Friday, June 19, 2015

The Morning Call---When the Fed's away, the rats will play

The Morning Call


The Market

The Averages (DJIA 18115, S&P 2121) had a euphoric day, reveling in Fed dovishness/lack of willingness to piss off the Markets.  Both closed above their 100 day moving averages and the upper boundaries of their very short term downtrend.  Clearly, we got the follow through needed to return our attention to the upside.  The strong bounce off the 100 day moving averages is further testimony to the power of this support level.  The spike above the upper boundaries of their very short term downtrends, negates those trends.  The focus now is on the indices’ former highs (18281, 2135) and the upper boundaries of their long term uptrends.

Longer term, the Averages remained well within their uptrends across all timeframes: short term (17398-20204, 2047-3026), intermediate term (17585-23727, 1845-2613) and long term (5369-19175, 797-2138).  

Volume was flat with the prior day; breadth improved.  Unsurprisingly, the VIX was off 9%, finishing below its 100 day moving average and within a very short term downtrend and a short term trading range.  While on the surface this move is positive for stocks, the VIX is again nearing a level at which it offers value as portfolio insurance.

The long Treasury had another down day, ending below its 100 day moving average and the upper boundaries of very short term and short term downtrends.

GLD was up, but continues its directionless meandering, though it did finish the day right on its 100 day moving average.   It remained below the neck line of the head and shoulders pattern.  Oil was up slightly, but still closed below the upper boundary of its short term trading range. The dollar also slipped, remaining below its 100 day moving average and within a very short term downtrend and a short term trading range.

Bottom line: investors got jiggy yesterday as they (rightfully so) interpreted the Fed’s bewildering performance on Wednesday as a sure sign that it is paralyzed and therefore will do nothing to upset the Markets, i.e. it will stay dovish.  The question is how much juice the bulls have left and how much further to the upside they can move stock prices.  All the relevant barriers (prior highs and upper boundaries of their long term uptrends) are nearby; so it won’t take long to answer that question.  I continue to believe that the indices will be unable to break their long term trends to the upside.

The correlation between stock and bond prices that has existed for the last six years appears to have been broken.   That augurs the return of the bond vigilantes, that is, the Fed may be losing control of the long end of the bond Market.  That doesn’t necessarily mean something negative is afoot.  Certainly in the past, long interest rates have risen (bond prices declined) while stocks prices made new highs.  But that generally occurred when the economy is coming out of a recession.  Today, that is not happening.  What seems more likely to me is that the bond guys are sick and tired of paying high prices for government paper when the government is doing nothing to improve the economic outlook. 


            We ended this week’s data dump on a positive note (nothing today):  both the headline and ex food and energy May CPI figures were less than anticipated; weekly jobless claims fell more than expected; and the first quarter US trade deficit came in a below estimates.  Plus the Philly Fed manufacturing index and May leading economic indicators were well ahead of forecasts. That means a third week in a row of decent numbers.  I am not suggesting any kind of ‘lift off’ scenario but they do make me feel more comfortable with our forecast.

            The only stat from overseas was improving UK retail sales.  Certainly, that is good; but it is the sole datapoint this week so it doesn’t contribute a lot to the international economic picture.

            Center stage continues to be held by:

(1)   global QE, with our own Fed maintaining its leadership.  I am not going to dwell on the results of Wednesday’s FOMC meeting; I think that I was pretty clear on my opinion in yesterday’s Morning Call.  The conclusion: the Fed is clueless about the economy, knows that monetary policy is extremely overextended and is clueless how to extract itself; hence its policy response is duck its head and pray, i.e. do nothing.  Helping the QE bandwagon along were the Swiss National Bank that left its key rate at a negative .75% and the Norwegian central bank that lowered its rates---again. 

***overnight, the Japanese central bank left its giant, economy sized QE intact.

Judging by the Market reaction, this was all welcome news---as it has been for the last six years.  The problems are that the growth rate of the US economy seems to have slowed which can’t be good for profits, the bond guys are starting to take long interest rates up which is probably not good for valuations and stocks are a mille short hair from historical highs.

                Another view of Wednesday’s FOMC meeting (medium):

(2)   the ongoing Greek tragedy.  Yesterday’s developments were:

[a]        a eurozone meeting that ended with no progress on a Greek deal---though in fairness, none was expected.  However, that didn’t stop the parties from laying some hot tongue on each other (short):
[b] a continuing run on the Greek banks (medium):

[c] and rumors yet to be confirmed that the ECB may believe that the Greek banks may not be able to open their doors on Monday (short):

            What if there is no deal in Greece (medium):

            ***overnight (medium):

Bottom line: the degree of uncertainty expressed in Wednesday’s Fed statement and the Yellen news conference has investors convinced that it will do nothing (i.e. stay accommodative).  And that was apparently all that was need to give the bulls a new lease on life.  Whether this enthusiasm is sufficient to overcome serious overhead technical resistance, the impact that a slowing economy could have on earnings and a potential monkey wrench in the valuation equation (higher long term interest rates) remains to be seen.

The Greek bailout crisis has yet to be resolved.  While I am encouraged by the Troika’s seeming willingness to negotiate pensions and debt relief, that doesn’t mean that it will happen or if it does that the Greeks will agree.  Whatever is going on over there, the risk of a Greek default or exit is still sufficiently high that some caution is warranted.

I am not poo pooing the notion that stock prices can’t/won’t go higher; I am suggesting that in the grand scheme of things most of the gain from this bull market has already been made and therefore it is a bit risky to be chasing stocks up except for the most seasoned traders. 

            Sweden’s largest fund manager bumping stocks (medium):

   This Week’s Data

            The June Philadelphia Fed manufacturing index was reported at 15.2 versus expectations of 8.0.

            The May leading economic indicators came in up 0.7% versus estimates of up 0.4%.





            Russia and NATO/US keep poking each other in the eye (medium):

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