Thursday, March 3, 2016

The Morning Call--S&P on verge of breaking downtrend

The Morning Call


The Market

The indices (DJIA 16899, S&P 1986) made further upward progress yesterday, moving still deeper into overbought territory; but on lower volume and continuing mixed breadth. 

            Liquidity has deteriorated (short):

The VIX fell 3.5%, negating its very short term uptrend.  It also finished below its 100 day moving average for the second day; if it remains there through the close today, the MA will revert from support to resistance---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] below the lower boundary of a short term downtrend {16709-17442}, [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 [c] above the upper boundary of its short term downtrend {1867-1953}; if it remains there through the close today, the trend will revert to a trading range, [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, ending in very short term and short term uptrends, as well as substantially above its 100 moving average. 

Bottom line: yesterday the Averages pushed to an overbought level that I have scarcely ever seen before.  Barring a dramatic plunge today, the latest downside momentum persisting since early January will likely have been broken.  We still need some confirmation by (1) the Dow breaking its short term downtrend and (2) both indices trading through their 100 day moving averages.  Nevertheless, the reset of the S&P will be 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.
            March madness (medium):

            Eighth year (presidential cycle) stock pattern (short):



            Yesterday’s US economic news was mixed: weekly mortgage and purchase applications fell while the February ADP private payroll report was stronger than expected.  In addition the latest Fed Beige Book was released and it showed overall economic progress across geographic and sector lines---though some of it was quite small. 

            Before getting too jiggy about employment, take a look at the stats on food stamp recipients (short):

            If you didn’t read the above ‘March madness’ you missed a reference to the Bureau of Economic Analysis which revised last year the seasonal adjustment factors for the winter months to reflect the prior two years difficult winters.  That means that this year’s economic stats for the winter months could be overstated due the mild winter.  The question is whether or not that accounts for the recent strength in the primary indicators.  I am not smart enough to know that; but it will prompt me to ‘go slow’ in reversing our current economic forecast.

            Overseas, South Korean factory output declined 1.9% and exports fell to a 14 month low; Moody’s reduced China’s credit rating.

            US imposes tariffs on cold rolled steel; shades of Smoot Hawley? (medium):

            More on Draghi’s options (medium):

            ***overnight, the February Markit EU composite PMI declined to a 13 month low; the February UK services index fell to a three year low.

Bottom line:  yesterday’s ADP private payroll report was a positive as long as you recognize that employment is a lagging indicator.  In addition, the news regarding the BEA’s revisions in the seasonal adjustment factors makes me less sanguine about the recent upbeat primary indicators.  To be clear, I am not saying that it totally discounts the improvements; but it suggests that I should wait a little longer than I ordinarily would before making any adjustments to our forecast.

The economic stats from rest of the world continue abysmal; so even if the US avoids recession, it will still have the global economy as a headwind. 

On the other hand, as long as investors believe in the Santa Claus scenario (i.e. an improving US economy, no further Fed rate hikes and aggressive monetary moves by the ECB and the Bank of China) stocks are likely continue to be well bid.   I continue to believe that a massively ineffective central bank QE/negative interest rate policy will not end well; and hence, the current rally represents an excellent opportunity to sell a portion of your profitable investments and sell your losers.

            Time to buy emerging markets? (medium):

            Update on Buffett indicator (medium):
    News on Stocks in Our Portfolios
General Dynamics (NYSE:GD) declares $0.76/share quarterly dividend, 10.1% increase from prior dividend of $0.69.
Forward yield 2.24%
Payable May 6; for shareholders of record April 8; ex-div April 6.
Additionally, Board also approved to repurchase an additional 10M shares of the common stock.

Exxon Mobil (NYSE:XOM) says it expects to cut FY2016 capex by 25%to $23B, while touting its financial flexibility and ability to adjust its investment program based on market demand fundamentals.
In a press release of its annual analyst day, XOM says it is on track to start up 10 new upstream projects in 2016-17, adding 450K boe/day of working interest production capacity; XOM says it has started up 22 major upstream projects since 2012, adding more than 940K boe/day of working interest production capacity, with six of the project start-ups occurring in 2015.
XOM says in 2015 it generated $33B of cash flow from operations and asset sales, as well as $6.5B of free cash flow, and cut capital and cash operating costs by $12B; upstream total unit costs fell 9% Y/Y, and refining unit cash costs are 15% lower than the industry average.


   This Week’s Data

            Weekly jobless claims rose 8,000 versus expectations of a 4,000 decline.

            Fourth quarter productivity fell 2.2% versus estimates of a 2.7% decrease; unit labor costs increased 3.3% versus forecast of up 4.1%.




Quote of the day (short):

  International War Against Radical Islam

            The collapse of EU open borders (short):
            Merkel in jeopardy (medium):

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