Wednesday, July 1, 2015

The Morning Call--A reprieve?

The Morning Call

7/1/15

The Market
           
    Technical

The indices (DJIA 17619, S&P 2063) rebounded weakly yesterday.   Both finished below its 100 day moving average---the Dow for the fifth day, the S&P for the second day. The Dow also ended below its 200 day moving average for the second day.  In addition, the Dow closed below the lower boundary of its intermediate term uptrend for the second day; while the S&P moved back above the lower boundary of its short term uptrend.

Longer term, if the Dow remains below the lower boundary of its intermediate term up trend through the close on Thursday, that trend will be negated.  With the bounce of the S&P back above the lower boundary of its short term uptrend, that challenge is now voided.  For the moment, the uptrends are: short term (17478-20284, 2060-3039), intermediate term (17679-23831, 1853-2621) and long term (5369-19175, 797-2138).  

Volume increased; breadth recovered nicely.  The VIX declined 3%, but remained above its 100 day moving average and the upper boundary of its very short term downtrend for a second day, negating that trend.  It is now within a short term trading range and an intermediate term downtrend.

The long Treasury was up down slightly, finishing below its 100 day moving average and the upper boundary of its very short term downtrend. 

GLD remained comatose, closing below its 100 day moving average and the neckline of the head and shoulders formation.  Oil was up on huge volume, but still ended below the upper boundary of its short term trading range.  The dollar rose, closing below its 100 day moving average and the lower boundary of a very short term downtrend.

Bottom line: yesterday’s weak stock rally did little to repair the Monday’s technical damage.  While the S&P did manage to recover back above the lower boundary of its short term uptrend, neither index could regain its 100 day moving averages. The bad news is that there was no improvement in the headlines out of Greece, Puerto Rico or China.  The good news is that all the typical ‘safe haven’ alternatives (Treasuries, gold and the dollar) are acting like nothing has happened.  The key remains follow through. 

    Fundamental
   
       Headlines

            Yesterday’s US economic stats were again upbeat: month to date retail chain store sales rose modestly, the April Case Shiller home price index was up less than anticipated and the June consumer confidence was much stronger than forecast.  There was one disappointment---the June Chicago PMI.

                Goldman lowers its 2015 forecast for GDP, sales and earnings growth (medium):

***overnight, Chinese manufacturing PMI was unchanged while the Japanese capital spending number improved significantly.

                But the numbers continue to take a back seat to other developments:

(1)   the Greek bailout/Grexit remains a minute to minute crisis.  As of last night, Greece missed the IMF payment, Tsipras rejected another offer from the Troika, the official bailout program ended last night and the ECB meets today to decide if it will end the liquidity injection program for the Greek banks.  Despite one escalation move after another, it appears [based on the pin action in the Treasury, gold and dollar markets] that investors continue to believe that a solution will be reached to keep Greece in the euro.
           
Investors still not panicking over Greece (short):

***overnight, Tsipras appeared to be backing down, telling the Troika that he would accept the terms of their latest proposal with some minor changes.  A source at the ECB, responded that those changes were not minor.  In the meantime, officials are meeting to consider the latest Greek offer.

                        Though Germany appears to be taking a hard line (short):

(2)   Puerto Rico’s governor stated that the commonwealth’s debts are not payable.  There is a lot of disagreement as to exactly how dire this crisis is---not that there isn’t a major problem, but rather just how potentially disruptive it could be.
           
A report on Puerto Rico’s financial problems (short):

                 What Puerto Rico’s debt crisis means to muni bondholders (medium):

(3)   the volatility continues in the Chinese stock market, most of it to the downside. The concerns here are [a] the impact that a stock market bust could have on Chinese consumer spending at a time that the economy is already slowing and [b] contagion that spreads to other global securities’ markets.

Among the many problems facing the Chinese market is the lack of experience of fund managers (medium):

Bottom line: there remain a number of problems with which the Markets must deal.  Potentially, none of them may lead to negative consequences that would threaten US economic or corporate profit growth.  On the other hand, every one of them could.  The point being that there are a lot of unknowns out there and the recent decline in prices hardly reflect those risks.  So I wouldn’t be stepping in front of this train, even if I thought that stocks were reasonably value before Greece, Puerto Rico and the Chinese markets problem hit critical mass. 

As I noted yesterday, it is far too early to be assuming that one or more of these crisis could lead to mean reversion in equity prices.  So I am not advocating running for the hills.  However, if our Portfolios hadn’t already Sold a portion of their holdings that had hit their Sell Half Prices and/or those companies that no longer met our quality criteria, I would have a list of the stocks that I would Sell and the quantities I would Sell taped to my computer screen. 

            The latest from Bill Gross (must read):

     
Economics

   This Week’s Data

            Month to date retail chain store sales rose slightly.

            The April Case Shiller home price index was up 0.3% versus expectations of up 0.8%.

            The June Chicago PMI was reported at 49.4 versus estimates of 50.6.
           
            June consumer confidence came in at 101.4 versus consensus of 97.4.

            Weekly mortgage applications fell 4.7% while purchase applications were down 4.0%

            The June ADP private payrolls report showed an increase in jobs by 237,000 versus expectations of a rise of 220,000.

   Other

Politics

  Domestic

  International War Against Radical Islam

            A brief history of US/Iran nuclear negotiations (medium):







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