Thursday, November 17, 2016

The Morning Call--Cognitive dissonance starting to creep in

The Morning Call

The Market

The consolidation from an overbought position that I had been expecting seemed to have started yesterday, though it didn’t show much force.  The indices (DJIA 18864, S&P 2176) were down slightly on even lower volume and slightly less positive breadth.  The VIX was up 3%, closing below its 100 day moving average (now resistance), below its 200 day moving average (now support; if it remains there through the close on Friday, it will revert to resistance) and bounced off the lower boundary of  a very short term uptrend for seemingly the ninth time.  I say ‘seemingly’ because it was an unimpressive rebound.  The key as always is follow through.

Funds flow (medium and a must read):

The Dow ended [a] above on its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] in a short term uptrend {17971-20028}, [c] in an intermediate term uptrend {11544-24389} and [d] in a long term uptrend {5541-20148}.

The S&P finished [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 {1995-2193}, [d] in an intermediate uptrend {1983-2585} and [e] in a long term uptrend {862-2400}. 

The long Treasury was up for a second day; though most of the fixed income complex was down.  As I noted yesterday, this is more likely a sign of correcting an oversold condition versus anything really positive.  TLT closed below its 100 day moving average (now resistance), below its 200 day moving average (now resistance), below a key Fibonacci level, in a developing a very short term downtrend, in a short term trading range and in an intermediate term trading range.  Not a pretty picture and one that will require a lot of work to just not be ugly.

GLD couldn’t hold on to its one day rally, finishing below its 100 day moving average (now resistance), below its 200 day moving average (now resistance) and in a short term downtrend.  

Bottom line: the Averages took a rest yesterday which probably means absolutely nothing with respect to their current upside momentum.  Despite a growing chorus pointing out the not so positive consequences of Trump’s fiscal/regulatory policies, investor enthusiasm seems relatively undiminished.  At the moment, the only real hitch in the gitty up is that the indices are out of sync.  How that is resolved will likely point the to near term direction.

            More on the soaring dollar (medium):



            This week’s hot streak in economic data cooled off a bit yesterday: weekly mortgage and purchase applications were down, October industrial production (primary indicator) was below estimates, the November homebuilders’ confidence index was unchanged from October and October PPI was flat with September.

            ***Yellen testifies before congress today.  Here are her prepared remarks (medium):

            Nothing from overseas other than but one day following all those optimistic OPEC production cuts headlines, reality set in as several members decline to meet next year. 

            Now that everyone has taken a pause to assess the potential impact of the Trump fiscal regulatory policies, cognitive dissonance is starting to creep into the narrative.  I have linked to a number of discordant views, not because I am a skeptic about the possible effect of those policies.  I have already said that I believe the net outcome will be positive.  But because I hope to temper any impulse you may have to start tip toeing through the tulips and run out and buy stocks.
            This from Bill Gross (medium):

            This from Jeff Gundlach (medium):

            This from congress (medium):

                This from Brett Arends (medium):

                This from the Treasury market (medium):

                Inflation expectations rising (short):

            Dividend cuts ramp up in the fourth quarter (short):

            Bottom line:  ‘……while I am all in on a better economic outlook, its magnitude and timing are very much in question.  Plus, we have no idea about the consequences of a more confrontational trade policy and an expanding budget deficit. 

My caution may be totally misplaced and end up being dead wrong. Certainly, near term, it will appear that way.  But I keep coming back to the extraordinary level of current Valuations.  I can see stocks attacking the upper boundaries of their long term uptrends which would means a max upside of 6-10%.  On the other hand, even if our Valuation Model is under estimating current Fair Value by 50%, the downside is still 20-25%.  10% up/25% down is not a great risk/reward equation.

            If you haven’t already, I would build your portfolio’s cash position by selling a portion of those stocks that have performed well and all of your losers.’

            My thought for the day: most everyone is smart enough to make money in stocks.  Not everyone has the stomach.  If you can’t stop yourself from buying at the top and selling at the bottom, you should avoid stocks altogether.

       Investing for Survival
            The art of doing nothing (part 2)
    News on Stocks in Our Portfolios

   This Week’s Data

            October industrial production was flat versus expectations of up 0.1%; capacity utilization was 75.3 versus estimates of 75.4.

            November homebuilder optimism came in at 63, in line.

            Weekly jobless claims fell 19,000 versus forecasts of up 3,000.

                        October CPI rose 0.4%, in line.

            October housing starts were up 25% versus projections of up 11.5%.

            The November Philadelphia Fed manufacturing index came in at 7.6 versus consensus of 8.0.


            Update on big four economic indicators (medium):

            Trump team hints at ‘infrastructure’ bank (medium):



  International War Against Radical Islam

            Interview with an American journalist in Iraq (medium):

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