Thursday, September 3, 2015

The Morning Call--China closed for the weekend

The Morning Call

9/3/15

The Market
         
    Technical

The indices (DJIA 16351, S&P 1948) staged a recovery yesterday, although it was nothing significant, technically speaking.  The Dow ended [a] below its 100 and 200 day moving averages, both of which represent resistance, [b] in a short term downtrend {17019-17938}, [c] in an intermediate term trading range {15842-18295}and [d] in a long term uptrend {5369-19175}.

The S&P finished [a] below its 100 and 200 day moving averages, both of which represent resistance, [b] below the upper boundary of a very short term downtrend, [c] in a short term downtrend {2026-2090, [d] within an intermediate term uptrend {1902-2675} [e] within a long term uptrend {797-2145} but [e] below the important 1970 level. 

Both of the Averages are developing pennant formations, with three lower highs and one higher low.  Those boundaries may be early warning systems on Market direction.

Volume declined; breadth improved.  The VIX dropped 17% but still closed [a] above its 100 day moving average, now support, [b] within a short term uptrend, [c] within an intermediate term trading range {it remains well above the upper boundary of its former intermediate term downtrend and [d] a long term trading range.
               
The long Treasury fell 1%, finishing [a] above its 100 day moving average, now support and [b] within short and intermediate term trading ranges.   The question remains, is the recent down move a function of heavy sales by the Chinese and emerging market central banks or a sign that the Fed will lift rates in September and/or the economy is improving?  You know my answer.

GLD dropped, remaining below its 100 day moving average, within short, intermediate and long term downtrends.  However, it ended below the lower boundary of   its very short term uptrend; it is closes there today, the trend will be negated.  

Oil was up 2%, finishing within a short term trend trading range, but below its 100 day moving average and within intermediate and long term downtrends.
           
The dollar also rose, ending below its 100 day moving average, now resistance, and within short and intermediate term trading ranges. 

Bottom line:  yesterday’s bounce was a plus in that the Averages failed to get down to their August lows. Although the rebound was touch on the meek side given recent volatility.  Nonetheless, it represents a failed challenge of the lower boundaries of the indices’ intermediate term trends.  In addition, given that Chinese developments have been the downward pressure on the Market recently and that its markets are closed till next Monday, some follow through to the upside is likely.  On the other hand, as I said, the bounce was mild on lower volume and the S&P didn’t get close to that 1970 level. 

That said, I am watching for the Averages to break either the upper or lower boundaries of the developing pennant I mentioned above as the best near term indication of direction.  In the meantime, as long as volatility continues at present extremes, it is almost impossible to make any meaningful comment on the Market’s direction.

            We are not in the outlier anymore (medium and a must read):

            The mark of the bear (medium):

            Correction or bear market (medium):

            Market performance after a down August (short):

    Fundamental

       Headlines

            Yesterday’s US economic data was mixed: weekly mortgage and purchase applications along with second quarter nonfarm productivity and unit labor costs were better than forecast while the ADP private payroll report and July factory orders were disappointing.

            In addition, the Fed released its latest Beige Book report which I would characterize as upbeat across geographic as well as economic sectors.   Investors generally interpreted this narrative as supportive of the Stanley Fischer comments at last weekend’s Jackson Hole conference; that is, a September Fed Funds rate hike is definitely on the table.  And it happen just so the Fed can prove that it can actually raise rates.  However, given what is occurring in the foreign exchange markets (liquidating Treasuries) and its deflationary impact on the US economy, I think that it would a foolish move---the Fed has already missed the window to begin tightening without causing economic disruptions; doing it now will only exacerbate those aforementioned deflationary forces.

            How is that QE working out for you Mr. Central Banker? (medium):

            More on the odds of QEIV (medium):

            QE in one easy lesson (short):

            And this from Bill Gross (medium):

            Overseas, likely in anticipation of the long celebratory weekend upcoming, the Chinese government continued its campaign to stabilize its stock market, ‘encouraging’ nine Chinese brokerages to pledge thirty billion yuan to purchase stocks.  That is all fine and great to be sure that the markets are not a distraction during the pageantry; but that it no way means that the fat lady has sung.

            This is an ‘in the weeds’ article on Chinese debt and how it gets resolved.  It echoes the same theme of Rogoff and Reinhart: too much debt slows growth (long):

            China’s new local government debt cap (short):

            Will China devalue further (medium):

            ***overnight, the August EU Markit composite PMI was slightly above estimates while the Japanese Markit services PMI was much better than anticipated.

Bottom line:  while the upcoming Chinese holiday may stem the flow of lousy economic news for a couple of days, it does nothing to alter the facts on the ground.  There are still huge imbalances in the Chinese economy that have been manifesting themselves in declining stocks and the yuan.  And they are not going away.

The Fed and the ECB both have monetary policy problems growing out of the liquidation of Chinese and emerging market currency reserves; that is, this liquidation process is acting as monetary tightening in the US and EU.  So now the Fed is faced with the unsavory choice of raising the Fed Funds rate in the midst of an unwanted monetary tightening or responding to its real near term problem by introducing some new and improved form of QE and make the unwind of QEInfinity all the more difficult.   

Against that backdrop, global economic activity is clearly slowing.  I would argue that the US economy is also slowing, though admittedly there remains disagreement on that thesis.  However, even if I concede the point, the US will not remain unaffected indefinitely.   The point being that the gap between stock prices and valuations is large and there appears to be nothing on the economic horizon to close that gap.

That said, I remain of the opinion that near term investors are focusing less on fundamentals and more on the technicals. The keys to watch are (1) the boundaries of the developing pennant formation and (2) whether the indices will challenge their intermediate term trends and whether or not those challenges are successful. 

While we are waiting, do nothing.

            Five forces driving the market (medium):

            Are stocks sending a recession signal (medium)?

            Most widely read study suggests that portfolios should be cash (medium):
           
            The latest from Marc Faber (medium):

      are


Economics

   This Week’s Data

            July factory orders rose 0.4% versus expectations of up 0.9%.

            Weekly jobless claims rose 12,000 versus estimates of up 2,000.

            The July US trade deficit came in at $41.9 billion versus forecasts of $42 billion.

   Other

            Most recent Fed Beige Book report
           
Politics

  Domestic

On $15 an hour minimum wage (short):

More on Clinton email problems (short):

  International War Against Radical Islam

            Obama’s Iran nuke deal has the votes (short):

               






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