Wednesday, October 12, 2016

The Morning Call---Higher rates, lower earnings, both or noise

The Morning Call

10/12/16

The Market
         
    Technical

Yesterday, the indices (DJIA 18128, S&P 2136) took a beating, breaking below several resistance levels.  Volume was up slightly; breadth negative.  The VIX popped 15%, but still closed below its 100 day moving average (resistance)---though not by much---and in a short term downtrend.  That means that it is still a net positive for stocks, but getting less so.  In addition, it is still in a very short term uptrend---a negative. 

The Dow ended [a]  below its 100 day moving average, now support; if it remains there through the close on Thursday, it will revert to resistance, [b] above its 200 day moving average, now support, [c] below the lower boundary of its short term uptrend {18230-19953}; if it remains there through the close on Thursday, it will reset to a trading range, [c] in an intermediate term uptrend {11472-24317} and [d] in a long term uptrend {5541-19431}.

The S&P finished [a] below its 100 day moving average, now support; if it remains there through the close on Thursday, it will revert to resistance, [b] above its 200 day moving average, now support, [c] below the lower boundary of its short term uptrend {2147-2562}; if it remains there through the close on Thursday, it will reset to a trading range, , [d] in an intermediate uptrend {1960-2562} and [e] in a long term uptrend {862-2400}. 

The long Treasury was down again.  It closed below its 100 day moving average (resistance) and below a third Fibonacci level. It remained within short term, intermediate term and long term uptrends.  TLT’s chart is still healthy but getting less so.

GLD fell, ending below a key Fibonacci level, below its 100 day moving average (resistance), in a short term downtrend and below its 200 day moving average (if it remains there through the close on Friday, it will revert to resistance).  This chart gets uglier.

The dollar has been up strongly of late, successfully challenging its 100 day moving average (now support) and the upper boundary of its short term downtrend (now a trading range).

Bottom line: if one assumes that yesterday’s pin action represented investors deciding that maybe a December rate hike isn’t a positive and/or earnings may not be that good, then that would bring the Averages in line with the other Markets (bonds, gold and the dollar) reflecting concern about higher rates.   However, while bonds, gold and the dollar have been suggesting that scenario for over a week now (which by the way, would not be the case if they were worried about lousy earnings/poor economy), stocks have been a lot more ambivalent.  So even though the indices are breaking support levels, I want to see confirmation of those challenges before becoming persuaded that equity investors are firmly convinced that higher rates are a negative for stocks. 

That said, if investors do believe that a rate hike is coming, that it is a bad thing for stocks and that forces the Fed to fade the December rate hike, then this could all be a giant exercise in masturbation.  Of course, if the Fed proceeds with the hike, heartburn could ensue.
           
            Recency bias is creating frustration among the stock guys (short):

    Fundamental

       Headlines

            There were only a couple of minor US datapoints released yesterday: the September small business confidence index was slightly weaker than expected while month to date retail chain store sales were very disappointing.

Overseas, October German investor confidence was better than expected.  In addition, OPEC production soared to record highs, implying the implementation of yet another commonly used tactic of this group of thieves---yak about a production cut, raise production, then cut it back to the prior level.

            ***overnight, second quarter EU business investment was up fractionally; August EU industrial production was above expectations.

            Bottom line: as I noted above, all the Markets seemed to come together in the acceptance of an increased probability of higher interest rates.  Add the uncertainties being created by some lousy earning numbers (yesterday’s Alcoa profit report was disappointing) and the implosion of the GOP; and you have got a real s**t stew of potentially bad news---‘potentially’ being the operative word.  We don’t know if these initial poor earnings reports are indicative of the entire season; we don’t know that if they are or if they cause Market weakness, it will cause the Fed to back off the rate hike; we don’t know if the (declining) bond Market is a sign of lost Fed credibility and that forces the Fed to raise rates in an attempt to regain that credibility, the weak stock Market or poor economic/corporate profits  notwithstanding; and we don’t know if yesterday’s pin action was just noise.  However, given the ten day performance in the long bond, gold and dollar markets, we have strong reason to suspect that they are discounting higher rates.  

In short, there is a lot of balls in the air right now, which means heighten uncertainty.  And heighten uncertainty usually means weak Markets.  Until we get some clarity, that weakness could continue short term.  For that to continue long term, then a lot of those uncertainties have be resolved to the negative; and we have no idea whether or not they will. 

So while the Markets could experience some heartburn near term, before I get too beared up, I want to see resolution to some of the aforementioned issues.  That said, it is not too late to take some money off the table.

            Corporations hitting the limit in payouts (medium and a must read):

            The latest from John Hussman (medium):

            My thought for the day: when you run with the crowd, you get trampled.  Stocks are grossly overvalued on almost every metric available largely because of QE and ZIRP.  No one wants to sell as long as they believe the Fed ‘put’ exists.  When they stop believing that, only one guy gets out the door.

       Investing for Survival
   
            A speck of sand on a long beach.

    News on Stocks in Our Portfolios
 
The Procter & Gamble Company (NYSE:PG) declares $0.6695/share quarterly dividend, in line with previous.

CF Industries (NYSE:CF) declares $0.30/share quarterly dividend, in line with previous.

Cummins (NYSE:CMI) declares $1.025/share quarterly dividend, in line with previous.

Economics

   This Week’s Data

            Weekly mortgage applications were down 6.0% while purchase applications were down 3.0%.

   Other

            The economy is not OK (medium):

            The Chinese banking system continues to deteriorate (medium):

Politics

  Domestic

  International

            Russia orders students studying abroad home (medium):


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