Tuesday, June 16, 2015

The Morning Call---The third round of Russian roulette

The Morning Call


The Market

The Averages (DJIA 17791, S&P 2048) fell yesterday, finishing below their former all-time highs, their 100 day moving averages (which have provided strong support for the indices for over the last two years.) and the upper boundaries of their very short term downtrends.  My attention right now is how the indices trade around those 100 day moving averages.  An inability to recover above these support levels would be another negative technical divergence.

Longer term, the Averages remained well within their uptrends across all timeframes: short term (17356-20161, 2045-3024), intermediate term (17551-23693, 1842-2610) and long term (5369-19175, 797-2138).  

Volume rose slightly.  Breadth was negative; of note, the flow of funds indicator broke an uptrend going back to May 2014.   The VIX was up 11%, closing above its 100 day moving average and within a very short term downtrend and a short term trading range.

More divergences (short):

The long Treasury was up fractionally, ending below its 100 day moving average and the upper boundaries of very short term and short term downtrends.

China: the source of the recent selling in Treasuries (medium):

GLD drifted higher---continuing to do nothing and ending below its 100 day moving average and the neck line of the head and shoulders pattern.  Oil was a bit lower, closing below the upper boundary of its short term trading range. The dollar also declined, closing below its 100 day moving average.  Last week, it broke below the lower boundary of a developing pennant formation, resetting to a very short term downtrend.

Bottom line: the price action in the indices seems to be starting to reflect the divergences that have been emerging the last couple of months.  How they handle their 100 day moving averages will likely be an important factor in whether the Averages get in sync with or continue to diverge from the numerous oft mentioned internal market indicators.

The long bond continues to act poorly; the dollar looks like it could be rolling over; and gold and oil have been trading in tight, unexciting ranges.

            The US economic news flow this week got off a lousy start: the June NY Fed manufacturing index was well below expectations while May industrial production was negative.  The NAHB confidence index was a plus.  But given that industrial production is a primary indicator, yesterday’s data was solidly downbeat.  That said, we have had two promising weeks of stats in a row; so there is no reason to get beared up.

            Update on big four economic indicators (medium):

            There was no international economic data; though the big, fat Greek drama continues to command center stage.  At the moment, nothing seems to be going as hoped, as the latest round in bail out talks broke down (medium):

            Amid rumors of capital controls (medium):
                More (medium):

            I actually thought that comments from the Troika on the handling of the Greek pension system (one of, if not the biggest sticking point in the negotiations) indicated some willingness to compromise---though clearly the headlines don’t bear that out.  It seems the Greeks are on their third chamber in this ultimate game of Russian roulette.   Which means that there is still the chance of a successful conclusion to this clusterf**k; but clearly the odds are shrinking.

            The other item preoccupying investors this week is the Tuesday/Wednesday FOMC meeting.  Consensus appears to be that rates will remain unchanged.  The disagreements are centered around the language in the Fed statement and in Yellen’s post meeting news conference---hence Wednesday could be exciting (volatile).

            ***overnight, German investor confidence, EU car sales and Indian exports all disappointed.

Bottom line: yesterday’s economic stats notwithstanding, the data is showing signs of some stabilization.  That clearly is a plus and hopefully we will see more of the same.  A return to the first four months of steadily deteriorating numbers would open the potential for a worst case scenario---a recession when the Fed has no policy ammo.

The Greek bailout endgame draws ever nearer.  However, I think that no matter badly this may end, the eurocrats will manage to extend the uncertainty well beyond boundary of rational expectations.  That doesn’t mean that it will necessarily end in failure; but it is likely to be a Chinese water torture test whatever happens.  What worries me is that if a Grexit occurs, I don’t think the pain of the resulting consequences is being properly discounted.

Finally, the consensus is that the Fed will leave rates unchanged at its meeting this week.  A rate hike would be a surprise.

 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.

            The latest from John Hussman (medium):


   This Week’s Data

            May industrial production fell 0.2% versus expectations of a 0.2% increase; capacity utilization came in at 78.1 versus estimates of 78.4.

                The June National Association of Homebuilders confidence index was reported at 59.0 versus forecasts of 56.0

                Month to date retail chain store sales slipped again last week.

            May housing starts fell 11% versus consensus of down 4%; however, April was revised up.  Building permits soared 12% versus expectations of up 3%.




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