Thursday, May 5, 2016

The Morning Call--Dow breaking down

The Morning Call


I have a lot going on in the next couple of weeks.  Friday we leave to be with our daughter on Mother’s Day.  So no Morning Call tomorrow or Closing Bell.  Next week, courtesy of new FINRA regulations, I need to obtain an additional registration; so I will be studying for the qualifying exam and then take it.  I will be doing it on line; so I will be in the office and aware of what is transpiring in the Market.  If communication is needed, I will send out a Subscriber Alert.

The Market

The indices (DJIA 17651, S&P 2051) continued to decline on flat volume and weakening breadth.  Of note is that the flow of funds indicator has broken an uptrend.  The VIX was up another 3%; it continues to act as if it has made a bottom.

The Dow closed [a] above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] below the lower boundary of its short term uptrend for the second day {17782-18736}; if it remains there through the close on today, it will reset to a trading range, [c] in an intermediate term trading range {15842-18295} and [d] in a long term uptrend {5541-19413}.

The S&P finished [a] above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] in a short term trading range {2039-2110}, [d] in an intermediate term trading range {1867-2134} and [e] in a long term uptrend {830-2218}. 

The long Treasury was up again, ending above a key Fibonacci level but remains within an area of congestion dating back to early February.

GLD was down, closing right on its recent high (a key Fibonacci level).  A break below that level would suggest more weakness.  However, it also finished above its 100 day moving average and within a short term uptrend.

Bottom line: the Dow will reset to a trading range today if it can’t recover above the lower boundary of its short term uptrend (about 130 points away).   If that happens, there is almost no visible support other than the lower boundaries of the newly reset trading ranges between current prices and the August 2015/February 2016 lows.  Today’s close clearly has some technical importance.

            Market to nowhere (medium):



            Yesterday’s US economic news took a turn for the better: the April PMI services index, the April ISM services index, March factory orders and the May US trade deficit were all better than forecast.  However, weekly mortgage and purchase applications were mixed and the April ADP private payroll report was disappointing.  Score one for the optimists.

            Nevertheless, for the week to date that leaves the data mixed: plus---weekly purchase applications, the May trade deficit, the April PMI services index, the April ISM nonmanufacturing index, March factory orders, April light vehicle sales and first quarter nonfarm productivity; negative---weekly mortgage applications, the April ADP private payroll report, April ISM manufacturing index, March construction spending, month to date retail chain store sales, weekly jobless claims and first quarter unit labor costs. 

The primary indicators were also mixed: March factory orders (+), March construction spending (-) with first quarter productivity (+) and unit labor costs (-) offsetting. 

            If the week ended today, then the score for the last 35 weeks, would be seven positive to upbeat, twenty six negative and two neutral.  However, there are two datapoints yet to be released; one of which (April jobs report) is quite important.  So how this week stacks up overall is still uncertain.

            Overseas, the picture was much clearer.  Most of the stats were lousy---a dramatic reversal from the prior week.  Given the long term trend, one has to assume at the moment that last week was an outlier.  However, I think that a couple more weeks of numbers are needed to confirm that.

            ***overnight, the April Caixin (Chinese) services PMI came in below estimates.

            Thankfully, the central banks were quiet.  But that does nothing to remove the onus of the overall impact of irresponsible monetary policies and their results---the gross mispricing and misallocation of assets.

Bottom line: yesterday’s economic reports were very upbeat; but that only served to keep the week to date from being a total bust.  There remains a couple of stats yet to be reported that could move the needle in either direction.  But even assuming the best case, the US economy would still have delivered only eight positive data weeks in the last 35. 

On the other hand, the global numbers were solidly back in the negative camp.  The European stats were a complete turnaround and the Chinese data refuted all the recent happy talk about a recovery.  If last week was indeed an outlier and this trend continues, then it will remain difficult for the US to avoid recession, especially if the best the data can get in the next 35 weeks is eight positive ones.

In the meantime, stocks remain very overvalued.  It makes sense, in my opinion, to continue to sell a portion of any stock that has done well for you and all of any loser.

            Staying with the theme of minimizing trading costs and maximizing your long term performance, it is very important to set realistic return objectives.  Part of that is ignoring the promises of guaranteed returns or of the long term track record of some money manager and then base your assumptions of annual returns on those promises.  As a former partner of mine used to say ‘if you want a guarantee, go buy a refrigerator from Sears’.  To be sure, the stock market has produced 7-8% annual returns over a long period of time---the operative words being ‘over a long period of time’.  However (1) short term things can get messy and (2) those long term returns are free of fees, commissions and trading friction.

My first objective is not achieving a return, it is preservation of capital.  My second objective is to create a growing income stream from high quality investments.  I could care less what the hedge funds are doing or that I might underperform the Market in any one year.  What I want is to always be in the game and my income growing.

 There couldn’t be a better time to keep your expectations under control than now.  Interest rates are extremely low.  So investors can’t have the same expectations from the fixed income investments that they did in the past.  Of course, they can buy junk bonds which provide higher yields.  But those yields aren’t what they used to be; more important, they carry a much higher risk than investment grade securities.  The temptation is to ignore or minimize that risk for the sake of a higher yield.  But that doesn’t make the risk any less.  And when risk materializes which it inevitably does, the capital losses resulting from lower prices can quickly wipe away any of the gains received from a higher yield. 

The same goes for stocks.  The argument to buy stocks as a way to improve income is financial malpractice as far as I am concerned.  Stocks carry more risk than junk bonds for the simple reason that they have a lesser claim on a company’s cash flow than its debt.  Yes, the dividend of very financially sound companies may have less risk of not being paid than the bonds of a high risk company.  But you are still accepting more risk; just not as much as with a junk bond.  It is still risk.  Arguing that it is OK to buy stocks because the Market will always come back is true as long as you want to suffer the interim discomfort.  Just ask anyone who owned stocks in 2000 or 2008. 

Stanley Druckenmiller on the Fed, stocks and gold (medium):

            Citi is none too happy either (medium):

            A look at the new normal (medium):

       Investing for Survival
            Big returns, narrow doors.
    News on Stocks in Our Portfolios
Kimberly-Clark (NYSE:KMB) declares $0.92/share quarterly dividend, in line with previous.

CF Industries (NYSE:CF): Q1 EPS of $0.40 misses by $0.05.
Revenue of $1B (+4.9% Y/Y) beats by $162.39M

Becton, Dickinson (NYSE:BDX): FQ2 EPS of $2.18 beats by $0.16.
Revenue of $3.07B (+49.8% Y/Y) in-line


   This Week’s Data

            The April PMI services index came in at 52.8 versus expectations of 52.0.

            March factory orders were up 1.1% versus estimates of up 0.6%.

            The April ISM services index was reported at 55.7 versus projections of 54.7.

            Weekly jobless claims rose 17,000 versus forecasts of up 5,000.


            Free trade in trouble in the US (medium):




            Thoughts on Russian aggression rom Pat Buchanan (medium):

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