Friday, July 24, 2015

The Morning Call--Will better economic and corporate profit numbers = higher stock prices?

The Morning Call


The Market

The indices (DJIA 17731, S&P 2102) were down again yesterday.  The Dow traded below its 100 day moving average (remember the importance of this trend line as support for the last 18 months) for the third day; though the S&P is still above its comparable level.  If the Dow closes below its 100 day moving average today, the MA will change from support to resistance for the second time in three weeks. 

The DJIA also ended below the lower boundary of its intermediate term uptrend (remember the slope of the intermediate term uptrend is somewhat steeper than the short term uptrend) for the fourth time in three weeks; although it never confirmed the break in any of the prior three challenges.  The S&P is still 30 points away from the lower boundary of its short term uptrend.  The short term question at the moment is, how will the Averages resolve these divergences?

 Longer term, the indices are, for the moment, within their uptrends across all timeframes: short term (17638-20562, 2083-3062), intermediate term (17856-23995, 1869-2635) and long term (5369-19175, 797-2145).  

Volume fell; breadth turned negative.  The VIX (12.6) pin action was up, reverting to more normal behavior.

The long Treasury was up strong, but still closed below its 100 day moving average and within its short term downtrend.

High yield bonds: another divergence (medium):

GLD fell for the seventh day in a row.  It ended below its 100 day moving average and within 5% of the lower boundary of its long term downtrend.

Oil was down, finishing below its 100 day moving average and on the lower boundaries of its short and intermediate term trading ranges.  If it remains below this level through next Monday, the short term trend will re-set to down; if it stay there through the close on Tuesday, the intermediate term will re-set to down.  The dollar fell, ending above but very near its 100 day moving average and within short and intermediate term trading ranges.

Bottom line: the Averages are back at prices at which support levels are being challenged.  A break of the indices short and intermediate uptrends would clearly support the notion that this Market has topped.  However, that is getting way ahead of events.  It will take some serious whackage to successfully challenge those trends.  So for now, best to stay patient and focus just on the follow through of those trends that are already being threatened.

            The pace of release of US economic picked up a bit yesterday: weekly jobless claims fell much more than expected, the June Chicago National Activity Index was well ahead of estimates as were the June leading economic indicators and the July Kansas City Fed manufacturing index continued to decline, just not as much as anticipated.  In short, the numbers pretty much assured another upbeat week for economic stats.
            Another troubling sign (short):

            ***overnight, the major rating agencies downgraded Puerto Rico and UBS announced that it would cease accepting PR bonds as collateral.

            Overseas, the results were more mixed---up retail sales in Canada versus down in Great Britain. 

            ***overnight, the July Markit flash manufacturing PMI in both the EU and China were below expectations.

            Other headlines included a great day (in the aftermarket) for corporate earnings as AMZN (which was up 18% in after-hours trading and will probably lead a market rally today, at least, early on), ATT, CSCO, SBUX and V all posted better than consensus results. 

            In hedge fund manager, Ray Dalio’s, quarterly investor report, he expressed concern about his economic outlook for China.   As a long time China bull/investor, this clearly brought back into focus recent worries about that country’s economy and Market and their possible impact on the global economy/Market. 

The reason is simple: as you know, one of the troubling aspects about investing in China is the lower level of confidence we have in the veracity of the data, economic or otherwise, published by the government because its tendency to make the reported stats reflect its own narrative.  So when a sophisticated and well respected analyst with significantly better raw data retrieval capabilities and who is a long time bull on China suddenly changes his tune, a lot more doubt is created than a switch in opinion of an equally sophisticated, well respected analyst on the US where everyone has roughly equal access to the data and therefore has a lot more confidence in their own analysis. 

Bottom line: yesterday’s US economic data was really good by recent standards although I need a lot more of those kind numbers before I would consider altering our outlook. 

In addition, if yesterday’s aforementioned after hours profit reports are an indication that this earnings’ season is taking a turn for the better, then it may provide investors with yet another opportunity to ignore the fact that overall corporate earnings increases have over the last couple of years become more a function of accounting than physical growth.  If not, they may still ignore it; it will just require more denial of the cognitive dissonance. 

On the other hand, Ray Dalio’s comments reinforce my worry that China’s economic problems and their impact on the global economy can’t be as easily dismissed as investors seem to have done with its manipulation of it stock market.  While the Chinese government may have been able to muscle the stock market and may have the ability to manipulate the reported data, it ultimately can’t hide what is actually transpiring in the economy because it is not a closed system.  Eventually, whatever is occurring internally will be felt externally; and if it is a slowdown in growth, its impact will be seen/felt in the global numbers irrespective of what the Chinese say.    

I continue to 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.

            More on valuation (medium):


   This Week’s Data

            June leading economic indicators rose 0.6% versus expectations of up 0.2%.

            The July Kansas City Fed manufacturing index came in at -.7 versus June’s release of -.9.


            Commercial real estate is booming (short):



  International War Against Radical Islam

            Turkey getting more deeply involved in Syria (medium):

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