Friday, September 4, 2015

The Morning Call---The Market needs follow through to the upside

The Morning Call


The Market

The indices (DJIA 16374, S&P 1951) struggled higher yesterday, and perhaps gave us a hint on future direction.  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 {2024-2088}, [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 intraday traded through the upper boundaries of those developing pennant formations, but failed and dropped to close right on their upper boundaries.  In addition, the S&P challenged the 1970 level and fell back.  So it would appear that the upside momentum of Tuesday’s bounce has already petered out.  That doesn’t mean that this brief rally is over; but stocks need to follow through to upside today or a fourth lower high will have been set.  

Volume declined; breadth was mixed.  The VIX fell, 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 VIX and Market bottoms (short):

            A little deeper in the weeds look at volatility (medium):

The long Treasury rebounded, finishing [a] above its 100 day moving average, now support and [b] within short and intermediate term trading ranges.  

GLD dropped again, remaining below its 100 day moving average, within short, intermediate and long term downtrends.  In addition, it ended below the lower boundary of   its very short term uptrend for a second day, voiding that trend.  So the notion that GLD had made a bottom was wrong.  We now must wait for it to retest its July low to know if a bottom has been made.  

Oil was up 1.5%, 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 right on its 100 day moving average, now resistance, and within short and intermediate term trading ranges. 

Bottom line:  yesterday’s advance was a weak follow through to Wednesday’s already weak bounce.  That doesn’t necessarily mean that the rally is over; but if stocks aren’t up today, it will.  The relative frailty of yesterday’s follow through was made all the more so because (1) there was an absence of more bad news out of China and (2) the narrative from the overnight ECB meeting was upbeat. 

I continue to watch for the Averages to break either the upper or lower boundaries of the developing pennant 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.

            The end of ‘buy the dips’? (medium):



            We finally received a positive day of economic data.  The plus side included the US July trade balance, the August Markit services PMI and the August ISM nonmanufacturing index.  The only discordant note came from weekly jobless claims.  Unfortunately, this will not get us to a positive week of numbers; and it clearly won’t stop the warning light flashing over another potential downgrade of our forecast.

            Overseas, the news was also upbeat: the August Markit EU composite PMI was slightly better than anticipated while the August Markit Japanese services PMI was well above estimates.

            In addition, the ECB met yesterday and left policy rates unchanged but modified its asset purchase program to provide more flexibility if the ECB decide to expand the size, composition and duration of that program.  In addition, Draghi, besides announcing lower estimates for both inflation and economic growth within the EU, emphasized his willingness, readiness and ability to do more if needed.  In short, QE is alive and well in Europe.

                        ***overnight, July German factory orders and August UK retail sales were both quite disappointing.

Bottom line:  I got to tell you I was a bit surprised by the Market’s mediocre response to positive domestic and global economic news, the QE narrative out of the ECB and the radio silence from China.   We all know, of course, that there is no demonstrable linkage between stock prices and the news.  However, in a highly volatile market which is bouncing off a recent low on a day when the news was upbeat both here and abroad, I was still surprised by what was in essence a flat day.

That said, I shouldn’t be amazed that a good day’s news has little effect on a Market that is substantially overvalued.  Especially when that day’s news is a respite in a longer term trend in disappointments from multiple sources. 

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.

       Investing for Survival

            The risk in chasing yield (medium):

    News on Stocks in Our Portfolios

   This Week’s Data

            The August Markit services PMI was reported at 56.1 versus expectations of 55.2.

            The ISM services index came in at 59.0 versus estimates of 58.5.

                August retail chain store sales were encouraging.

                August nonfarm payrolls rose 173,000 versus forecasts of 223,000.




  International War Against Radical Islam

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