to wonder what is prompting all this upbeat propaganda.  Surely not a coming rate hike. (medium):

            Overseas, the UK and EU April CPI’s came in above expectations---another sign of a stronger growth and keeping Europe as the bright spot in the international economic picture.  In addition, an ECB executive said in a speech that the ECB intends to ‘front load’ its QE.  That helped European stock markets, though I remain a skeptic on its ultimate impact on their economies. 

            ***overnight, first quarter Japanese GDP was reported up much more than anticipated; the Bank of England kept key interest rates at record lows.

            The dark spot in Europe remains how the Greek bail out end game plays out.  The latest bit of negative news coming out of Germany where Merkel is having a tough time selling a bailout in any form to her parliament. (medium):

            ***overnight, a Greek official said that his country would be unable to make the June 5 IMF debt payment.  Meanwhile the ECB met to discuss raising the discount it places on the collateral Greek banks use for loans.

Bottom line:  yesterday’s housing numbers offered some welcome relief from the barrage of poor economic data.  Follow through, of course, is the key; without it, all we have is an isolated stat that could very well get revised down. 

            The data and the likelihood of recession (medium):

I am a bit taken back by the two recent Fed studies attempting to paint a smiley face on the economy.  I am not sure anyone in the real world is believing it; the big question is do they?  Because if they do, we could see higher rates sooner than many investors think---except, of course, for the bond guys.

Yesterday’s EU CPI numbers were encouraging (a sign of economic growth).  Unlike the US data, they are part of an improving trend.  Hopefully, this will continue; because as I noted in last week’s Closing Bell, I am clinging to a ‘muddle through’ international economic scenario like it is the last bottle of Famous Grouse on earth.

It won’t be long now---until we know whether the euros can solve the Greek bail out without blowing something up.  I remain cautious about the impact of the final outcome.

 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.

            Another look at valuations (medium):

            Are art auctions a sign of the top (medium):

            A thought experiment from a bull (medium):

                Strategists year end S&P target (short):


   This Week’s Data

            The growth in month to date retail chain stores sales slowed---1.8% versus last week’s 2.1%.

            Weekly mortgage applications fell 1.5% while purchase applications were of 4.0%.


            More on China’s new QE (medium):

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