Friday, January 22, 2016

The Morning Call---Draghi ignites an oversold bounce

The Morning Call

1/22/16

The Market
         
    Technical

The indices (DJIA 15882, S&P 1868) traded in a fairly narrow range yesterday, giving Market participants some relief from the recent volatility heartburn.  The Dow closed [a] below its 100 day moving average, now resistance, [b] below its 200 day moving average, now resistance, [c] below the lower boundary of a short term downtrend {16888-17620}, [c] back above the lower boundary of its intermediate term trading range {15842-18295}, negating Wednesday’s break, [d] in a long term uptrend {5471-19343}.

The S&P finished [a] below its 100 day moving average, now resistance, [b] below its 200 day moving average, now resistance [c] below the lower boundary of a short term downtrend {1933-2023}, [d] back above the lower boundary of its intermediate term trading range {1867-2134}, negating Wednesday’ break, [e] in a long term uptrend {800-2161}. 

Volume fell; breadth was mixed to negative.  The VIX was down 3%, ending [a] above its 100 day moving average, now support and [b] in short term, intermediate term and long term trading ranges. 

The long Treasury declined, but finished above the upper boundary of its very short term trading range for a second day, thereby resetting to an uptrend.  It also ended above its 100 day moving average, now support and within short term and intermediate term trading ranges.

GLD was up fractionally, but still closed [a] below its 100 day moving average, now resistance and [b] within short, intermediate and long term downtrends. 

Bottom line: while yesterday’s pin action was much more subdued than we have experienced of late, the indices still managed to recover above the lower boundaries of their intermediate term trading ranges.  That is important not just because major support levels held but also because there is deep chasm below these levels before the next support levels exist.   The bad news is that there was only modest follow through from Wednesday’s huge intraday bounce.  I still think that this Market could go either way over the short term, though yesterday’s close does tilt me towards the upside---and remember the Market is still deeply oversold.  As always, follow through is important.
           
            Some statistics on annual stock returns in years with 10%+ drawdowns (short):

            The macro momentum bubble (medium):

    Fundamental

       Headlines

            Yesterday’s economic stats were once again to the downside: weekly jobless claims were disappointing and the January Philadelphia Fed manufacturing index was down slightly less than expected but the December number was revised down almost double its original reading.

            In addition, we received another negative anecdotal datapoint.  This time from a major railroad.

            Overseas, ECB left key rates unchanged; and in a subsequent news conference, Draghi observed that inflation was not a problem in the EU, but the economy was showing signs of weakness.  So he whipped out his old reliable ‘whatever is necessary’ shtick; and the Markets seemed to love it.  He was joined in the easy money dance by China which made substantial liquidity injections into its financial system and Japan which will consider more QE---after saying earlier that more QE would do no good 

Finally, the Bank of Russia held an emergency meeting due to the declining ruble, mirroring the turmoil in many other currency markets.

            ***overnight the January Markit EU composite flash PMI fell to the lowest level in eleven months.

Bottom line: no improvement in the US economic news; and the problems of the global central banks are mounting: declining economic growth, weak currencies and financially shaking banking systems.  Not a prescription for stronger economies or Markets.  That said, stocks are way overvalued even on a slow economic growth scenario both here and abroad accompanied by half way sensible monetary policy.

I am not suggesting that investors run for the hills.  I am suggesting that on any rally that (1) they take some profits in winners that have held up during this decline and/or eliminate investments that have been a disappointment and (2) they lose the notion of ‘buying the dips’. 

            The latest from George Soros (short):

       Investing for Survival
   
            Ten truths about bear markets:
           
   
Economics

   This Week’s Data

            The December Chicago Fed national activity index was reported at -30.

   Other

            The dead hand of debt (medium and a must read):

            Has government regulation stymied entrepreneurship (medium)?

            Van Hoisington reviews 2015 and comments on the Fed and QE (medium and a must read)

Politics

  Domestic

You can’t make this stuff up (short):

  International War Against Radical Islam







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