Wednesday, October 21, 2015

The Morning Call--QE still = euphoria

The Morning Call


The Market

The indices (DJIA 17217, S&P 2030) were off slightly yesterday, but remained above their September highs for a third day.  The Dow ended [a] below its 100 and 200 day moving averages, both of which represent resistance; it retreated from its 100 day MA {17250}, [b] in a short term downtrend {17068-17792}, [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; it too fell back from its 100 day MA {2039}, [b] below the upper boundary of a very short term downtrend, [c] in a short term downtrend, but nearing its upper boundary {1983-2044}, [d] in an intermediate term uptrend {1939-2731} [e] a long term uptrend {797-2145}. 

Volume fell; breadth was mixed.  The VIX (15.75) rebounded,  finishing [a] below its 100 day moving average, now resistance, [b] within a short term downtrend and [c] in intermediate term and long term trading ranges. 
The long Treasury was off slightly, ending above its 100 day moving average, still support, within very short term, short term and intermediate term trading ranges and continues to develop a pennant formation. 

            And Treasuries much more worried about the debt ceiling talks than stocks (short):

GLD rose, closing [a] above its 100 day moving average, now support [b] in a short term uptrend [c] in intermediate and long term downtrends.  In my opinion, it needs to successfully challenge the upper boundary of its intermediate term downtrend to conclusively establish that a bottom has been made.

Bottom line: stocks remain modestly overbought, but they continue to work off that condition by sliding sideways versus retreating---a decent signal that there is more upside.  Supporting that notion is the fact that the Averages remain above their September highs.  On the negative side, they both fell back from their 100 day moving averages.  Remember these MA’s provided support to the indices for almost a year before finally being broken; so they should represent the same type of resistance on the upside. 

In other words, stocks are facing a number of countervailing forces all of which are in close proximity.  My technical bias is still on the side of another challenge of the Averages all-time highs; though on the fundamental side, (1) I don’t think that challenge will be successful and (2) Fair Value will ultimately pull prices lower.
            Make or break moment for stocks? (medium):



            We received two datapoints yesterday: month to date retail chain store sales were a bit better than the prior week, housing starts were strong but building permits were equally weak.  I noted yesterday that the improved housing index likely portended better numbers for all that segment’s measurements---so far that was only partially true with the permits stat disappointing.  But we get existing home sales later this week.  All that said, the housing sector has a multiplier effect on the economy; and if the housing index indeed points to a strong market, it may be enough to keep the economy out of recession.

            There was no international datapoints.  However, there were more earnings/revenue misses from high profile companies: United Technologies, Yahoo and Chipotle.
Earnings expectations are falling (short):

            ***overnight, Japanese September exports grew at the slowest pace in over a year.

Bottom line: strong housing starts are definitely an economic plus though dampened somewhat by the poor building permits number.  The other major item yesterday was more poor earnings reports, especially among industry leaders.  So far the cumulative earnings beats are well ahead of misses.  The problem is that the big companies are dominating the misses which means that aggregate corporate profits are coming in below expectations. 

And worse, estimates are accelerating to the downside.  Normally, this is not good for stocks---‘normally’ being the operative word.   As I am fond of reminding you, right now, we are in uncharted waters with respect to monetary policy.  To date, QE has kept investors positively ecstatic in the face of a steady stream of lousy news---at least partially because corporations were able to borrow money cheap to buy back shares which jacked up profits per share.    But it now appears that the buy back/higher manufactured earnings story is ending as the E in P/E is starting to falter. 

However, I am not going to tell you that this is the trigger that alters the investment equation in investors’ minds.  Gosh only, they have been ignoring (what is to me) the obvious for more than a year.  They can certainly do it for another year. 

I will tell you that I am not going to start buying that line of logic and I will take the appropriate action on any of our holdings that either trades within its Sell Half Range or its underlying company’s fundamentals no longer qualify for our Universe.


   This Week’s Data

            Month to date retail chain store sales were up slightly from the prior week.

            Weekly mortgage and purchase applications were up strong but continued to be impacted by the new lending disclosure rules.


            Signs of peak employment? (medium):

            And now the good news (medium):



  International War Against Radical Islam

            Anti-muslim protests heat up as more emigrants arrive (medium):

                        As tensions continue to escalate in the Middle East (medium):

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