Friday, August 19, 2016

The Morning Call--Confusion rules

The Morning Call

8/19/16

The Market
         
    Technical

The indices (DJIA 18597, S&P 2187) extended Wednesday’s post FOMC minutes gains though with only moderate enthusiasm.  Volume continued low but breadth improved slightly.  On the other hand, the VIX fell 6%, finishing below its 100 day moving average and within a short term downtrend.  While that reflects a sizeable drop in investor fears and is thus a plus for stocks, it is still close to the lower boundary of its intermediate term trading range (support) which should pose some challenge to further complacency.

And (short):

The Dow ended [a] above rising 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] within a short term uptrend {17627-19363}, [c] in an intermediate term uptrend {11316-24143} and [d] in a long term uptrend {5541-19431}.

The S&P finished [a] above its rising 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] within a short term uptrend {2067-2306}, [d] in an intermediate uptrend {1917-2519} and [e] in a long term uptrend {862-2400}. 

The long Treasury rose.  While it ended above its 100 day moving average and well within very short term, short term, intermediate term and long term uptrends, it remained below the lower boundary of the developing pennant formation.   However, it has risen faster than that lower boundary every day following the break, so I am not sure if there is any directional information to be had. 

On a fundamental note, you would think that with every central bank in the world reaffirming their dedication to easy money that bond prices would be making new highs (lower yields = higher bond prices) along with stocks.  But they are not.  Likely this reflects the weakening dollar which is also a product of easy US money.  Of late the weak dollar has caused currency spreads to widen more than the foreign/US yield spreads (in other words, the more attractive US Treasury yield is offset by the weakness in the dollar---most institutional players buy a US bond because of the higher yield but also hedge the risk of a declining dollar by doing a currency swap. The cost of doing that swap has risen to the point that the yield advantage of the US bond is being offset by the higher cost of the currency swap. Hence, fewer foreign buyers; hence bond prices are not rising), diminishing their investment appeal despite their higher yield.  This is part of the unusual pin action in the VIX, bonds, gold, currency and oil about which I have been lamenting.

Speaking of the dollar, it has been declining over the last three weeks, suggesting that the currency market knows that either the US economy is weaker than the optimists believe or that the Fed will remain easy longer or both.

Is the dollar about to break down? (short):

GLD was up slightly, ending above its 100 day moving average and within short term and intermediate term uptrends.  It too should be responding positively to easier money and a declining dollar.  But it isn’t---I am still concerned about last week’s failed second try to surmount a key Fibonacci level and voiding of a very short term uptrend.

Bottom line: the Averages responded to a do-nothing Fed policy pretty much as would be expected, if a little less enthusiastically than I would have supposed.  Still there is nothing, technically speaking, to impede an advance on the upper boundaries of the indices long term uptrends.  That said, I have explained above some of the confusing pin action in the VIX and the bond, gold, oil and currency markets that seem to be indicating that something is amiss.  Be careful.

    Fundamental
     
       Headlines

            Yesterday’s US economic data kept the tone of this week’s stats neutral to positive: weekly jobless claims fell more than estimates, the July leading economic indicators were much better than expected and the Philly Fed index was in line.  That is enough to put this week’s dataflow in the plus column.

            Overseas, July UK retail sales were better than expected; July Chinese home prices rose more than anticipated and July Japanese trade numbers were terrible.

            And just to be sure that there is no one that isn’t confused about Fed policy, yesterday St. Louis Fed chief Bullard gave a very dovish monetary policy speech while San Francisco Fed head Williams gave a hawkish speech.  This on the heels of the Dudley hawkish statement on Tuesday and the Fed’s Bugs Bunny FOMC minutes on Wednesday.

            The latest from Bill Gross on QE (medium):

Bottom line: one day, no one is going to pay any heed to what the Fed says.  One day, the economic consequences of QE will become manifest.  It may be tomorrow; it may be a year from now.  But when it happens, the Market dynamics will almost certainly change.  Given that stocks have achieved nosebleed valuations via Fed bulls**t and free money, it seems likely all that will be reversed.  If I was only smart enough to know the timing.  But alas, I am not; so I must sit back and enjoy the part of my portfolio that is invested and take some money off the table when our stocks trade into their Sell Half Range or their underlying companies’ fundamental decline to the point that they no longer qualify for inclusion in our Universe.

My thought for the day: every successful investor that I have ever known focused on controlling his/her risk and let return take care of itself.  I have seen far too many investors who aspired to success fail because they chased return and paid not enough attention to risk.   The first and last question that I ask myself in analyzing an investment is ‘what is my downside?’

       Investing for Survival
   
            The benefits of being proficient in mathematics.

    News on Stocks in Our Portfolios

Home Depot (NYSE:HD) declares $0.69/share quarterly dividend, in line with previous.
 
Economics

   This Week’s Data

            The July leading economic indicators were reported at +0.4% versus expectations of +0.2%.

   Other

            Another stem winder from David Stockman (medium):

            The problems that algo traders are creating in the cattle market (medium):

            More on student loans (short):

Politics

  Domestic

Here is a very good article on why bankers aren’t going to prison for their role in the financial crisis (medium):

More on what is wrong with America (short):

And (short):

And as long as we are at it, how about this (short):


  International War Against Radical Islam


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