Tuesday, October 4, 2016

The Morning Call--Talking up another rate hike

The Morning Call

10/4/16

The Market
         
    Technical

Unable to generate a follow through to Friday’s upbeat performance, the indices (DJIA 18253, S&P 2161) fell yesterday.  Volume disappeared; breadth was mixed.  The VIX was up 2%, but still closed below its 100 day moving average and in a short term downtrend---which remains supportive of stocks.  Nonetheless, it is still in a very short term uptrend---a negative. 

The Dow ended [a]  above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] within a short term uptrend {18132-19866}, [c] in an intermediate term uptrend {11437-24282} 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 {2136-2372}, [d] in an intermediate uptrend {1952-2554} and [e] in a long term uptrend {862-2400}. 

The long Treasury had another poor day, as Fed governors are out once again talking up a rate hike.  It remained above its 100 day moving average and well within very short term, intermediate term and long term uptrends.  Still TLT’s chart is starting to get a little squirrelly.

GLD fell yet again, finishing below its 100 day moving average and within a short term trading range.  It has now made a fourth lower high.  This is not a healthy chart and it is getting more unhealthy---not a plus for our GDX holding. 

***overnight, GLD is getting crushed.  If it opens down big, the Aggressive Growth Portfolio will Sell its GDX.
               
Bottom line: the Averages edged lower on paltry volume, indicative of nothing.  The momentum remains to the upside.  So I continue to believe that a challenge of the former all-time highs (18668/2194) is highly likely.

    Fundamental

       Headlines

            Yesterday’s US economic data was mixed: the September ISM manufacturing index and September vehicle sales came in ahead of expectations while the September Markit manufacturing PMI and August construction spending were below estimates.

            ***overnight, the Atlanta Fed lowered its third quarter GDP growth outlook (again) to 2.2%.

Overseas, the news was much better---both September Chinese manufacturing and nonmanufacturing PMI’s advanced; the September EU manufacturing PMI was up

            ***overnight, Japanese September consumer confidence came in above forecasts; the central bank of India cut key interest rates.

            Last week’s headlines carried through yesterday:

            More on the OPEC production ‘cut’ (medium):

            Mohamed El Erian on Deutschebank (medium):

Bottom line: longer term, the economic data both here and abroad provides little optimism.  Last week’s upbeat US stats and mixed overseas numbers along with yesterday’s mixed US stats and very positive foreign numbers hardly bring that long term trend into question.  Nonetheless, improvement has to start somewhere, sometime.  So I am not dismissing this progress as irrelevant. Indeed, I acknowledge that there is an outside chance that the US economy could be stabilizing---‘outside’ being the operative word.  It is way too soon to seriously consider an economic rebound.

In addition to the poor trend in data, there are a number of current and upcoming political/economic events (OPEC, Deutschebank, Brexit, the Italian referendum and the US elections) that could be disruptive. 

Here is two more. Patience.

Problems in the land of the rising sun (medium):

US ends FY2016 with third largest deficit in history (medium and a must read):

I continue to believe that the Market is giving investors a great opportunity to shift their asset allocation to a more conservative stance (like more cash).

            Update on market valuation (medium):

            My thought for the day: mean reversion is a powerful force, both in economics and the Market.  In the case of stocks, when multiples reach historic highs, the odds increase of a return to the norm; and the more stretched those multiples get, the more powerful the mean reversion.  Less certain is the timing of the process; and that is why investors get aestheticized by old adages like ‘it is different this time’ and the ‘market climbs a wall of worry’ which are true until they are not.  Mean reversion has always been true.

     
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Economics

   This Week’s Data

            The September Markit manufacturing PMI came in at 51.5 versus the August reading of 52.0.

            The September ISM manufacturing index was reported at 51.5 versus expectations of a 50.2.

            August construction spending fell 0.7% versus estimates of +0.3%.

            September vehicle sales were 17.8 million units versus forecasts of 17.4 million.

   Other

            Buffett and his Wells Fargo holding (medium):

            Who is driving global growth (short)?

            Negative yield bonds now total $12 trillion worldwide (short):

            Bankruptcies pile up in restaurant industry (medium):

Politics

  Domestic

Quote of the day (short):

  International War Against Radical Islam

            Syria continues to deteriorate (medium):

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