Thursday, November 5, 2015

The Morning Call--Is Yellen testing the Market, again?

The Morning Call


The Market

The indices (DJIA 17867, S&P 2102) took a breather yesterday.  The Dow ended [a] above its 100 moving average, now support, [b] above its 200 day moving average, now support, [c] above the upper boundary of its short term downtrend {17005-17718} for the third day, resetting to a short term trading range {16919-18148}, [d] in an intermediate term trading range {15842-18295} and [e] in a long term uptrend {5471-19343}.

The S&P finished [a] above its 100 moving average, now support, [b] above its 200 day moving average, now support, [c] back below the upper boundary of its short term trading range {2016-2104); negating Tuesday’s challenge, [d] in an intermediate term uptrend {1950-2942} [e] a long term uptrend {800-2161}, [f] above its September highs, now representing support.

Volume was up; breadth was down.  The VIX (15.5) rose 6%,  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.  Below 13, it will again represent good portfolio insurance.

            More on breadth (short):
The long Treasury up slightly, ending above its 100 day moving average, still support, within very short term, short term and intermediate term trading ranges and right on the lower boundary of the developing pennant formation.  If it breaks down, it would suggest more movement to the downside.  However, the price advance on a day that Yellen emphasized that a December rate hike is still very much on the table, seemingly indicating skepticism about that move.

GLD was down 1%, closing [a] below its 100 day moving average for the third day, reverting to resistance, [b] below the lower boundary of its short term uptrend for the second day; if it remains there through the close today, it will reset to a trading range, [c] in intermediate and long term downtrends.  Clearly, we are one day away from undoing all the technical progress GLD has made since mid-July.

The dollar was strong, finishing back above the upper boundary of its very short term downtrend; if it closes above there through the close today, it will reset to a trading range. It remains within short term and intermediate term trading ranges.  Unlike TLT, the moves appears to anticipate a December rate hike (which would likely result in a stronger dollar).

Bottom line: the Averages once again reached an overbought condition; so yesterday’s pause is not particularly surprising.  Recall this same circumstance (overbought) occurred in mid-October and stocks worked it off by trading in a fairly tight range over time (versus a big sell off).  Arguing for a repeat of that performance is inertia; arguing against it is the continued weakness in breadth (see above) and the potential for investor concern about a December rate hike.

Still the odds of the indices challenging their all-time highs and the upper boundaries of their long term uptrends continue to improve.  Although I still believe that those challenges, especially to the upper boundaries of the long term uptrends, will be unsuccessful.



            The US economic data were upbeat yesterday: weekly mortgage and purchase applications were down, the October PMI services index was flat and the October ADP private payroll report, the September trade balance and the October ISM nonmanufacturing index were all better than forecast.  Unless we receive some really disastrous numbers in the rest of the week, this will be the second positive week in the last three---though admittedly it is only the second in the last eleven.  Nonetheless, this could be a signal that economic growth is beginning to re-stabilize. 

While it is too early to tell, if the economy is starting stabilize, then we may be able to take recession off the table.  That doesn’t mean that the economy hasn’t decelerated; it just means that the rate of decrease may have declined.

Overseas, EU services PMI were up less than expected, UK were better than estimates while Chinese were less than anticipated and its composite PMI was negative.  In other words, another day, another set of disappointing international stats.   That said, Draghi’s endorsement of a measure to insure safety of bank deposits is a positive step in providing additional stability of EU financial system. 

***overnight, October German factory orders fell 1.7% versus expectations of a 1.0% rise; October EU retail sales declined 0.1%.

The big news of the day came out of the Fed (as it does all too often) in which in testimony before congress, Yellen made it clear that the Fed could raise rates in its December meeting---adding yet another chapter to its never ending on the one hand/on the other hand, dovish/hawkish circle jerk dialectic.  Why anyone listens to these guys astounds me.  They are clearly confused/afraid of what they have wrought and don’t know what to do---like a 25 basis point rise in interest rates even means anything to the economy.

            The Fed’s dilemma (medium):

Bottom line:  the Fed remains paralyzed by the potential Market reaction to a minor policy adjustment.  If I had to lay odds, I would bet that Yellen changed the tone of the Fed’s narrative to more hawkish just to see how the Market would react after the latest moon shot.  If there is not a serious sell off in stock prices, then the Fed will likely raise rates.  If there is, then it probably won’t.  

As you know, my thesis has been that since QE has impacted Markets very positively and the economy not at all, then the absence of QE will impact the Market very negatively and the economy not at all.  But I am revising that to: since QE has impacted the Markets very positively and the economy negatively, then the absence of QE will impact the Markets very negatively and the economy positively.  The corollary to this is that the longer QE goes on the more positive its effect on the Markets but the more negative its effect on the economy.  And therein lies the Fed’s problem---does it pander to the Market and wreck the economy or take away the punch bowl and stabilize the economy?

The only question is, when does QE go away?  Whenever, I am not willing to maintain a heavy equity exposure.  I believe that anyone buying stocks at current valuations on more monetary easing is assuming an unnecessary and unacceptable level of risk.  Hence, I would not chase stock prices at these levels.  Indeed, I would use the strength to take some profits in winners and/or eliminating investments that have been a disappointment.
            With 75% of S&P companies reporting the earnings season, profits have declined 3.1%.

   This Week’s Data

            The October PMI services index came in at 54.8, in line.

            The October ISM nonmanufacturing index was reported at 59.1 versus expectations of 56.7.

            Weekly jobless claims rose 16,000 versus estimates of a 2,000 increase.

            Third quarter nonfarm productivity was up 1.6% versus forecasts of up 0.1%; unit labor costs increased 1.4% versus consensus of up 2.2%.




  International War Against Radical Islam

            Update on the immigration problem in Europe (medium):

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