Friday, March 4, 2016

The Morning Call--Euphoria over QE

The Morning Call


The Market

The indices (DJIA 16943, S&P 1993) just keep on, keepin’ on, moving still deeper into overbought territory; but on lower volume and continuing mixed breadth. 

The VIX fell 2.5%, closing below its 100 day moving average, now resistance but within a short term trading range.  Still it is reflecting increased stability and that is a plus for stocks.

The Dow closed [a] below its 100 day moving average, now resistance, [b] below its 200 day moving average, now resistance, [c] above the lower boundary of a short term downtrend {16694-17343}, [c] in an intermediate term trading range {15842-18295}, [d] in a long term uptrend {5471-19343}, [e] and is building a third higher high.

The S&P ended [a] below its 100 day moving average, now resistance, [b] below its 200 day moving average, now resistance---though that MA is now at the circa 1999 level [c] above the upper boundary of its short term downtrend for the third day, resetting the short term trend to a trading range {1867-2104}, [d] in an intermediate term trading range {1867-2134}, [e] in a long term uptrend {800-2161} and [f] is building a second higher high.
The long Treasury rallied, finishing firmly within a short term uptrend and above its 100 day moving average. 

GLD rose on good volume, ending in very short term and short term uptrends, as well as substantially above its 100 moving average. 

Bottom line: the change in intermediate term momentum (from down to up) took a big step, with the S&P resetting to a short term trading range.  To be confirmed, we need help from (1) the Dow breaking its short term downtrend and (2) both indices trading through their 100 day moving averages [and the S&P is close].  Nevertheless, the reset of the S&P is a significant step in reversal of momentum. 

Assuming the indices can rise above their 100 day moving averages, the all-time highs will be the next major price objectives which I remain convinced will not be broached.
            What is propping up oil prices? (short):



            Yesterday’s economic data was mixed while the primary indicators were tilted to the plus side: fourth quarter productivity and unit labor costs were less negative than had been anticipated (+) while the February ISM nonmanufacturing index was slightly better than expected (+); on the other hand, weekly jobless claims rose more than estimates, January factory orders were less than forecast (-) and the February Markit services PMI was very disappointing.   This has been the pattern of this week as well as last week.  Clearly, it is encouraging to the economic bulls---as it should be.  I am holding off reversing my recent recession call because (1) the longer term trend in the economic numbers is still quite negative and (2) I am trying to get a handle on the impact of those revised seasonal factors that I mentioned yesterday.

            That said, this discussion might be academic given the continued abysmal performance from the rest of the major economies.  Yesterday, South Korean factory output declined and  its exports fell to a 14 month low; the February Markit EU composite PMI declined to a 13 month low; the February UK services index fell to a three year low and the February Brazil composite PMI collapsed to 39.0.  My point being that the global economy continues to act as a major headwind to our own growth; so even if the US avoids recession, its economic progress will likely continue to be subpar.

            Of course, nobody cares because the consensus seems to be that Draghi and/or the Fed and/or the Japanese are going to save investors’ bacon by instituting another round of QE/negative interest rates or in the US’s case, leaving rates unchanged. 

Bottom line:  the US economic data releases have been on something of a roll the last two weeks which clearly makes both the economic and Market bulls happy; and they should be; the numbers have been good.  My argument for not getting too jiggy is that (1) it is too soon to pronounce that all is well and (2) we need clarity on the extent to which the revised seasonal adjustment factors have influenced the latest economic data.

In addition, investors seem increasing excited in anticipation of more QE/negative rates from the world’s central bankers---although I remain skeptical about the benefits of more easy money.  Nevertheless, this anticipation is having the same effect every QE move has had since 2009---it has driven asset prices to unrealistic heights.

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

            A different look at Buffett’s valuation measure (medium):

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    News on Stocks in Our Portfolios

   This Week’s Data

            January factory orders rose 1.6% versus expectations of up 2.0%.

            The February ISM nonmanufacturing index was reported at 53.4 versus consensus of 53.1.

            The February Markit services PMI came in a 49.7 versus January’s reading of 53.7.

            February nonfarm payrolls rose 70,000 versus forecasts of up 39,000.

            The January trade deficit was $45.7 billion versus projections of $43.9 billion.




Cruz’s economic plan (medium):

A look at what Mitt Romney has said and done (medium):


            The problems with a Brexit (medium):

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