Tuesday, December 8, 2015

The Morning Call--No news and no follow through

The Morning Call


The Market

The indices (DJIA 17730, S&P 2077) were down, unable to generate any follow through to Friday’s stellar performance.  The Dow ended [a] above its 100 moving average, which represents support, [b] above its 200 day moving average, now 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 support, [c] in a short term trading range {2016-2104}, [d] in an intermediate term uptrend {1975-2768}, [e] a long term uptrend {800-2161} and [f] still within a series of lower highs. 

A rare pattern in the S&P (short):

            A point and figure look at the Markets (medium):

Volume fell; breadth was negative.  The VIX (15.8) was up 7%, ending [a] below its 100 day moving average, now resistance, [b] right on the upper boundary of its short term downtrend, and [c] in intermediate term and long term trading ranges. 

The long Treasury was strong again, recovering above its 100 day moving average.  You will recall that had been trading below this MA, then recovered above it and reverted to support; on the next day, it fell back below this MA and is now back above.  Clearly a battle is going on around this moving average; so I am holding off even making a call.  That said, since the MA itself is trending upward, I am inclined toward further gains and this moving average ultimately acting as support---meaning higher bond prices/lower yields.  TLT is within very short term, short term and intermediate term trading ranges.

Oil got crushed, falling below the lower boundary of its short term trading range on huge volume; if it remains below this boundary through the close on Wednesday, the short term trend will re-set to a down.

GLD gave back part of its Friday’s gain. It ended [a] below its 100 day moving average, now resistance and [b] within short, intermediate and long term downtrends. 

Bottom line: the volatility continues and the Averages are setting a series of lower highs.  On the other hand, they are also marking a series of higher lows.  So the Market seems to be in the midst of a bull/bear battle. 

Short term, I still think that seasonal bias will kick in at some point.  Whether that leads to a challenge of the upper boundaries of the indices long term uptrends remains the question.

Longer term, the numerous divergences below the Market surface along with our assessment that stocks are very richly valued, I believe argues against a successful challenge and for a decline to significantly lower levels.
            The power of momentum on pre-Fed meeting days (short):



            Yesterday was slow on news.  The only US datapoint was the October report on consumer credit which fell sharply from September; making matters worse, the only areas of strength were in student and auto loans. 

            There was a notable whackage of oil prices, likely due to a follow through to last week’s OPEC meeting which voted not to reduce production.  Key technical levels were broken suggesting even more downside though we won’t get confirmation until Wednesday.  Were this to occur and recent history is any guide, the economic consequences are likely to be negative---the ‘unmitigated positive’ crowd having been humbled into silence.  Indeed, it will only exacerbate the already declining trend in corporate earnings.

Here is some more anecdotal evidence to shame the ‘unmitigated positive’ crowd (medium):

            S&P forward earnings continue to fall (short):

            There was no international economic datapoints.  Although in related news, the Greek parliament passed an austerity budget---not good news if you are a Greek.

            ***overnight, Chinese November exports were down 6.8% while imports were down 8.7%; Japanese third quarter GDP was up 1%; EU third quarter GDP was up 0.3% but that is a decline in growth from the second quarter; October UK manufacturing was down 0.4% versus estimates of down 0.2%; and the Bank of France lowered its forecast for French fourth quarter GDP growth.

Bottom line: the cross currents in the economy continue to inject confusion.  The official numbers are not great while much of the anecdotal evidence is very discouraging.  The Market narrative seems to be shifting towards to a debate about whether or not the US is heading into recession (two major banks have suggested an elevated probability of recession in the last week); and  that can’t be good, especially with stocks a couple of percent off their all- time highs.  In addition, it puts Fed policy under even closer scrutiny at a time when it is changing direction---the risk being that it starts tightening at the moment the economy is faltering. 

I am still uncertain about the outcome on the market of a Fed rate hike next week, the impact of collapsing oil prices, increased violence in the Middle East and concerns about spreading terrorism.   What I am certain of is that stocks are at historically high valuations and an unexpected/unintended consequence from any of the aforementioned could trigger a sudden change price.

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.

            Assuming how the Market will react of a Fed rate hike can be tricky (medium):

            The latest from John Hussman (medium):

       Investing for Survival
            For those with a 20-30 year time horizon:
    News on Stocks in Our Portfolios

   This Week’s Data

            October consumer credit grew ($16 billion) at half the pace of September ($28.6 billion) and was well below consensus ($20 billion).

            The November Small Business Optimism Index came in at 94.8 versus expectations of 96.0.


            A look inside last week’s US trade deficit report (medium and a must read):


  International War Against Radical Islam

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