Tuesday, August 11, 2015

The Morning Call--China devalues the yuan

The Morning Call

8/11/15

The Market
           
    Technical

Yesterday, the indices (DJIA 17615, S&P 2104) staged a fairly impressive rally from an oversold position.  The Dow ended [a] below its 100 and 200 day moving averages, both of which represent resistance, [b] back above the lower boundary of its recently re-set short term trading range {17385-18295}, voiding Friday’s break, [c] in an intermediate term trading range {15842-18295} and [d] in a long term uptrend {5369-19241}.

The S&P finished above [a] its 100 day moving average, voiding Friday’s break and [b] the lower boundary of its short term uptrend, voiding Friday’s break.  It remains in uptrends across all timeframes (2100-3029, 1884-2648, 797-2145). 

            Not quite as optimistic (medium):

Volume rose fractionally; breadth was improved, though the flow of funds indicator remains negative.  The VIX (12.22) was down 9%---closing below its 100 day moving average and remaining within a short term trading range, an intermediate term downtrend and a long term trading range.  I continue to believe that the VIX under 12 represents value as portfolio insurance.

                        More on the VIX (medium):  

            More on momentum (medium):

                        More on sentiment (short):

The long Treasury fell, but still ended for the third day above [a] its 100 day moving average, re-setting it from resistance to support [b] the upper boundary of its short term downtrend, re-setting the short term trend to a trading range and [c] the lower boundary of a very short term uptrend.

GLD was up for the fourth day in a row, but remained below its 100 day moving average and in downtrends across all timeframes.

Oil was up 2%, but still finished below its 100 day moving average and within short and intermediate term downtrends. The dollar also declined, remaining above its 100 day moving average and within short and intermediate term trading ranges. 

Bottom line: yesterday’s relieved some pressure on the technicals; but not a lot.  The Dow voided Friday’s break to the lower boundary of its recently re-set trading range; but all the other recently re-set trends remain intact.  On the other hand, the S&P bounced back above its 100 day moving average and the lower boundary of its short term trading range, leaving all trends up.  While the pin action was unquestionably a positive, the fact that the Averages are out of sync remains a big problem.  Remain patient but pay close attention because I still believe that the big Market news near term will likely be told by the technicals.

The momentum in the battle in the bond market remains in the hands of the no hike/economic weakness crowd as several trends are changing direction.  This seems inconsistent with the recent driving narrative in the stock market (improving economy/a Fed rate hike) unless the thesis is now that the poor Chinese and Japanese economic data assures mega central bank liquidity injections, so a slight move by the Fed towards normalization doesn’t matter.  I am not really comfortable with that storyline; at least, not at the moment.  So I am still looking at the stock and bond markets being part of the current multiple divergence mishmash.

                The latest from John Hussman (medium):

            A graphic summary of yesterday’s action in all markets (medium):

            This bull market’s duration (short):

    Fundamental
   
       Headlines

            There was no US economic data yesterday, though there was a great piece of anecdotal news---Buffett made another of his big acquisitions.  Buffett inspired events generally have a commensurate impact on the Market.

            There also was one bit of upbeat international news, i.e. Greece and Troika appear near to an agreement on financial reforms that will grant Greece a E86 billion bailout.  If this proves out, then certainly the risk of a Grexit or some financial crisis spawned by a default remains low.

            *** overnight, it looks like the deal has been cut.

            There were, however, a boatload of negative international stats:  Chinese inflation, exports and imports were well below expectations (clearly supporting the notion that these guys have some serious problems) and Japanese consumer sentiment was the lowest in six months (more validation that the Japanese workingman is getting screwed by Abenomics).

            But instead of viewing these numbers as bad news, it appears to have rekindled investor hopes that the Banks of China and Japan will keep global QEInfinity on the fast track.  Whether this was just an excuse for a short covering rally off an oversold condition or an indication that investors remain enthralled with the viability of QE, is tough to tell after one day’s pin action.   However, if in the next couple of trading days, it appears to be the latter, then stocks could very well be heading back to challenge their all-time highs.    

***overnight, providing further proof that (1) its economy is up s**t creek and (2) QE is a joke and doesn’t work, the Chinese government devalued the yuan in lieu of its fruitless efforts to do the same by massive liquidity injections.

Bottom line: yesterday witnessed a counterpoint to the issues that I raised last Friday:

(1)   that investors were getting nervous that the QE endgame was at hand.  Those poor Chinese stats don’t necessarily mean that the Bank of China will pump up the volume of its version of QE.  But given the government’s response to falling stock prices, it seems reasonably assured.  That said, QE having proved itself near worthless economically in experiments by virtually every other major central bank in the world, there seems little reason to assume that it will be any different in China, assuming QE on steroids is implemented.  On the other hand, QEInfinity has proven a boon to stocks were it has been employed; and yesterday’s pin action in China and the US suggests that it still does.

(2)   the flow of negative anecdotal data is impacting individual components of the Averages.  As I noted above, there was a quite positive anecdotal news item yesterday in the form of the Buffett bid for Precision Castparts.  Whether that was a one off item or the start of an improving trend in anecdotal datapoints is to be determined. 

***overnight, consumer spending expectations and freight car loadings collapsed.

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.
           
            The results of this earnings season:  61% of the S&P companies beat their earnings estimates; 53% beat their sales expectations.

    
Economics

   This Week’s Data

            The July small business optimism index was reported at 95.4 versus expectations of 95.0.

            Second quarter nonfarm productivity was up 1.3% versus estimates of up 1.6%; unit labor costs were up 0.5%, in line.

   Other

            The NY Fed’s survey of consumer spending expectations collapsed in July (medium):

            US freight carloads fell in July (short):

Politics

  Domestic

  International War Against Radical Islam







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