The indices (DJIA 17515, S&P 2046) got hammered yesterday. Both finished below both their 100 and 200 day moving averages. The Dow closed below the lower boundaries of both its short and intermediate term uptrends. If it remains below its short term uptrend through the close on Friday, the trend will be negated; if it remains below its intermediate term uptrend through the close next Monday, that trend will be negated. The S&P ended below the lower boundary of its short term uptrend; if it remains below that trend through the close on Friday, that trend will be negated.
Stock performance in cyclical and structural bull/bear markets (medium):
Longer term, the Averages are, for the time being, in uptrends across all timeframes: short term (17531-20337, 2084-3047), intermediate term (17733-23875, 1858-2626) and long term (5369-19175, 797-2138).
Volume fell but that was likely due to the three hour suspension in trading at the NYSE. Breadth was negative. The VIX rose 22%, ending above its 100 day moving average and within a short term trading range and near the upper boundary of its intermediate term downtrend.
The long Treasury was up again, apparently still attracting the ‘safe haven’ trade. However, it remained below its 100 day moving average and the upper boundary of its short term downtrend.
GLD was up slightly---but still no sign of investors seeking it as a safe haven. It finished below its 100 day moving average and the neckline of the head and shoulders formation and very near the lower boundary of its intermediate term trading range.
One theory on gold prices (medium):
The dollar fell slightly, like gold, not demonstrating any characteristics of a safe haven. Oil was down 2.5%, finishing below its 100 day moving average and near the lower boundary of its short term trading range.
Bottom line: can you say ‘volatility’? After the dramatic intraday reversal Tuesday, indices headed south at the outset yesterday and continued down throughout the day. Investors apparently not quite so sanguine about the Greek bail out dilemma or the potential fallout from the plunging Chinese stock market.
As noted above, the Averages blew through numerous support levels. The key, as I so often point out, is the follow through. On the positive side, stocks are oversold. Plus ‘buying the dips’ has been the ‘go to’ strategy for the last six years and it has worked. Clearly, with all those broken support levels, it needs to work again and rather quickly. The negatives are the aforementioned broken trends; and the plunging Chinese markets are starting to impact investor psychology. Strap on your flak jacket.
Two minor US economic indicators was released yesterday: weekly mortgage and purchase applications were up while May consumer credit rose less than anticipated.
More important was the release of the minutes from the latest FOMC meeting. While they read very similar to the closing statement of that meeting, they nevertheless were a touch more hawkish than that statement that a rate hike in September appears to have remained on the table.
Which Fed whisperer Hilsenrath seems to echo.
That said, there is no way anyone can postulate what the Fed is going to do, given present confusion over developments in both Greece and China. Now both situations may be resolved by September, giving the Fed a much less troublesome picture going forward than they have at present. But if they aren’t, I can’t believe that the Fed would make any move towards tightening.
Speaking of Greece, in early headlines yesterday, Tsipras indicated a willingness to meet the austerity demands of the Troika in order to gain bailout funds. However, we later learned that he apparently also asked for the renegotiation of the terms of Greece’s current debt. That got mixed and some highly emotional responses.
Germany says ‘nein’
The IMF says ‘oui’
Meanwhile, Greek businesses start pricing in drachmas
So my bottom line here hasn’t changed: I don’t know how this ends and I don’t know what it means for the markets if it ends badly; but I do believe that there will be unintended consequences; and since those are by definition unknowable, this situation demands some caution.
On the other side of the globe, the Chinese markets continue to slide; and in another desperate move, the Chinese government made stock sales by major shareholders illegal and over one half of the listed companies asked for a trading halt their stocks (short):
***overnight, China blaming Soros for sell off (medium):
The steep decline is concerning enough; but I am also bothered by (1) given the controls that the government has attempted to exercise over the markets, what is occurring now, bad as it is, can’t be characterized as price discovery. The point being, what happens when the markets, in an attempt at price discovery [like all stocks being traded], overwhelm government moves [like the government determining who can buy and sell]? and (2) given that you can’t believe anything that is reported in China anyway, you have to wonder how leveraged up the market participants really are and if there are other forces driving prices down that we don’t even know about.
China’s worrisome financial crash (medium):
Which is causing problems for the yen carry trade (short):
Bottom line: about the best that can be said at the moment is that conditions are confusing in both Greece and China. Yesterday’s pin action suggested that at least for a day, investors have taken notice. I don’t see way of reasonably forecasting whether circumstances improve or deteriorate in either. We may wake up tomorrow and all will be well. On the other hand, both have the potential to turn to s**t.
This is a time when there is nothing to do but await the outcome of disruptive events. Given the current spread between prices and Fair Value (at least as determined by our Model), I believe that there is more downside. Even if I am wrong, it is way too soon to be buying weakness. But it is time to be glad that our Sell Half Discipline has pushed our Portfolios to own some cash.
This Week’s Data
Consumer credit rose less than expected in May.
Weekly jobless claims rose 15,000 versus estimates of a 6,000 decline.
The latest Atlanta Fed second quarter GDP growth estimates has now risen to 2.3%
Median household income rose in May.
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