Thursday, May 19, 2016

The Morning Call--More confusion from the Fed

The Morning Call

The Market

The indices (DJIA 17526, S&P 2047) had a volatile day courtesy of the Fed but ended basically unchanged on the day.  So they remained close to the lower boundary of their short term trading range which also happens to be the neck line of a head and shoulders formation.  Volume fell and breadth continued weak.   The VIX was up another 2.5%, ending within short and intermediate term trading ranges and drew ever nearer to its 100 day moving average.  If it breaks above that MA, it would not bode well for stocks.

The Dow closed [a] above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] within a short term trading range {17498-18736}, [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 (down 1.3%), along with virtually every other fixed income security, got banged hard on heavy volume (as a result of the more hawkish sounding FOMC minutes released yesterday afternoon), ending below the upper boundary of a very short term downtrend, pushing through a key Fibonacci support level and approaching its ascending 100 day moving average.  A break below that MA would indicate growing momentum to the downside (higher interest rates).  It did stay within a short term uptrend.

GLD was also hit hard (and for the same reason as the TLT), bouncing down off a key Fibonacci level and breaking below the lower boundary of a very short term uptrend---neither very positive.  It did manage to stay within its short term uptrend as well as above its 100 day moving average. 

Bottom line: both of the Averages remain near a challenge of the lower boundaries of their short term downtrends. If those levels can’t hold, my attention will shift from resistance levels to support levels.  Bonds and gold got whacked hard on the prospect of a June Fed rate hike.  If that notion gains any traction, then I will likely sell a portion of the GDX holding in the Aggressive Growth Portfolio.

            More on sell in May (medium):



            Only one datapoint was released yesterday: weekly mortgage and purchase applications which were down.  It is a minor indicator, so there is little of significance to this as a stand-alone number.

Overseas, first quarter Japanese GDP came in better than expected; April Chinese housing pricing soared 12.4% year over year (can you say ‘bubble’?) both of which provided added ammo to the notion of an improving economic outlook which gained some traction on Tuesday with the better housing and industrial production stats and the hawkish statements by two Fed officials.

Now comes the release of the minutes from the last FOMC meeting which read a good deal more hawkish than the Fed statement following that meeting.  That said, there were still a lot of if’s, and’s and but’s in the commentary.  Enough so, that there could be no June hike and the Fed could green apple two step its way to seeming consistency. 

All that said, putting the data, the Fed official comments and the Fed minutes together and suddenly investors are seemingly worried about a June rate hike.  I say seemingly because stocks sold off immediately following the release of the minutes, then rallied back to flat on the day.  Where the panic really showed up was in the fixed income and gold market.  

            I am going to make no claims to any kind of accurate interpretation of yesterday’s confusing intermarket price movements.  In fact, I am not sure there is one.  In addition, two of the more dovish Fed members speak today and Yellen will make public comments twice before the next Fed meeting.  So there is plenty of room for more of the usual on-the-one-hand, on-the-other-hand mewing that ultimately leads to nothing.  

So until we get something more concrete than two weeks of positive data and a weeks old Fed minutes, I remain in the camp believes that the Fed doesn’t have the cojones to raise rates in June because only someone that is ADD could believe that the economy is doing great based on those two indicators.  Plus, in my opinion, for the Fed to raise rates, it would have be very secure in its own mind that Brexit won’t occur next month.  I remain open to altering that opinion when the facts change; but so far, they haven’t changed enough.

            China’s reaction (short):

Bottom line: as far as the Markets go, I will, as usual, wait to see (1) any follow through in the bond and gold markets before I start disturbing positions there and (2) some resolution to yesterday’s see saw performance of stocks.  In the meantime, cash is a wonderful thing.

            More on valuation (medium):

   This Week’s Data

            Weekly jobless claims fell by 16,000 versus expectations of a 19,000 decline.

            The May Philadelphia Fed manufacturing index was reported at -1.8 versus estimates of +3.0.

            The April Chicago Fed national activity index came in at +10; however, the March reading was revised down from -44 to -55.


            The cost of regulation (medium):



  International War Against Radical Islam

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