Thursday, December 17, 2015

The Morning Call--Everything coming up roses

The Morning Call


The Market

The indices (DJIA 17749, S&P 2047) smoked yesterday.  The Dow ended [a] above its 100 moving average, which represents support, [b] above its 200 day moving average, now resistance; if it remains there through the close next Monday, it will revert to support, [c] within a short term trading range {16919-18148}, [c] in an intermediate term trading range {15842-18295}, [d] in a long term uptrend {5471-19343}, [e] and still within a series of lower highs.

The S&P finished [a] above its 100 moving average, which represents support, [b] above its 200 day moving average, now resistance; if it closes there through the close on Monday, it will revert to support, [c] in a short term trading range {2016-2104}, [d] in an intermediate term uptrend {1982-2775}, [e] a long term uptrend {800-2161}, [f] still within a series of lower highs. 

Volume was flat; breadth improved.  The VIX (17.8) fell 15%, ending [a] below its 100 day moving average, now support; if it remains there through the close on Friday, it will revert to resistance, [b] within short term, intermediate term and long term trading ranges. 



The long Treasury declined again, closing below its 100 day moving for the second day, now support; if it remains there through the close on today, it will revert to resistance.  It is also within very short term, short term and intermediate term trading ranges.

GLD rose, finishing [a] below its 100 day moving average, now resistance and [b] within short, intermediate and long term downtrends. 

Bottom line: I have to admit I was surprised by the Market’s enthusiastic reception of the Fed rate decision.  As I have noted several time, this had to have been to most discounted Fed move in a long time; so I had expected a more muted reaction.  That said, this pin action was also likely influenced by the end of tax loss selling, the soon to arrive Santa Claus rally and tomorrow’s giant options expiration.  How much so, I have no idea.  It will probably be early next week before we know the answer.

I continue to have no feel for the short term direction of the Market.  Longer term, the numerous divergences below the Market surface, the turmoil in the high yield debt market which historically has anticipated problems in the stock market along with our assessment that stocks are very richly valued I believe argues against a successful challenge of the upper boundaries of the indices long term uptrends and for a decline to significantly lower levels.



            Yellen’s upbeat assessment of the economy notwithstanding, yesterday’s stats were not that great: November housing starts and building permits were stronger than expected; however, weekly mortgage and purchase applications, November industrial production and the December manufacturing PMI flash index were all below forecasts.

            Overseas, the numbers weren’t any better:  the Bank of China lower its GDP growth estimates for 2016 and the December French Markit composite PMI fell.

            ***overnight, the IMF told Ukraine in must negotiate in good faith with Russia over a $3 billion note due on Sunday in order to receive its next round of bailout money; German  December business confidence fell slightly; the Chinese yuan fell for the ninth day in a row.

            Of course, the big news of the day was the Fed rate decision and the tone of its accompanying statement---and as in noted above, it kept investors tip toeing through the tulips.  In sum:

(1)   raised the Fed Funds rate by 25 basis points; however, it took no action to reduce the size of its [bloated] balance sheet,

(2)   reasoned that the economy had, at last, achieved its objective [ignoring the high level of drop outs from the labor forces and that inflation is nowhere near its benchmark],

(3)   changed to a [more complicated] formula that would determine the timing and size of future rate increases or shrinkage of its balance sheet---though Yellen declined to provide clarity on how the new criteria will be used to make those judgments.

In short, the Fed raised rates but its post-meeting statement as well as Yellen’s comments were very dovish.

            The FOMC statement:

            The Fed’s economic projections:

            Fed whisperer Hilsenrath’s comments (medium):

Bottom line:  I remain puzzled by the Fed’s public assessment of the economy.  The trend, well documented in these pages, is not great.  Indeed, the numbers were better before the last Fed meeting than this; or said another way, they have deteriorated since the last meeting.  And today’s and this week’s stats are just the most current example.  You don’t have to take my word for it.  If you look at the bond market’s assumptions as reflected in current rates and spreads, it is much less enthused about the economic prognosis.  In fact, it is pricing higher odds of a rate CUT at the next FOMC meeting than a rate HIKE. 

That said, as long as none of this seems to matter to stock investors, equity prices will continue to advance.  Certainly, the seasonal bias will help things along.  Nonetheless, I think that the economy has weakened too much, that the stock market internals are so broken and that the high yield debt market has deteriorated too such an extent that mean reversion will begin to weigh heavily on the stock market. 

One other item.  My long held belief that an end of QE will be neutral to positive for the economy but negative for the Market is now going to be tested, the pitifully weak reversal notwithstanding.

I am not suggesting that investors run for the hills.  I am suggesting that they use the Market strength to take some profits in winners and/or eliminating investments that have been a disappointment.

            Let me back up for a second and give an investment strategy view from 30,000 feet.  In the last six months the divergences inside the Market have been as pronounced as I have seen in my career save the 1970 ‘nifty fifty’---energy, emerging markets and now high yield debt aren’t just showing signs of weakness, they are getting crushed.  So much so that despite the fact that large segments of the stock market continue to be dramatically overvalued, the aforementioned have already experienced their own bear markets, being down 30% to 50% or more.

            While I still believe that stocks in general will eventually catch down, so to speak, our Buy Discipline still suggests that purchases be made when assets reach their Buy Value Range, especially if they have suffered price declines on the order of magnitude noted above.  That is why our Portfolios bought energy related stocks/ETFs several weeks ago and why our ETF is buying high yield today.

            That said, they could very well suffer more when the rest of the Market follows them down, so the hedge here is to start buying but average in over time.


   This Week’s Data

            November industrial production fell 0.6% versus expectations of down 0.2%; capacity utilization fell to 77.0 from 77.4 in October.

Update on big four indicators (medium):

            The December manufacturing PMI flash index was reported at 51.3 versus estimates of 52.8

            Weekly jobless claims fell 11,000 versus forecasts of down 12,000.
            The December Philadelphia Fed manufacturing index came in at -5.9 versus projections of +1.2.

            The third quarter US traded deficit was reported at $124.1 billion versus consensus of $119.0 billion.


            Latest on student loans (short):



  International War Against Radical Islam

            The FBI’s problem with muslim leaders (medium):

            US foreign policy becomes ever more convoluted (medium):

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