Wednesday, June 1, 2016

The Morning Call--Off to a poor start

The Morning Call


The Market

The indices (DJIA 17787, S&P 2096) had a volatile day, selling off firmly through mid-day then rallying into the close to cut losses in half.  Volume spiked while breadth continued weak.   The VIX was up 8%, bouncing off the lower boundary of its short term trading range for the fourth time.  That pin action suggests that the recent rally may be over; however, strong follow through to upside is necessary before giving up on stocks moving higher.

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 managed a move to the upside, bouncing off its 100 day moving average.  It is encouraging that TLT seems little impacted by the threat of a coming Fed rate hike.  However, it still has much work to do on the upside in order to break out of the current trading range.

GLD was also up, rebounding off the lower boundary of its short term trading range and recovering back to the level of its 100 day moving average.  As I noted in yesterday’s Morning Call, it is on the verge of a significant breakdown.  Yesterday’s pin action halted that process---at least for a day.  Now we need follow through to the upside to get comfortable that the worse is over.

Bottom line: the Averages appear to be digesting recent gains.  Yesterday’s intraday recovery, even though stocks didn’t fully recoup earlier losses, was a decent sign that there could be a further move higher.  At this point, my assumption is that the indices will at least challenge the upper boundaries of their short term trading ranges. 

A break in GLD below its 100 day moving average and the lower boundary of its short term trading range will likely lead to a paring of the Aggressive Growth  Portfolio’s position in GDX.



            Yesterday’s US economic news was discouraging: April personal income and core PCE were in line while personal spending was up more than expectations; the March Case Shiller home price index rose more than forecast; the May Chicago PMI was disappointing; May consumer confidence was very poor; the May Dallas Fed manufacturing index dropped substantially.  Not much for the economic bulls to hang their hat on.  But if you are in the everything-is-awesome-so-a-rate-hike-is-just-what-the-doctor-ordered camp, the Case Shiller home price number had to make your legs tingle.

            Overseas, the data was surprisingly upbeat: May EU inflation fell but April Japanese factory orders, household spending and job availability were better than estimates.  That is as good a day as we have gotten in the last year.  At the moment, it is simply an aberration; but if more positive stats follow, then I would have to consider that the global slowdown as stabilized.

            ***overnight, things returned to normal: May Japanese manufacturing PMI declined; May Chinese manufacturing PMI was unchanged while the services PMI slowed in growth and the Caixin manufacturing PMI fell for the 15th consecutive month; the EU manufacturing PMI was flat; Swiss first quarter GDP was below expectations.

            Bottom line: yesterday’s US datapoints did nothing to support the notion that the economy is improving.  That said, there are enough mixed signals that no one should be too hard line in their forecast.  On the other hand, even if the US economy has ceased shrinking, that does not mean one should expect anything more than a continued below average growth.

            Greenspan agrees (medium):

            In addition, the Fed has now set the Market up for an interest rate increase in June or July based on an improving economy.  If that doesn’t occur, investors will likely experience a further loss of confidence in our central bank---something well deserved but would be too long in the coming.

            On the other hand, stocks are priced for perfection, have been for 18 months but conditions have been anything but perfect.  I continue to believe that every portfolio should own more than a token cash position.

            The latest look at the Market’s long term performance (short):

            Two important questions facing the Market (medium):
            Must watch interview with Jim Grant:

My thought for the day comes from Joseph Schumpeter, an economist and political scientist, who wrote that an economic “recovery is sound only if it does come of itself. For any revival which is merely due to artificial stimulus leaves part of the work of depressions undone and adds, to an undigested remnant of maladjustments, new maladjustment of its own…”   A reminder that while Fed stimulus---through low rates or other measures---may be an attempt to help the economy in the near term, ultimately it does not actually solve problems. It simply relocates (asset mispricing, misallocation, pulling forward future demand) and defers the day of reckoning.

Yet today investors look to the Fed to solve the economic problems when in fact the Fed bears a major responsibility for those problems in the first place.  By pursuing QE after QE instead of allowing the system to cleanse itself, needed adjustments have been deferred to later periods and possibly even handed it off to subsequent generations.

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    News on Stocks in Our Portfolios

   This Week’s Data

            The March Case Shiller home price index rose 0.9% versus expectations of up 0.7%.

            The May Chicago PMI came in at 49.3 versus estimates of 50.7.

            May consumer confidence was reported at 92.6 versus consensus of 97.0

            The May Dallas Fed manufacturing index dropped substantially from the April reading to -13.1.

                Weekly mortgage applications were down 4.1%, while purchase applications were down 5.0%.

            Month to date retail chain store sales improved markedly from the prior week.


            China remains a problem (medium):

            Corporations are debt bingeing (medium):

            What QE has bought us (medium and a must read):




            The Battle of Britain (medium):

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