Thursday, November 3, 2016

The Morning Call--Fed assumes low profile ahead of elections

The Morning Call


The Market

The indices (DJIA 17959, S&P 2097) had another bad day, with both indices trading below round numbers (18000/2100) which tends to have meaning (in this case negative) to technicians.  Volume declined, breadth negative, though the Averages are reaching oversold levels.  The VIX was up another 4%, closing above its 100 day moving average (now support), above its 200 day moving average for the fourth day, reverting to support and continued the strong follow through off the lower boundary of its very short term uptrend.  In addition, it is now less than a point away from challenging the upper boundary of its short term downtrend.   Nothing positive here for stocks.

The Dow ended [a] below its 100 day moving average, now resistance;  [b] above its 200 day moving average, now support, [c] within a short term trading range {17092-18693}, [c] in an intermediate term uptrend {11544-24389} and [d] in a long term uptrend {5541-19431}.

The S&P finished [a] below its 100 day moving average, now resistance, [b] above its 200 day moving average, now support, [c] within a short term trading range {1995-2193}, [d] in an intermediate uptrend {1974-2576} and [e] in a long term uptrend {862-2400}. 

The long Treasury ended up slightly on the day, closing below its 100 day moving average (now resistance), below its 200 day moving average (now resistance), below a key Fibonacci level and in a developing a very short term downtrend.  In addition, it remained near the lower boundaries of its short and intermediate term uptrends.  Meanwhile, most of the other segments of the fixed income market continued to get hammered---the only explanation I have for this divergence is that the Treasuries are starting to act as ‘safe havens’.

GLD continued to make slow upward progress, finishing above its 200 day moving average and one key Fibonacci level.  However, it is below its 100 day moving average (resistance) and within a short term downtrend.  It also challenged the next Fibonacci level but was unsuccessful.  This is likely either be a sign of the loss of momentum or just a pause in a one month uptrend.  When we know, it will tell us more about the strength of the buying behind that one month uptrend.

Bottom line: the indices fell below two technically important levels yesterday---the lower boundary of the tight trading range beginning in September and the ‘round number’ levels of 18000 and 2100.  Both point to lower prices.  Having said that, they have been down seven days in a row which is very unusual; plus, they are getting oversold.  So a bounce is to be expected.   The strength of that bounce should provide some insight about whether stocks go lower or a lot lower.



            Economic data releases yesterday were mixed: weekly mortgage and purchase applications were down; the October ADP private payroll report recorded a much smaller increase in employment than expected, but the upward revision of the September number more than offset the decline.
            How real is the recovery? (medium):

            In addition, the FOMC completed its November meeting; and the following statement read pretty much as expected: (1) no rate increase, (2) a slightly improved narrative on the economy, implying the December rate hike is on schedule but coupled with the usual disclaimer that it is subject to additional data, (3) inflation is edging higher, and (4) a subdued tone that suggested that it wanted the Fed meeting/statement to be politically neutral.

            The Fed statement:

            Central bank models are mostly bunk (medium):

            The big danger at lower bound (medium):

            A scathing review of ECB monetary policy (medium):

                        ***overnight, the Bank of England met, left both rates and its bond buying program unchanged but warned that the falling pound could lead to tighter monetary policy (medium):

                        Also a UK court ruled that the decision on triggering the Brexit procedure must be approved by Parliament (medium):

Bottom line: the FOMC minutes didn’t really do much to provide clarity to a potential December rate hike, though they weren’t expected to given the proximity to the elections.  That said, fixed income markets continued under pressure indicating that bond investors believe that an increase is coming. 

So where are we regarding that multitude of uncertainties facing investors?  (1) divergent central bank policies---the BOJ and ECB have suggested ease while the Fed is not backing off a December rate hike stocks---conditions worsening, (2) the high level of drama in the US elections---bad and likely to get worse, (3) OPEC production cut---failed accompanied by much acrimony, (4) heightened US/Russian tensions in the Middle East---the Russian fleet has not reached Syria yet and democrats are accusing Putin of interfering in US elections, (5) rising inflation---see Fed statement and (6) the deteriorating EU banking system---no new news.  In short, most of the new information received this week on the above issues has been downbeat. 

I continue to believe that stocks are grossly overvalued and that sooner or later, prices will experience mean reversion.  Take the current opportunity to build your cash position by lightening up on your winners and selling your losers.

            My thought for the day: human emotion is one of the biggest enemies of the average investor.  Much has been written about the impact of greed and fear on an investor’s performance; and they are all true.  It is important to govern those emotions especially at times when stock prices are at extreme valuations (like the present).  Wishful thinking is another performance killer.  Dreaming about all the profits one is going to make on some stock inhibits rational analysis of any change in the fundamentals and/or the willingness to cut bait when the stock price is indicating that something is wrong.  Finally, stubbornness and pride are not attributes.  Holding on to a loser because you believe that you are smarter than the Market is a recipe for disaster.  You don’t know more than the Market; and if you did the SEC would come after you for insider trading. 

       Investing for Survival
            Living (and investing in multiple timeframes).
    News on Stocks in Our Portfolios
            CF Industries (NYSE:CF): Q3 EPS of $0.13 beats by $0.14.
Revenue of $680M (-26.7% Y/Y) misses by $110.84M
            Qualcomm (NASDAQ:QCOM): FQ4 EPS of $1.28 beats by $0.15.
Revenue of $6.2B (+13.8% Y/Y) beats by $360M.
            Becton, Dickinson (NYSE:BDX): FQ4 EPS of $2.12 beats by $0.03.
Revenue of $3.23B (+5.6% Y/Y) beats by $10M


   This Week’s Data

            Weekly jobless claims rose 7,000 versus expectations of a 3,000 fall.

            Third quarter nonfarm productivity climbed 3.1% versus estimates of +2.2%; unit labor costs were up 0.3% versus forecasts of up 1.4%.


            Auto repossessions soar (medium):



Quote of the day (short):

  International War Against Radical Islam

            The story of the Iranian ransom payment gets worse (medium):

            The US needs to get out of Syria (medium):

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