Thursday, July 2, 2015

The Morning Call--Watch how the Averages behave around their 100 day moving averages

The Morning Call

7/2/15

I am taking this holiday weekend off, so no Closing Bell.  See you on Monday.  Have a great fourth.

The Market
           
    Technical

The indices (DJIA 17758, S&P 2077) made further gains yesterday on the news that the Greek PM had folded like a cheap umbrella.   Both finished below its 100 day moving average---the Dow for the sixth day, the S&P for the third day. The Dow bounced back above its 200 day moving average.  In addition, the Dow recovered back above the lower boundary of its intermediate term uptrend, voiding its current challenge. 

Longer term, the Averages are in uptrends across all timeframes: short term (17491-20297, 2060-3039), intermediate term (17685-23837, 1853-2621) and long term (5369-19175, 797-2138).  

Volume declined; breadth was mixed.  The VIX fell 12%, but remained above its 100 day moving average and within a short term trading range and an intermediate term downtrend.

The long Treasury dropped 1.5%, finishing below its 100 day moving average and the upper boundaries of its very short term downtrend and short term downtrend. 

GLD remained comatose, closing below its 100 day moving average and the neckline of the head and shoulders formation.  Oil was down big, reflecting rumors that a draft was being circulated on an Iranian nuke deal (later denied); it ended below the upper boundary of its short term trading range.  The dollar rose, but still closed below its 100 day moving average and the lower boundary of a very short term downtrend.

Bottom line: the Market’s technical picture improved as both the Averages are now back above the lower boundaries of uptrends---voiding the challenges to those trends.  (This recent pin action is a great illustration of the rationale behind our time and distance discipline.)  In addition, the ‘safe haven’ plays that I have been watching (Treasuries, gold and the dollar) continued to act as though Greece, Puerto Rico and China  are not problems (in truth, we did get good news on the first two)---which indicates a lack of fear in current investor psychology and bodes well for stocks short term.

On the other hand, volume was unimpressive, breadth was mixed and both the indices are still well below their 100 day moving averages.  If the current bounce stops short of those moving averages, that is likely a sign that there is further downside.

            Stock performance in pre-election years that lag (short):

    Fundamental
   
       Headlines

            Yesterday’s US economic news turned mixed.  The good news came in the ADP private payroll report, the June ISM manufacturing index and May construction spending; the bad news was weekly mortgage and purchase applications, the June PMI manufacturing index and June light vehicle sales.  I don’t think that this has any meaning beyond an endorsement of our forecast of a sluggishly growing economy.

            In Greece, Tsipras said that he would accept the latest Troika offer with a few minor modifications and call off the referendum.  The Troika’s response: sorry, Charlie, (1) those modifications are not minor, (2) our offer is off the table and (3) we want the referendum.  In short, the bluff has been called and the Troika holds the cards.  So the Sunday referendum vote now appears to be the next event (the outcome of which it seems that the Troika is betting will be that the Greeks want to remain in the euro---although this crisis remains a minute to minute affair, so I won’t be surprised whatever happens.  Bottom line, Tsipras blinked and that probably means that the odds of a Grexit have declined.
           
            Here is a great article on how a Greek default would work, or not (medium):

            Here is an article on how this mess could get resolved, or not (medium):

            Puerto Rico and Greece have the same problem (medium):

            In Puerto Rico, the government met all principal and interest payments on current debt yesterday.  The can has been kicked.

            In China, markets continued to decline (medium):

            ***overnight, the Chinese stock market fell again.  And in other news the central bank of Sweden lowered key interest rates.

Bottom line: it now looks like the odds have increased that Greece will remain in the euro and that Puerto Rico will continue to service its debts.  That doesn’t mean that they will or even if they do that either’s fiscal problems have been solved.  Indeed, they will likely only get worse and pop up again at some future date except that circumstances will be even more dire.  Nonetheless, the risk of a major negative event occurring short term has seemingly lessened. 

Now the question is, did these recent unsettling events cause investors to stop daydreaming and make a serious re-examination of their current valuation parameters?  If not, then we will likely be see another challenge of the current all-time highs.  If so, this decline is not over given the extraordinary gap between current prices and historical valuation metrics.

            Update on valuation:

            Private equity firms continue to be large sellers of stock (medium):

            Four minutes with Robert Shiller:
              
Economics

  This Week’s Data

            The June PMI manufacturing index was reported at 53.6 versus expectations of 53.7.

            The June ISM manufacturing index came in at 53.5 versus estimates of 53.2.

            May construction spending rose 0.8% versus consensus of up 0.5%.

            Light vehicle sales fell in June.

            Weekly jobless claims were up 10,000 versus expectations of a decline of 1,000.

            June nonfarm payrolls increased 31,000 less than in May versus estimates that it would be 50,000 less; however, May’s job growth was lowered by 26,000.

   Other

Politics

  Domestic

  International War Against Radical Islam







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