Thursday, October 15, 2015

The Morning Call--Rate hike off the table?

The Morning Call


The Market

The indices (DJIA 16924, S&P 1994) suffered a bit more indigestion yesterday; but it still looks like they are just working off an overbought position.  The Dow ended [a] below its 100 and 200 day moving averages, both of which represent resistance, [b] in a short term downtrend {17084-17797}, [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 {1988-2049}, [d] in an intermediate term uptrend {1935-2728} [e] a long term uptrend {797-2145}. 

Volume increased---continuing the recent pattern of up volume on down days and down volume on up days.  Breadth was mixed.  The VIX (18.3) was up 2% (less than I expected given the Averages performance) finishing [a] above its 100 day moving average one day, which I am leaving on neutral, awaiting more follow through, [b] within a short term downtrend and [c] in intermediate term and long term trading ranges. 

The long Treasury was up again, ending above its 100 day moving average, still support; and within very short term, short term and intermediate term trading ranges. 

GLD was up 1.85%, closing [a] above its 100 day moving average, now support [b] above the upper boundary of its a short term trading range; if it remains there through the close on Friday, it will re-set to a short term uptrend, [c] above the upper boundary of its intermediate term downtrend; if it remains there through the close next Monday, it will re-set to an intermediate term trading range and [d] within a long term downtrend. 

The dollar fell below the lower boundary of its short term trading range; if it remains there through the close on Friday, it will re-set to a short term downtrend.  It remained below its 100 day moving average.

Bottom line: stocks continued working off their overbought position; so no need to read anything more significant in yesterday’s decline than that.   Further, in the absence of any meaningful technical damage, I think an attempt at challenging earlier highs a reasonable probability. 

That said, there was some noticeable pin action in gold and the dollar---with gold blasting through the upper boundaries of both its short and intermediate term trends and the dollar weakening.  Both support a weak economic growth, low interest rate environment.  However, their moves indicated a lot more angst (about a poor economy) than reflected in the stock market.  Whether they are outliers or providing guidance should be clear in the coming days.
            Is the rally over? (medium):

            Or are stocks just range bound (medium):



            Yesterday’s US economic news was not good: September retail sales rose in line but ex autos, they fell more than anticipated; both the headline and ex food and energy September PPI were down more than estimates and August business inventories were flat while sales were down.  There were also terrible weekly mortgage and purchase applications numbers; but this was largely a reversal of last week’s revised computational methodology.

            There were also several negative anecdotal developments: (1) the Fed Beige Book was a bit more circumspect than its prior rendering---likely reflecting the stream of lousy data of late, (2) Walmart slashed its earnings guidance, supporting the aforementioned poor retail sales numbers (3) Delta’s CEO said that there was a worldwide glut of wide bodied aircraft [Boeing]---yet another example of the misallocation of assets fostered by zero interest rates and (4) Illinois delayed pension payments, citing liquidity problems (medium):

Are we already in a global recession (medium)?

Overseas, the news was only slightly better: September Chinese CPI rose less than expected while PPI fell, a research firm says that Chinese banks’ nonperforming loan ratio (to equity) is six times higher than reported and Brazil retail sales fell 9.6% year over year.  The good news was that September UK unemployment declined and the IMF increased its 2015/2016 GDP growth estimates for the UK.

            ***overnight, central bankers around the globe were talking up more QE; in an article, Fed whisperer Hilsenrath said that there would likely be no rate hike in 2015.

Bottom line: Tuesday’s upbeat data gave way to yesterday’s return to the negative dataflow of the last six weeks; especially worrisome was the September retail sales number which is a primary indicator.  The outlook is made all that much worse by a number of discouraging anecdotal events and continuing lousy international stats.  

Investors seem to be stuck in the mindset that poor data means an easy Fed which is in turn a major plus for the stock market.  They, of course, are likely correct about the ‘easy Fed’ part.  However, assuming that the economy is just bad enough to keep the Fed on the sidelines but good enough to avoid recession (keeping stocks rising), may be putting too fine a point on their forecast.  Last time I checked, disappointing corporate earnings and recession were not good for stocks. 

As I noted yesterday: ‘None of this would necessarily be concerning were it not for the elevated valuation of stock prices.  Indeed the combination of six weeks of lousy US economic numbers, an even longer string of poor international stats and declining earnings expectations coupled with the Averages being only 5% off their all-time highs, strikes me as a really bad risk/reward equation.’

            For the bulls (short):

   This Week’s Data

            August business inventories were flat, as expected; however, sales fell 0.6%.

            The Fed released its latest Beige Book report which, not surprisingly, was more downbeat than its predecessor---likely another reason for no rate hike this year.

            September CPI fell 0.2%, in line; ex food and energy, it was up 0.2% versus estimates of +0.1%.

            Weekly jobless claims fell 7,000 versus forecasts of up 7,000.

            The October NY Fed manufacturing index came in at -11.36 versus consensus of -7.0.


            The Atlanta Fed now has third quarter GDP up 0.9%.



  International War Against Radical Islam

            US Syrian policy rapidly becoming a joke (medium):

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