Tuesday, June 30, 2015

The Morning Call--Monday's disaster hat trick

The Morning Call

6/30/15

The Market
           
    Technical

The indices (DJIA 17596, S&P 2057) took it in the snoot yesterday in the aftermath of the Greek government’s decision to call a referendum on the Troika’s bail out proposal, the fear of Puerto Rican bond default and a crashing Chinese market.   Both finished below its 100 day moving average (the Dow ended below its 200 day moving average) and its former all-time high.  In addition, the Dow closed below the lower boundary of its intermediate term uptrend (I know it is a bit confusing for the lower boundary of an intermediate uptrend to be above the lower boundary of a short term uptrend.  But it is a function of differing rates of ascension between the two going back to mid-2011); while the S&P ended below the lower boundary of its short term uptrend.  I posed the question in last week’s Closing Bell: do the bears now have the juice to push the Averages below those strong support levels (100 day moving averages)?  This time the answer appears to be, yes.

Longer term, we now have two challenges going on: (1) if the S&P remains below the lower boundary of its short term uptrend though the close on Wednesday, that trend will be negated, (2) if the Dow remains below the lower boundary of its intermediate term up trend through the close on Thursday, that trend will be negated.  For the moment, the uptrends are: short term (17465-20271, 2058-3037), intermediate term (17665-23807, 1851-2619) and long term (5369-19175, 797-2138).  

Volume was off from Friday’s Russell rebalancing session; but with that exception, it was the highest in the last 30 trading days.  Breadth was poor, but not nearly as bad as I thought that it would be.  The VIX soared 35%. Closing above its 100 day moving average and the upper boundary of its very short term downtrend.  It is also nearing the upper boundary of its intermediate term downtrend.

The long Treasury was up 2.5%---not surprising given its role as safe haven.  However, it remains below its 100 day moving average and closed right on the upper boundary of its very short term downtrend. 

Somewhat surprisingly, GLD did almost nothing, remaining below its 100 day moving average and the neckline of the head and shoulders formation.  Oil fell, remaining below the upper boundary of its short term trading range.  The dollar fell, closing below its 100 day moving average and the lower boundary of a very short term downtrend.

Bottom line: the indices are now challenging the lower boundaries of major uptrends as well as their 100 day moving averages---which have provide major support over the last two years.  The key now is whether those trend breaks will be confirmed. 

Not helping matters are (1) Puerto Rico’s governor stated that the island’s debt was not payable and (2) continued turmoil in Chinese markets.   On the other hand, the lack of any move up in gold prices or the dollar suggests that investors aren’t running to the ‘safe havens’.

Finally remember that (1) significant global events can blow technical analysis out of the tub on a short term basis; that is one of the reasons for our time and distance discipline and (2) the Market was way oversold on the close last night.  So again, follow through is key.

    Fundamental
   
       Headlines

            Yesterday’s US economic data was weighed to the upside:  May pending home sales rose more than forecast and while the June Dallas Fed manufacturing index was down, it was less than anticipated.  Good for our forecast.

            Forget data dependent, the Fed is Market dependent (medium):
            http://www.cnbc.com/id/102791653

            But not particularly relevant, given the increasing uncertainty surrounding events is Greece.

            Greece will default on IMF payment today (short):

            For an opinion, I defer to more knowledgeable experts than I:

            Mohamed El Erian on the Grexident (medium):

            David Stockman on the Grexident (medium):
           
            In the interest of ‘fair and balanced’ (medium):

            ***overnight, the Troika offered to consider debt rescheduling/forgiveness in exchange for Tsipras urging the Greeks to vote yes to accept the Troika’s bail out proposal.

Bottom line: Markets got hit by a double whammy yesterday with the odds of a Grexit rising and the prospects of Puerto Rican default coming to the fore (***overnight, the governor confirmed that he would seek to delay some debt service).  Add that to the dive in Chinese markets and investors were faced with a pretty stomach turning cocktail.  Whether or not these factors precipitate a mean reverting move in the stock market is yet to be seen.  Even if you think not, I believe that this is not a time for heroics.

***overnight, the Chinese market continued to plunge while the Chinese government announced that it was considering allowing state pension plans to invest in stocks---yeah, that is going to end well.

        
Economics

   This Week’s Data

            May pending home sales rose 0.9% versus expectations of up 0.6%.

            The June Dallas Fred manufacturing index came in at -7.0 versus estimates of -13.5.

   Other

            Another proposed regulation from the administration that is sure to help employment (short):
Politics

  Domestic

  International War Against Radical Islam

            The US and Russia now bumping heads in Syria (medium):






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