Friday, December 4, 2015

The Morning Call--The wind blew, the s**t flew and I couldn't see for a minute or two

The Morning Call


The Market

The indices (DJIA 17477, S&P 2049) sold off hard again yesterday, again on multiple, disparate news events.  The Dow ended [a] above its 100 moving average, which represents support, [b] below its 200 day moving average, now support; if it remains below this MA through the close on Tuesday, it will 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 remained below the prior lower high.

The S&P finished [a] above its 100 moving average, which represents support, [b] below its 200 day moving average, now support; if it remains below this MA through the close next Tuesday, it will revert to resistance, [c] in a short term trading range {2016-2104}, [d] in an intermediate term uptrend {1973-2766} [e] a long term uptrend {800-2161}, [f] and below the prior lower high. 

Volume rose; breadth was down.  The VIX (15.9) was up 15%, ending [a] right on  its 100 day moving average, now resistance, [b] above the upper boundary of its short term downtrend; if it remains there through the close on Monday, it will reset to a trading range and [c] in intermediate term and long term trading ranges. 
The long Treasury plunged 2.75%, finishing below its 100 day moving average one day after reverting to support; given the magnitude of this move, I am leaving it as resistance.  It finished within very short term, short term and intermediate term trading ranges.  As I note below, this move was likely the result of the unwind of a very crowded long the dollar/long bonds, short the euro/short euro bonds trade which had been set up in anticipation of a Draghi bazooka at yesterday’s ECB meeting.

GLD rose 1.0%, ending [a] below its 100 day moving average, now resistance and [b] back above the lower boundary of its short term downtrend and [c] within intermediate and long term downtrends. 

Oil was up 2% on rumors of production cuts out of OPEC.  The dollar was down 2.25% for the same reason as the TLT decline.

Bottom line: volatility was king yesterday on the back of a number of surprises (Draghi, OPEC).  Unfortunately, most of it was to the downside with both indices (1) experienced strong follow through to the downside, (2) challenging its 200 day moving average and (3) firmly establishing a lower high.  None of this suggests higher prices near term. That said, stocks still have a strong seasonal bias working for them; so I don’t think there is a lot of downside from here.  But the Averages proximity to their all-time highs argues against big upside.


            Yesterday’s US economic remained mixed:  November services PMI was up as was October factory orders; on the negative side, the November ISM nonmanufacturing index was disappointing and was the stat that investors appear to have focused on.

Ditto mixed in the global economy: EU November services and composite PMI’s came in below expectations while the Chinese November composite PMI was above.
                Normally, mixed data elicits little response from the Markets; but the ISM nonmanufacturing index shortfall got a lot of attention because the bulls have been arguing that manufacturing could decline (which it has) as long as the service sector held up.  Ooops.

            Still, the Market was dominated by a number of independent but significant events yesterday that likely accounted for the volatile pin action:

(1)   Yellen testified before congress but her narrative didn’t change.  However, following the ECB meeting, Draghi pulled out a pea shooter versus the expected bazooka: rates were lowered 10 basis points, less than anticipated and he did nothing with respect to additional bond purchases.  Markets went nuts following the meeting and Draghi’s news conference because a major monetary weakening had been anticipated.  Indeed, it may have been one of the most expected events of this year; and, hence, a lot of money had been bet on a weaker euro, a stronger dollar and higher bond prices (pushing EU rates down would prompt investors to sell euro denominated bonds and buy dollar denominated bonds)---so a lot of bets got unwound in a hurry, hence the volatility.

At the risk of being too cynical, it seems logical to me that with Yellen seemingly committed to raising rates, that she would ask Draghi to go slow on easing so as to not make the divergence in monetary policy (Fed tightening, ECB easing) quite so pronounced---at least until after the Fed rate hike.  In other words, we may still see the ECB pull out that bazooka in the next couple of months.

(2)   there were rumors swirling around today’s OPEC meeting---production cuts, no production cuts.  No one knows what is going to happen; but clearly potential production cuts would likely have a profound impact on energy and energy related companies.

(3)   finally, concern over an increase in domestic terrorism rising out of the California shootings acted as a weight on stock prices.  Historically, these type of Market impacting events tend to have a short term shelf life. 

            Here is a chart showing the Market’s reaction to various news events (short):

Bottom line: the volatility and cross currents in yesterday’s pin action were very confusing.  I am not sure anyone, me included, knows exactly what drove stock, bond, currency and commodity prices.  But here is my take: (1) the Fed is determined to raise rates, (2) one of the biggest problems it has is the strong dollar [strong dollar = weakening economy], (3) a bazooka move by Draghi would exacerbate that problem, (4) so whether she pleaded with Draghi to delay a major easing or he did on his own, it happened. 

However, none of this central bank mischief changes the facts on the ground: (1) the US economy continues to weaken, so a rate hike will in retrospect look like either bureaucratic hubris or sheer lunacy, (2) on the other hand, if the Market continues to get whacked, based on its historical behavior, there is a decent probability the Fed could back out of its rate increase, (3) the EU economy continues to weaken, so Draghi’s pea shooter move yesterday move was a hat tip to Yellen; in retrospect, it is likely to be viewed as such.   None of these will enhance the investor confidence in the central bankers which will likely increase both volatility and risk premiums---in short not a plus for stocks.

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.

            One analyst opinion on why a 25 basis point rise in the Fed Funds rate may be more significant  than we may have thought (medium):

            Citi sees 65% of a recession in 2016 (medium):

       Investing for Survival
            Everything you think that you know about happiness is wrong:

    News on Stocks in Our Portfolios

   This Week’s Data

            The November services PMI was up versus the prior month.

            The November ISM nonmanufacturing index came in at 55.9 versus expectations of 58.2.

            October factory orders rose 1.5% versus estimates of up 1.4%.
            November nonfarm payroll rose 211,000 versus consensus of 190,000.
            The November US trade deficit came in a $43.7 billion versus projections of $40.6 billion.


            Truck loadings plunge (medium):

            Inside auto sales in the US (medium):




            Danes reject more EU integration (medium):

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