Tuesday, December 15, 2015

The Morning Call--Will the Fed really hike rates?

The Morning Call


The Market

The indices (DJIA 17368, S&P 2021) rallied off a very oversold condition yesterday.  The Dow ended [a] bounced off its 100 moving average, which represents support, [b] below its 200 day moving average for the fourth day; it will now revert to 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] below its 100 moving average, which represents support; if it remains there through the close today, it will revert to resistance, [b] below its 200 day moving average for the fourth day in a row; it will now revert to resistance, [c] back above the lower boundary of its a short term trading range {2016-2104}, negating Friday’s break, [d] in an intermediate term uptrend {1980-2773}, [e] a long term uptrend {800-2161}, [f] still within a series of lower highs. 

Volume rose; breadth improved.  The VIX (22.7) was up 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 fell, closing above its 100 day moving, now support and within very short term, short term and intermediate term trading ranges.

Oil stabilized, at least for a day, ending within short term, intermediate and long term downtrends. 

GLD was 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 bounced somewhat weakly off an oversold condition.  However, they continue to challenge support levels.  Given this tepid pin action, it is not at all clear to me where follow through will materialize (in either direction).  Making matters all the more uncertain is the rate decision forthcoming from FOMC meeting today and tomorrow and the huge options expiration on Friday.  On a somewhat brighter note, the Santa Claus rally usually kicks in the last two weeks of December. 

Net, net, I 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.
            The ‘free lunch’ trade (short):


            No US datapoints were reported yesterday; although this will, nonetheless, be a busy week for stats capped by the Wednesday FOMC rate decision.  Overseas, the Bank of Japan manufacturing survey remained in plus territory; however, the Chinese yuan continued to get hammered.

            ***overnight, November UK inflation rose 0.1%, the central bank of Sweden kept its key lending rate unchanged at -0.35% and China allowed the further depreciation in the yuan.

            Yesterday’s paucity of economic data notwithstanding, the trend, as I keep documenting, has not been good.  In other words, the economic evidence supporting the Fed rate decision, arguably the most important event this week, overwhelmingly points to no increase in rates.  However, no one at the Fed seems to want to be confused by the facts.  Making matters all the more difficult to analyze is that (1) a 25 basis point rise is not apt to have any impact on the economy [which argues for the Fed to raise rates irrespective of the economic dataflow] and (2) the Fed’s economic centered narrative notwithstanding, everyone knows that it is in fact focused on the Markets---and with the stock market taking some body blows and the high yield market in disarray, there is some reason to believe that the Fed could chicken out of its most well publicized rate hike in history.

                One way in which the problems in the credit market impact stocks (medium):

Bottom line:  If your head isn’t spinning in the midst of all these cross currents, you are a better man (woman) than I.  However, forgetting the byzantine logic of the Fed, the facts on the ground are that the economy is stumbling at best, the stock market internals lack any consistency and the high yield debt market is in a shambles, which as I noted above, has historically preceded a similar performance in equities.

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.

            Update on the Buffett Valuation Indicator (medium):


   This Week’s Data

            November CPI was reported at 0.0%, in line; ex food and energy, it was +0.2%, also in line.

            The December New York Fed manufacturing index came in at -4.59 versus forecasts of -7.0.




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