Thursday, September 10, 2015

The Morning Call---No follow through in either direction

The Morning Call


The Market

The see saw pin action continued with indices (DJIA 16253, S&P 1942) closing down after a big early morning advance.  The Dow ended [a] below its 100 and 200 day moving averages, both of which represent resistance, [b] in a short term downtrend {16997-17916}, [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 {2020-2084}, [d] within an intermediate term uptrend {1906-2679} and [e] a long term uptrend {797-2145}. 

My observations are (1) the Averages voided the pennant pattern to the upside; that means that the upper boundary goes away.  However, the lower boundary remains intact and now includes three higher lows; and supports the historical notion that a break out of a pennant pattern to the upside is followed by more upside, (2) however, the S&P rallied through 1970 then fell back, making it the third unsuccessful attempt to challenge this resistance level and (3) the intraday reversal came in the face of generally upbeat economic news both here and abroad.  

While on balance, this analysis carries a negative overtone: (1) I repeat my recent caution that the current extreme volatility makes any directional forecast suspect and (2) stocks are in a very short term zone marked on the upside by S&P 1970 and on the downside by the rising trend of higher lows.  Let’s get out of this range and see if there is any technical clarity.

Volume was down slightly; breadth negative. The VIX rose 5%, ending [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.

            Update on sentiment (medium):

The long Treasury bounced off its 100 day moving average intraday, leaving it as support and remained within short and intermediate term trading ranges. 

GLD (106) fell 1.25%, closing in downtrends across all timeframes and below its 100 day moving average.  It can still build a bottom were it to fail to successfully challenge its July/August lows (104).  But that is yet to be seen. 

Oil was down 3.5%, keeping it below its 100 day moving average and within a short term trading range and intermediate and long term downtrends.

The dollar was unchanged, closing below its 100 day moving average, which is now resistance, and within short and intermediate term trading ranges. 

Bottom line: the Averages continue the dramatically churn in something of a no man’s land between the lower boundaries of their intermediate term trends and the upper boundaries of the short term downtrends.  Unfortunately the width of that zone is considerable; so stocks can continue their current volatile trading and not threaten either set of trends.  On a very short term basis, they are in a zone with two well defined boundaries: S&P 1970 on the upside and the trend of higher lows on the downside.  Trying to decipher short term direction in this technical morass is an exercise in futility. That said, as long as the lower boundaries of the indices intermediate term trends hold, the Market is in a simple correction in a bull market.

The long Treasury’s pin action continues to suggest a Fed rate hike and a stronger economy.  As you know, I don’t think that this scenario will occur. 

            A sucker’s rally? (medium):



            Yesterday’s US economic data were mixed: weekly mortgage and purchase applications fell, month to date retail chain store sales growth held constant with the prior week and the July Labor Department job openings report was very upbeat.  That said the job openings report was by far the most important and, therefore, gave a positive overall tone to the day.

            Overseas, both Japan and China announced their intent to reduce taxes.  Part of these actions were simply extensions of pledges already made.  However, the simple fact that governments are anticipating using tax policy to combat the current malaise I believe is a plus.  That was the good news.  The bad news was UK trade, production and manufacturing stats were dismal.

            Citi sees 55% chance of a global recession beginning in China (medium):

            More Chinese government intervention in their securities markets (medium):

            ***overnight, August Chinese CPI rose 2% but PPI fell 5.9%; S&P downgraded Brazil’s credit rating to junk; July Japanese machinery orders were down 3.5%, prompting a government official to predict more QE.

Bottom line:  as evidence that technical factors seem to be foremost in investor’s minds, I present the last two days of trading: (1) Tuesday, the news was mixed to negative and stocks smoked, (2) Wednesday, the dataflow was mixed to positive and stocks opened strong and ended down 1.5%. 

Looking at the fundamentals, there is nothing to suggest that our current (lower revised) economic outlook is not right on.  In fact, I am worried that I might have to do it again, perhaps even including a recession in that outlook.  I must admit that the potential for tax relief in China and Japan is encouraging; but both have been making those noises for some time and, to date, there is little to show for it.  And unfortunately, even if they do, we have to include the possibility that it may be too little too late.  Finally, it is becoming increasingly likely that the central banking community may have lost control of the one thing their policies have successfully impacted---asset prices.

So I have no fundamental reason to challenge my thesis that stocks are overvalued. My sense of just how overvalued they might get was not great; but it doesn’t change their degree of overvaluation.  If stocks break through their intermediate term trends to the downside that will likely be remedied.

This is a time to do nothing.


   This Week’s Data

            Month to date retail chain store sales grew at the same pace as last week.

            The July Department of Labor job openings report showed a 3.9% increase.

            Weekly jobless claims dropped 6,000 versus expectations of a 7,000 decline.

            August import prices were down 1.8% versus estimates of sown 1.6%; export prices were off 1.4% versus forecasts of -0.4%.


            The current corporate revenue recession (medium):

            Three minutes with David Stockman on the Fed:



The key role of conservatives in taxing carbon (medium):

  International War Against Radical Islam

            The latest from Khamenei (short):
            Everyone is stepping up their military presence in Syria (medium):
                Russia steps up presence in Syria (medium):

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