Tuesday, January 5, 2016

The Morning Call---Support levels at risk

The Morning Call


The Market

It looks like no Santa Claus rally this year.  Yesterday, the indices (DJIA 17148, S&P 2012) took it in the snoot.  The Dow ended [a] right on its 100 moving average, which represents support, [b] below its 200 day moving average, now 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 has now made yet another lower high.

The S&P finished [a] below its 100 moving average, which represents support; if it remains below this MA through the close on Wednesday, it will revert to resistance, [b]  below its 200 day moving average, now resistance, [c] below the lower boundary of its short term trading range {2016-2104}; if it remains there through the close on Wednesday, it will reset to a downtrend, [d] in an intermediate term uptrend {1995-2788}, [e] a long term uptrend {800-2161}, [f] and while it made a higher high last week, its short life make it of little value when considering the trend to lower highs. 

Volume was up; breadth declined.  The VIX (20.7) rose 14%, ending [a] above  its 100 day moving average, now resistance; if it remains there through the close on Wednesday, it will revert to support, [b] within short term, intermediate term and long term trading ranges. 


The long Treasury was up, closing right on its 100 day moving average, now resistance and within very short term, short term and intermediate term trading ranges.

GLD lifted 1.4%, finishing [a] below its 100 day moving average, now resistance and [b] within short, intermediate and long term downtrends. 

Bottom line:  yesterday’s pin action was a bit unsettling with several key support levels in the S&P being challenged.  In addition, the absence of the Santa Claus rally is concerning, at least in the short term.  However, longer term, the continuing development of a topping formation, the numerous Market divergences and our belief that stocks are very richly valued are much bigger worries.  That said, the key for the moment is, as always, follow through and whether or not the Averages can successfully challenge support levels.



            Yesterday’s news flow matched the somber tone of the Market---manufacturing PMI, the ISM manufacturing index and construction spending numbers were all dismal.

            Overseas, it was not much better.  While the EU manufacturing PMI was encouraging, China’s was terrible (actually showing contraction) and the UK’s was weak.  Other bad news out of China included a further decline in the yuan and stock trading was halted after circuit breakers were tripped.  Putting a cherry on top, Saudi Arabia and Iran are now rattling their sabers---which could lead to some sort of Sunni/Shi’a showdown.  Remember, these guys have radical mentalities.

Bottom line:  the most positive assumption about the economy is that it could be bumping along at a reduced rate of growth.  Last week’s data kept that hope alive; though yesterday gives one pause.  The Fed is now less accommodative; the trend in global data has been abysmal, yesterday’s EU December manufacturing notwithstanding; and the economy is not apt to get any help from the political class any time soon given their attention will likely be dominated by re-election.  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.

The Fed and productivity (medium and a must read):

More important, the Market has smoked under the QE regime; and 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, 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.

            More on valuation (short):

            The latest from John Hussman (medium):

            Kyle Bass on energy and China (medium):

       ETF Highlight

The Vanguard High Dividend Yield ETF (VYM) tracks the FTSE High Dividend Yield Index. The index selects high-dividend-paying US companies, excluding REITS, and weights them with a multifactor method. VYM offers excellent exposure in a low-cost wrapper. The fund’s broad basket stems partly from its comparatively lax dividend screens: Any company paying an above-average dividend and a great choice for those looking for cheap, easy-to-trade access that is forecast to pay a dividend in the next 12 months qualifies, although firms with high yields, thanks to falling stock prices, get lower weightings. This broad portfolio aligns well with other benchmarks by firm size and by yield. The similarities extend to sector breakdowns as well. In all, VYM looks very much like other segment benchmarks. Investors can access VYM at a very low round-trip cost, making it a great choice for those looking for cheap, easy-to-trade access.  VYM’s expense ratio is .1% and its yield is 2.74%.  The ETF Portfolio owns a 25% position in this ETF.

In the chart, you can see why profits have been taken and position size reduced.

       Investing for Survival
            Faulty assumptions of investors:
    News on Stocks in Our Portfolios

   This Week’s Data

            The December Markit manufacturing PMI declined from November.

            November construction spending was down 0.4% versus expectations of an increase of 0.7%

                The December ISM manufacturing index came in at 49.2 versus estimates of 49.2.


            BofA on China’s problems, echoing Kyle Bass’s comments above (medium):



  International War Against Radical Islam

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