Wednesday, August 26, 2015

The Morning Call--the roller coaster continues

The Morning Call

The Market

The indices (DJIA 15666, S&P 1867) pulled an Alfred Hitchcock move yesterday, soaring in early trading and then plunging in the final hour.  The Dow ended [a] below its 100 and 200 day moving averages, both of which represent resistance, [b] in a short term downtrend {17060-17957}, [c] below the lower boundary of its intermediate term trading range {15842-18295}; if it trades there through the close on Friday, it will re-set to a downtrend and [d] in a long term uptrend {5369-19175}.

The S&P finished [a] below its 100 day moving average, leaving it as resistance, [b] below its 200 day moving average which reverted to resistance yesterday, [c] below the upper boundary of a very short term downtrend, [d] in a short term downtrend {2033-2096}, [e] below the lower boundary of its intermediate term uptrend {1894-2657} for the second day; if it remains there through the close Thursday, it will re-set to a downtrend, and [f] a long term uptrend {797-2145}. 

September, the worst month of the year (short):

Volume was high, though not quite as much as Monday’s action; breadth was mixed, though the flow of funds indicator was terrible.  The VIX fell 12% [unusual for a down Market day], finishing [a] above its 100 day moving average, reverting to support, [b] above the upper boundary of its short term trading range, re-setting to an uptrend, [c] above the upper boundary of its intermediate term downtrend; if it remains there through the close today, it will re-set to a trading range and [d] a long term trading range.

The long Treasury fell again, but still ended [a] above its 100 day moving average, now support, [b] within short and intermediate term trading ranges but [c] right on the  lower boundary of a very short term uptrend.

This helps explain the unusual pin action in Treasuries recently (medium):

GLD declined, remaining below its 100 day moving average and in short, intermediate and long term downtrends.  However, it is in a very short term uptrend, which is close to being challenged.  If that is unsuccessful, then it would be a decent signal that the bottom has been made.

Oil rebounded, finishing below its 100 day moving average and within short and intermediate term downtrends.

The dollar also rose, but closed below its 100 day moving average, now resistance, and within short and intermediate term trading ranges. 

Bottom line: yesterday’s pin action was fairly impressive in the sense that (1)  there was every expectation of a bounce from a very deeply oversold condition; and yet the Market could not hold early gains and (2) more technical damage was done by the Dow closing below the lower boundary of its intermediate term trading range.  As you may recall, I have made the point that if the intermediate term trends turn negative, there is not real definable support levels until the Averages hit their 2011 lows (10332/1011)---not something that any of us care about contemplating.  Unfortunately, we must because both the S&P and Dow intermediate term trends are under attack.  That said, ‘contemplating’ is the operative word.  I am not ready to throw in the towel just yet.

Bonds continue to suggest no Fed rate hike and/or a weakening economy---though being off yesterday was a bit puzzling given the equity markets pin action.  Nevertheless, stocks and oil/commodities are also signaling that scenario.


            Lots of news yesterday, both here and abroad.  At home, month to date retail chain store sales improved slightly, the June Case Shiller home price index fell versus expectations of an increase, July new home sales were up less than estimates, August consumer confidence was well above consensus and the August Richmond Fed manufacturing index was disappointing.  In sum, weighed to the negative side, supporting our forecast but also keeping alive concern that I may have to lower our outlook again.

            Overseas, China made its anticipated move by easing its monetary policy though apparently declining to attempt to directly control its stock markets---seemingly demonstrating that it has learned nothing from either its own experience or that of other central banks.

                        Unfortunately, it appears that even those enhanced polices may be for the wrong reasons (medium):

                        Stephen Roach on China’s problems (medium):

                        The problem for the Chinese central bank (short):

            Another entrant in the currency wars (medium):

                        In other news, China reported a strong improvement in electric power generation (though many experts doubt that number) and an increase in leading economic indicators (though they were powered by higher bank loans), Japan’s market was off 4% and German August business confidence was ahead of expectations.  So mixed but debatable results.

Half the emerging markets are in bear markets (short):

                        All that said, the big news was the Market reversal that I discussed above. 

            Mohamed El Erian on the selloff (medium):

            The mysterious sell off (medium):

            Question of the day.  If stocks keep getting drubbed, does Yellen have a plan? (medium);

Bottom line: I was really surprised that the lower key interest rates implemented by the Chinese central bank didn’t have a positive impact on the Market and seems to support my theme of loss of faith in central bank failed policies.   However, as I noted in yesterday’s Morning Call, it is likely that the technicals will tell us if that notion has validity before it becomes manifest.

In the meantime, the recent selloff in stock prices has only marginally narrowed the gap between valuations and fundamentals; and sooner or later, that spread will mean revert.

At the moment, patience reigns supreme.  I would do nothing until the technical picture clears and price stability returns.

            As a final note, sometimes I violate my own Price Discipline.  This almost always occurs in a panic type Market when selling is more related to Market fears versus individual company fundamentals---in other words, while the mean price reversion process may have only begun for stocks, in general, it is happening with a vengeance in some stocks.  I point this out because a number of the stocks in our Portfolios are starting to violate their Stop Loss Prices.  

My rationale for violating my Discipline is that (1) unlike a violation of a Stop Loss Price as a single incident when individual company’s fundamentals are changing/deteriorating, in a plunging market, nobody is looking at an individual company’s fundamentals, they just want out, (2) we already have huge cash positions (53-55%) that provides plenty of stability of principal, so we don’t need to be forced to sell just to get that stability and can afford to sit back and allow prices to become even better values than represented in our Buy Value Ranges.  So don’t get alarmed as these price breaks occur.  We have plenty of price stability in our Portfolios and the Market may be giving us the opportunity at better value.

            Lance Roberts on what happens next (medium):

   This Week’s Data

            Month to date retail chain store sales was slightly better than the prior week’s reading.

            The June Case Shiller home price index fell 0.1% versus expectations of a 0.1% increase.

            July new home sales were up 5.4% versus estimates of up 7.0%.

            August consumer confidence came in at 101.5 versus forecasts of 94.0.

            The August Richmond Fed manufacturing index was reported at 0 versus consensus of 10.

                Weekly mortgage applications rose 0.2% while purchase applications were up 2.0%.

            July durable goods orders were up 2.0% versus expectations of -0.4%; ex transportation the number was +0.6% versus estimates of +0.4%.


            Another unmitigated positive of lower oil prices (medium):



A problem of trust (medium):

Example: Lois Lerner (short):

  International War Against Radical Islam

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