Tuesday, November 17, 2015

The Morning Call--The Paris attack brings out the bulls

The Morning Call


The Market

The indices (DJIA 17483, S&P 2053) staged a major comeback yesterday after two rough days in the Market.  The Dow ended [a] above its 100 moving average, which represents support, [b] below its 200 day moving average for a third day, now support; but if it remains below this MA through the close today, it will revert to resistance, [c] within a short term trading range {16919-18148}, [c] in an intermediate term trading range {15842-18295} and [d] in a long term uptrend {5471-19343}.

The S&P finished [a] back above its 100 moving average {which represents support}, negating Friday’s challenge, [b] below its 200 day moving average for a third day, now support; if it remains below this MA through the close today, it will revert to resistance, [c] in a short term trading range {2016-2104}, [d] in an intermediate term uptrend {1961-2754} [e] a long term uptrend {800-2161}. 

Volume rose; breadth improved.  The VIX (18) was down 10%, ending [a] back below above its 100 day moving average {now resistance}, negating Friday’s upside challenge, [b] back below the upper boundary of its a short term downtrend, negating Friday’s challenge and [c] in intermediate term and long term trading ranges. 
The long Treasury fell slightly, closing below its 100 day moving average, now resistance but within very short term, short term and intermediate term trading ranges.

GLD was up fractionally, ending [a] below the lower boundary of its short term trading range for a second day; if it remains there through the close today, it will re-set to a downtrend, [b] below its 100 day moving average, now resistance, [c] in intermediate and long term downtrends. 

Bottom line: stocks closed last Friday modestly oversold, so a bounce yesterday was not that unexpected.  That said, given the events in Paris, most investors probably would have bet on a down Monday in the Market---which luckily most couldn’t do.  There are likely multiple reasons for this performance aside from the Market’s oversold condition: (1) a very strong positive seasonal bias and (2) a decline in the odds of a December rate hike [see below] although that reasoning was not supported by the pin action in bonds---which, as you know, I pay a lot of attention to.   My conclusion: I am a little confused/nervous made all the worse by the big swings in volatility.  I continue to watch for follow through, one way or the other.



            We received one datapoint yesterday: the November NY Fed manufacturing index was well below estimates.  There was also a negative anecdotal stat: imports at the three largest US ports fell in both September and October.

            Overseas, the news wasn’t any better: Japanese third quarter GDP fell and the second quarter figure was revised down; in addition, the ECB said that nine large EU banks have a cumulative capital shortfall of $1.9 billion.

            ***overnight, October UK inflation was reported at -0.1% while factory output down 1.3%; copper prices continue to crash.

            Of course, most of the air time, newspaper ink and on line blogging was dedicated to last weekend’s attack in Paris.  Not to ignore the tragedy; but this is a financial blog--- my take is that if the Fed wants to use it, it has been handed a ‘get out of jail free’ card on the December rate hike---which is to say, that if the economic numbers continue to come in subpar, the Fed can use whatever economic disruptions occur as a result of the Paris attack as an excuse to not raise rates.  Indeed, I think that at least part of the driving force in Monday’s price advance was the lessening of odds of such a hike.   

That said, [a] if there were widespread consensus on that view, then the long Treasury would have been up {it was down} and [b] not to beat a dead horse, the Fed isn’t watching the economy, it is watching the Market; and however ironic it may be, if the Market continues to rally, I think that the Fed will go through with the rate increase.   

Bottom line: the US may or may not be stabilizing at a lower rate of economic growth.  However, global economies continue to deteriorate; and Paris attack’s potential negative impact on travel and tourism will likely only make matters worse. 

To date, the Fed has ostensively ignored this data and chosen to push the line that ‘all is well’.  So unless we get some absolutely horrendous economic news that can’t be painted in a more favorable light or the Market tanks, I believe that the Fed will stay on course to raise rates in December.   My conclusion hasn’t changed: whenever the Fed starts to normalize monetary policy, Market pain will be incurred; and the longer it waits, the greater the pain.

The most important point is that I would use the strength to take some profits in winners and/or eliminating investments that have been a disappointment.

            Gundlach doubts a December rate hike (short):

            Japan and QE (medium):

       Investing for Survival
            Why indexing works:
    News on Stocks in Our Portfolios

   This Week’s Data

            October CPI rose 0.2%, in line; ex food and energy, it was also up 0.2%, also in line.




This is what higher education in the US has come to (medium):

  International War Against Radical Islam

            ISIS next step (short):
            Ron Paul on Paris (medium):
Tuesday morning humor (2 minute video):

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