Wednesday, May 4, 2016

The Morning Call--Losing momentum

The Morning Call


The Market

The indices (DJIA 17750, S&P 2063) gave up all of Monday’s gains on increased volume and weakening breadth.  Of note is that the flow of funds indicator is breaking down.  The VIX was up 6%; it continues to act as if it has made a bottom.

The VIX versus credit spreads---though I am not sure about the author’s conclusion (medium):

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 {17758-18712}; if it remains there through the close on Thursday, 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 finally had a good day, bouncing off a key Fibonacci level but remains within an area of congestion dating back to early February.

GLD was down fractionally, but remained above its recent high.  It also finished above its 100 day moving average and within a short term uptrend.

Bottom line:  following Monday’s reset of the S&P to a short term trading range, the Dow is now challenging the lower boundary of its short term uptrend.   In addition, cracks are starting to appear in the breadth indicators.  I am holding to my assumptions until the Dow completes its challenge of its short term uptrend.  If successful, then we will be looking at another failed attempt by the Averages to attack their all-time highs---clearly not good.  If it remains within the uptrend then my assumptions will remain unchanged: (1) upward progress will continue though it will be a struggle and (2) the Averages will challenge their all-time highs/upper boundaries of their long term uptrends and fail.



            Two minor datapoints yesterday: April retail chain store sales were slightly lower than anticipated while April light vehicle sales were slightly above consensus.

            Overseas, the reversion to negative continues: the European Commission lowered its 2016 EU growth and inflation forecast and the April Caixin (China) manufacturing PMI fell for the 14th month in a row.

            China continues to ‘manage’ its economic narrative (medium and a must read):

            ***overnight, March EU retail sales fell 0.5%.

            In addition, the Bank of Australia lowered key interest rates.  In light of the recent Chinese (G20) and US Treasury threats, I think that Australia can get away with such a move because it is a primary supplier of raw materials to China, so this can’t really be termed an attempt at competitive currency devaluation.

            How long can the Fed stay wrong before it admits failure? (medium and a must read):

            On the other hand, maybe the Fed is tightening at the same time that it is mouthing dovish comments (medium and a must read):

Bottom line: the economic numbers were again disappointing.  Of particular note is not just this week’s Chinese data but also the anecdotal evidence presented in the above link that the government is taking extraordinary steps to ‘manage’ the reported stats as well as their analysis.  I think that this calls into question the veracity of the recent string of upbeat economic numbers and all the happy talk about a Chinese recovery. 

Meanwhile, if the US and China are attempting to muscle other central bankers to forgo additional QE steps (‘if’ being the operative word), the investors are going to lose the poor economy = more easy money connection that has proven so profitable to date.

In the meantime, stocks remain very overvalued, not just by my measure (see below).  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.

Yesterday, I discussed one of the problems that investors face is the constant barrage from brokers and/or financial advisors to do/buy something and do it right now.  How else are they going to get paid?  Usually, the reason for buying is something along the lines of ‘our analyst believes the stock is going to double in the next year’.  Not only do they want you to buy something, but more often than not, they want you to sell something (a relative underperformer) to pay of it---and that can generate a capital gain tax. 

One of the prime objectives of our Price Discipline is keep the investor trading activity to a minimum.  Why? Because commissions and the natural friction of trading are a huge cost to a portfolio.  If you have done your due diligence on a stock, then I am assuming you have a price objective that is a good deal higher than the price paid.  Aside from maintaining your work on the underlying fundamentals on the underlying company, this is a time to do nothing.  The point being: do your due diligence and stick with the decision---as long as the stock doesn’t violate your Stop Loss Price.
Increasing your Portfolio’s performance by not incurring unnecessary commissions, fees, market friction and taxes is a winning proposition for investors.  There is much to be said for doing nothing.

       Investing for Survival
            The benefits of rebalancing a portfolio’s asset allocation.

    News on Stocks in Our Portfolios
Emerson Electric (NYSE:EMR) declares $0.475/share quarterly dividend, in line with previous.

PepsiCo (NYSE:PEP) declares $0.475/share quarterly dividend, 7.1% increase from prior dividend of $0.7025.

Medivation (NASDAQ:MDVN) +3.9% AH following a Reuters report that Pfizer (NYSE:PFE) has approached the company to express interest in an acquisition, raising the possibility of a bid rivaling Sanofi's (NYSE:SNY) $9.3B offer by Sanofi.

MDVN has not yet decided whether it should engage with PFE in negotiations and is in discussions with its financial and legal advisers, according to the report.
MDVN last week rejected SNY's $52.50/share takeover proposal, and PFE, Novartis (NYSE:NVS) and AstraZeneca (NYSE:AZN) have been speculated as potential suitors.


   This Week’s Data

            April retail chain store sales were up 0.8% versus estimates of up 0.9%.

            April light vehicle sales were 17.4 million versus forecasts of 17.3 million.

            Weekly mortgage applications fell 3.4% while purchase applications rose 1.0%

            The April ADP private payroll report showed an increase of 156,000 jobs versus expectations of a rise of 193,000.

            The May US trade deficit came in at $40.4 billion versus projections of $41.4 billion.

            First quarter nonfarm productivity fell 1.0% versus an anticipated decline of 1.2%; unit labor costs rose 4.1% versus estimates of +3.5%.


            Blowback on the Transatlantic Trade and Investment Partnership agreement (medium):



Inequality that matters (short):

Club for Growth’s annual congressional scorecard.

A great thought experiment (short):

  International War Against Radical Islam

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