Friday, December 18, 2015

The Morning Call--Today could be very volatile & Happy Holidays

The Morning Call


Our daughter and her family arrive this afternoon, starting the Christmas season.  I am taking off the next two weeks; back on January 4.  As always I won’t be far from my computer.  So if Market impacting events or extreme Market volatility occurs and warrants moves in our Portfolio, I will be in touch.  Happy Holidays.

The Market

So much for post Fed meeting euphoria.  The indices (DJIA 17495, S&P 2041) retreated broadly yesterday.  The Dow ended [a] above its 100 moving average, which represents support, [b] back below its 200 day moving average, now resistance; this negates Wednesday’s challenge, [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 has now made yet another lower high.

The S&P finished [a] above its 100 moving average, which represents support, [b] back below its 200 day moving average, now resistance; this negates Wednesday’s challenge, [c] in a short term trading range {2016-2104}, [d] in an intermediate term uptrend {1984-2777}, [e] a long term uptrend {800-2161}, [f] and like the Dow has marked a new lower high. 

Volume was down as was breadth.  The VIX (18.4) rose 6%, ending [a] right on  its 100 day moving average, now support; this negates Wednesday’s challenge, [b] within short term, intermediate term and long term trading ranges. 
The long Treasury jumped over 1%, closing back above its 100 day moving average, now support; this negates Tuesday’s challenge.  It is also within very short term, short term and intermediate term trading ranges.

GLD plunged 2%, finishing [a] below its 100 day moving average, now resistance and [b] within short, intermediate and long term downtrends. 

Bottom line:  I said yesterday that it will probably be next week before we fully know the Market’s reaction to the Fed rate hike.  So just as I didn’t consider Wednesday’s moon shot a true reflection of investors’ overwhelming approval of the hike, I don’t think yesterday’s pin action was buyer’s regret.  We still have to get through one of the biggest options expiration ever today.  Even then, the bias of a Santa Claus rally will still likely have some influence. 

I continue to have no feel for the short term direction of the Market.  Longer term, (1) the numerous divergences below the Market surface, (2) the turmoil in the high yield debt market which historically has anticipated problems in the stock market, (3) my long held belief that the end of QE will be bad for the stock market, (4) 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.



            By way of a brief summary to this week:

(1)    the economic data yesterday [November leading economic indicators {+}, weekly jobless claims {0}, the Philly Fed index {-} and the third quarter US trade deficit {-}] and for the week were once again negative.  This marks the thirteenth week out of the last sixteen that point to a slowing US economy.  Further the international economic numbers showed no improvement; and, importantly, China has been on a ten day devaluation streak, suggesting that conditions there are not meeting ‘official’ guidelines.  The possibility of recession remains on the table, though I keep hoping those three weeks of positive to neutral stats reflect a leveling of growth at a reduced level.  I am leaving our forecast unchanged, but a weakened global economy remains a major risk to our forecast,

***overnight, the fourth quarter Chinese ‘Beige Book’ reflected deteriorating economic conditions across broad geographic and industrial sectors.

(2)   our elected official appear close to passing an omnibus spending bill whose content in no way matches the rhetoric out of the GOP which controls both houses.  I see no reason why fiscal policy won’t remain a drag on the economy whoever wins next November,

The new budget is still a crap sandwich (medium):

(3)   the Fed finally did the dirty deed, raising the Fed Funds rate by 25 basis points.  I continue to believe that [a] the unwind of QE should have started 18 months ago, [b] this will be more of a plus than a negative for the economy but more of a negative than a plus for the Markets---making Fed policy [or the lack thereof] the second major risk bearing on the economy.
The Fed’s first step in setting/maintaining the new higher interest rate (short):

 This is a great analysis of the Fed’s (Yellen’s) twisted reasoning for Wednesday’s rate hike.  However, I disagree on the cause of this lack of logic.  The author alleges that the banks pressured the Fed to raise rates in order to jack up their (the banks) profits---which is a bit too conspiratorial for me.  The simpler explanation, at least to me, is that Fed made the same mistake it has always made, to wit, waiting too long to transition from easy to tight money, and now it is trying to bulls**t its way out of this mistake. (medium):

                  More on the rate hike decision and what it could mean (medium):

                  SocGen: you are too late, Janet (medium):

                  The latest St. Louis Fed financial stress index (short but a must read):

                  One of the economic positives of the rate hike (medium):

                  Living in the aftermath (medium):

Bottom line:  the most positive assumption about the economy is that it is bumping along at a reduced rate of growth, Yellen’s comments notwithstanding.  Hopefully between the recent three weeks of more upbeat data and the positive impact I think that beginning of the end of QE can have, the US can avoid recession.  Unfortunately, the economy is getting no help from our ruling class in the form of a more growth oriented fiscal policy, from the global economy which continues to deteriorate or from global central banks which are in the midst of competitive valuations.  In short, the US may avoid a recession but not because of anything other than the ingenuity and hard work of American business and labor.

That said, because the Market has smoked under the QE regime, I continue to believe that it will be negatively impacted by the demise of QE.  It may take some time; after all, the beginning of the end of QE is a pretty pathetic attempt toward normalization.  Nevertheless, I think that the stock market is so overvalued and its 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. 

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.

            Portfolio advice (medium):

            Bank of America turns negative (medium):

       Investing for Survival
            The danger of selective memory:
    News on Stocks in Our Portfolios

   This Week’s Data

            November leading economic indicators rose 0.4% versus expectations of up 0.2%.


            The important role of recessions (medium and a must read):



  International War Against Radical Islam

            ISIS latest action; this time in Sweden (medium):
More tough talk from Putin (medium)

No comments:

Post a Comment