Tuesday, March 8, 2016

The Morning Call--Draghi's turn

The Morning Call


The Market

The indices (DJIA 17073, S&P 2001) had another good day, as volume remained low and breadth positive.  The VIX was actually up (not usual on an up day), but still closed within a very short term downtrend and below its 100 day moving average.

The Dow closed [a] above its 100 day moving average, now resistance; if it remains there through the close on Wednesday, it will revert to support, [b] below its 200 day moving average, now resistance, [c] above the lower boundary of a short term downtrend {16678-17426}, [c] in an intermediate term trading range {15842-18295}, [d] in a long term uptrend {5471-19343}, [e] and continues to develop a third higher high.

The S&P finished [a] above its 100 day moving average, now resistance; if it remains there through the close on Wednesday, it will revert to support, [b] below its 200 day moving average, now resistance [c] within a short term trading range {1867-2104}, [d] in an intermediate term trading range {1867-2134}, [e] in a long term uptrend {800-2161} and [f] continues to develop a second higher high. 

The long Treasury was off fractionally but finished well within its short term uptrend, its 100 day moving average and above a key Fibonacci retracement level.

GLD was strong again, ending in very short term and short term uptrends, as well as substantially above its 100 moving average.  However as in noted Saturday, this rally is getting a bit overextended. 


Bottom line: the bulls remain in command and momentum continues to shift to the upside as both of the Averages are challenging their 100 day moving averages.  Assuming those moving averages are reset, the only thing between current prices and their all-time highs is the breaking of the Dow’s short term downtrend. Every day, I point out how overbought the Market is, how low volume is and how many divergences continue to exist---all of which argue for a pause, at least in the short term.  Yet it ain’t happenin’.   So the best thing that I can do is lay back and enjoy the rally to the extent that it pushes up the prices in the stocks in our Portfolios.  But I would not chase prices.


            One US economic datapoint yesterday: January consumer credit was weak and the December number was revised down dramatically.        

            The news was overseas: January German factory orders fell; the IMF and EU are at loggerheads for a third Greek bailout over the strength of recent Greek reform measures.  In other words, the EU economic news remains dismal.

            ***overnight, February Chinese exports declined 25.4% year over year while imports fell 13.8&; January German industrial production rose 3.3%.

            More important, the Chinese government met for its annual planning session.  In it,
2016 economic growth estimate was lowered and references to potential fiscal stimulus were oblique, at best.  

So the current investor euphoria based seemingly on hopes for strong government actions to attack a slowing (recessionary?) global economy has suffered another blow.  First, it was the G20 meeting whose final communique was vague and paid weak lip service to the IMF’s recommendation for strong fiscal moves by individual governments to stimulate the global economy.  Now it is China.

            China’s new five year plan/fantasy (medium and a must read):

            But don’t worry, what China lacks in planning, it makes up for in debt creation (medium):

            Of course, the ECB is meeting this week.  Draghi has already given a preview of things to come in another ‘whatever is necessary’ letter sent to ECB members last week.  Every investor has his/her own wish list for ECB actions.  At this point, I think that valuations are at a level that if Draghi disappoints, it will not be well received.

            Negative interest rates are playing with fire (medium):

            BIS warns of gathering storm (medium):

            To be sure, it is likely that at least some investor euphoria is tied to the Fed doing nothing in its meeting next Tuesday and Wednesday.  At the moment, all hopes are tied to the recent two for one comments by Bullard and Dudley mewing pleasingly about the economy and yet poo pooing the need for a March rate hike.  Again, any deviation from the expected script would likely not make investors happy.

            Finally, we haven’t heard from the Bank of Japan; and given its history, trying to figure out what these guys are doing is like betting in a game of Dr. Pepper (seven card stud where 10’s, 2’s and 4’s are wild). 

Bottom line:  I just watched a clip of Goldman’s Abbey Joseph Cohen talking the bull case.  Her S&P 2016 year end valuation is 2100.  In other words, one of the most listened to strategists is suggesting optimism based on the S&P rising 5% by December 2016.  Well, goody for you Abbey and anyone else that wants to listen.  Because if you are right, the S&P won’t even get back to its all-time high, it won’t break out of its short or intermediate term trading ranges and it will be selling at 18X your 2016 S&P earnings estimate---which is most likely way too high based on the trend of the last two quarters. 

I would rather play Dr. Pepper than take that bet.  Stock prices are a short hair from their all-time highs, the economy is in recession at worse and sluggishly growing at best, the rest of the world’s major economies are in the s**t can, US corporate profits are in a downtrend and dividends are being cut.  I don’t care if Draghi, Yellen and Abe lease a fleet of 777’s and drop bundles of money around the world, it will not help---if history is any guide.

In my opinion, the current rally represents another excellent opportunity to sell a portion of your profitable investments and sell your losers.

            Analyzing 2015 Q4 earnings (medium and a must read):

            Are investors too obsessed with dividends (short)?

       Investing for Survival
            Why stock market declines are good.

    News on Stocks in Our Portfolios

   This Week’s Data

            January consumer credit was up $10.5 billion versus expectations of up $16.5 billion; the December reading was revised from up $21.3 billion to up $6.4 billion.

                The February small business optimism index came in at 92.9 versus expectations of 94.2.


            Inflation picking up? (medium):

            More on the likelihood of an oil production freeze (medium):



  International War Against Radical Islam

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