Thursday, February 4, 2016

The Morning Call---Confused? So am I

The Morning Call


The Market

The indices (DJIA 16336, S&P 1912) bounced around like a basketball on crack yesterday, ending up on the day; though the NASDAQ was down.  Volume rose, breaking the recent pattern of lower volume up days.  While it declined, volatility remained elevated as one might think it would on a very erratic price day.

   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 {16825-17580}, [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 day moving average, now resistance, [b] below its 200 day moving average, now resistance [c] within a short term downtrend {1910-1999}, [d] in an intermediate term trading range {1867-2134}, [e] in a long term uptrend {800-2161}  and [f] still within a series of lower highs. 

            Paying attention to the 200 day moving average (short):

The long Treasury bounced back from the upper boundary of its short term trading range, though most of the debt indices I watch were generally up in price.  The dollar got hammered, closing below its 100 day moving average.

 On huge volume, GLD blew through the upper boundaries of both its [a] short term downtrend; if it remains there through the close on Friday, the short term trend will reset to a trading range and [b] intermediate term downtrend; if it remains there through the close next Monday, the intermediate term will reset to a trading range.  We have to wait for our time and distance discipline to confirm these breaks; but we clearly could be witnessing a significant bottom in GLD.

Bottom line:  yesterday was as confusing a day as I have seen in some time.  Prices were all over the map, the dollar got pummeled, gold roared, oil was up and the long Treasury sort of snoozed through the session although many fixed income securities were up.  I think that it all is best explained by assuming that the Fed is going to back off interest rate hikes while the rest of the global banks pursue negative interest rates (stocks are happy, gold is happy, bonds, in general, are happy and the dollar is unhappy). 

All that said, when the day was done, the S&P had unsuccessfully challenged the lower boundary of its intermediate term trading range but couldn’t muster the strength to get back to the 1928 Fibonacci level (resistance)---all done on higher volume and with little change in the elevated level of volatility.  Of very short term importance, the Averages ended within a very short term uptrend.  Translated, I think this means confusion abounds, that neither bulls or bears control the board right now but stock prices still have an upside bias.  The caveat being that at the current level of schizophrenia, this all change on a dime.

Of particular note is the performance of GLD which having traded through its 100 day moving average is now challenging both its short term and intermediate term downtrends.  If successful, GLD should offer an attractive buying opportunity.
            Are commodities bottoming out? (short):
            Subsequent stock performance following a down January in the eighth year of the presidential election cycle (short):


            Yesterday’s US economic dataflow was discouraging: weekly mortgage and purchase applications declined and the January PMI services and the January ISM nonmanufacturing indices were below expectations---the latter for the third month in a row.  Remember a healthy service sector of the economy is what the bulls have been hanging their rosy economic outlook on.  So these service sector indicators are likely creating cognitive dissonance among the economic forecasting crowd.  There was one positive number: the January ADP private payroll report showed greater job growth than forecast, although it was considerably lower than the December reading.

            Overseas, the January Markit EU PMI manufacturing and services were below estimate and the price index was the lowest since March 2015.
            ***overnight Eurozone officials lowered both their 2016 inflation and growth projections while the Bank of England lowered its 2016 and 2017 growth forecasts for the UK.

            Other Market impacting developments:

(1)   comments from NY Fed chief Dudley suggested that the Fed is considering walking back its plans for additional rate hikes this year.   This seemed to bring joy to investors; clearly keeping alive the nexus of easy money and investor attitude.  I have speculated that a reversal in Fed policy back to QE especially one brought on by a change in the economic outlook so soon after starting a move to monetary policy normalization would ultimately lead to a loss of confidence in the Fed.  At the moment, that thesis appears at risk,

The latest from Bill Gross (medium):

The Fed basically confirms the economy is in trouble with its second tightening of credit standards (short):

(2)   plunging further into insanity, the Bank of Japan stated that it wouldn’t hesitate to take its own interest rates even further into negative territory.  On the heels of the government having to withdraw a bond offering, this seems ludicrous.  But it has to make those QEInfinity induced euphoria investors happy.

(3)   rumors of an OPEC meeting [to discuss production cuts] bubbled up again and oil responded enthusiastically---as it did last week.  It was also received an upbeat reception from investors.

The breakeven price of oil for many fracking companies is much lower than originally thought.  Now what do the Saudi’s do? (medium and a must read):

Bottom line: the economic dreamweavers are running out of ammo, yesterday’s ISM nonmanufacturing index clearly didn’t fit their scenario.  For that matter, neither did the EU PMI numbers.  While all this may be lost on investors, it isn’t on the central banks who are stumbling all over themselves to halt the slide in economic activity.  Unfortunately, the only solution (more liquidity, lower interest rates) that they can come up with is to provide another dose of the medicine that has already been shown not to work.    

So now the global economy is facing shrinking activity and declining solvency in the banking system caused by and now exacerbated by policies that increase the frailty of their balance sheets and reduce their ability to generate cash flow to absorb the problems therefrom.  And to put a cherry on top, corporate earnings are weakening both qualitatively and quantitatively---which the recent decline in stock prices in no way reflects.  In short, equities are overvalued and the economic forces currently at work will only make them more so.

I am not suggesting that investors run for the hills.  I am suggesting that in this 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 risks of being a doomsayer (medium):

            The number of dividend cuts are rising (short):


   This Week’s Data

            The January services PMI was reported at 53.2 versus expectations of 53.7

            The January ISM nonmanufacturing index came in at 53.5 versus estimates of 55.5.

            Weekly jobless claims rose 8,000 versus forecasts of up 2,000.

            Fourth quarter nonfarm productivity fell 3.0% versus consensus of down 1.8%; the doozy---unit labor costs rose 4.5% versus projections of a 4.4% decline.


            How long can Saudi Arabia afford to keep the price of oil suppressed (medium)?



  International War Against Radical Islam

            Is the Middle East a new Vietnam (medium and a must read)?

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