Wednesday, December 16, 2015

The Morning Call---The most discounted rate hike in history

The Morning Call


The Market

The indices (DJIA 17524, S&P 2043) continued their bounce off a very oversold condition yesterday.  The Dow ended [a] above its 100 moving average, which represents support, [b] below its 200 day moving average, now resistance, [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] back above its 100 moving average, negating Friday’s break; it remains support, [b] below its 200 day moving average, now resistance, [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 declined; breadth improved.  The VIX (21.07) fell 7%, ending [a] above its 100 day moving average, now support, [b] within short term, intermediate term and long term trading ranges. 

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

            More on the high yield debt sell off (medium):
            From the resident optimist (medium):

            Counterpoint (medium):

GLD declined 1.2%, finishing [a] below its 100 day moving average, now resistance and [b] within short, intermediate and long term downtrends. 

Bottom line: the Averages provided the strong follow through out of oversold territory---pin action much more consistent with their deep technically oversold condition than Monday’s paltry rise.  That said, technicals will probably have less impact on trading right now than what occurs with today’s FOMC rate decision and the current options structure going into Friday.

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.
            Is ‘tax loss selling’ season over? (short):



            Yesterday’s US economic news was mixed to negative: the December NY Fed manufacturing index was less bad (-4.59) than expected (-7.0), November CPI was in line (0.0%), the housing index was below estimates and month to date retail chain store sales were less than in the prior week.  Not helpful.

            There was no international data releases.

            ***overnight, the Bank of China lower its GDP growth estimates for 2016; the December French Markit composite PMI fell to 50.2 versus November’s 51.0 reading.

            Of course, everyone is focused on the FOMC meeting which will end today, accompanied by its rate decision and Fed’s rationale for it.  Although there is plenty of dissent as to the wisdom of a rate increase, there seems to be universal acceptance that it is going to occur---making this the most widely discounted rate hike in years.  Will this lead to a ‘sell the news’ Market reaction?  The answer likely rests with the narrative in the news conference following the meeting/decision; that is, will the policy statement be some mealy mouthed apology and a promise to not be aggressive in continuing to raise rates in the future or will it have a more hawkish tone?  I have no answer; but we will know later today.

            Here are several opinions from others:

            Three charts the Fed should consider (medium):

            A map of prior Fed rate hikes (medium and today’s must read):

            You think that I am rough on the Fed; read this merciless hammering of Fed policy (medium):

            Stephen Roach weighs in (short):

            Why low interest rates may be part of the new normal (medium and a must read):

Bottom line:  Paraphrasing my comments from yesterday, 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 Markets.  The pin action may hold up through year end with the help of Santa Claus; but barring an extraordinary positive exogenous event, I find a challenge of long term uptrends increasingly unlikely and that it far more probable we should be concerned with the potential downside.

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.

            Altered risk (medium):

       Investing for Survival
            To be great, you must first be good:
    News on Stocks in Our Portfolios

   This Week’s Data

            Month to date retail chain store sales were up less than the prior week.

            The December housing market index came in at 61 versus expectations of 63.

                Weekly mortgage applications fell 1.1% while purchase applications were down 3.0%.

            November housing starts rose 10.4% versus estimates of an increase of 7.6%; building permits were up 11.0% versus forecasts of unchanged.




What you need to know about the upcoming Omnibus Bill (short):

Congress lifts four decade oil export ban (medium):


            Implications of the French elections (medium):

            The war in the Middle East widens (medium):

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