Wednesday, November 2, 2016

The Morning Call--Is Trump the trigger?

The Morning Call

11/2/16

The Market
         
    Technical

The indices (DJIA 18037, S&P 2111) experienced one of their biggest move in the last couple of months---this time to the downside.  Volume declined; breadth was very negative.  The VIX was up another 8%, closing in a short term downtrend, above its 100 day moving average (now support), above its 200 day moving average for the third day (now resistance; if it remains there through the close today, it will revert to support) and continued the strong follow through off the lower boundary of its very short term uptrend.  The negative implications from its recent moonshot finally revealed itself in stock prices. 

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 {11529-24374} 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 {1972-2574} and [e] in a long term uptrend {862-2400}. 

The long Treasury ended down slightly on the day, closing below its 100 day moving average (now resistance), below its 200 day moving average for the fourth day, reverting to 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.  It seems likely a challenge of these uptrends is coming.

GLD continued the slow plodding advance that began in early October, finishing above its 200 day moving average and key Fibonacci level.  But it is below its 100 day moving average (resistance) and within a short term downtrend.  This chart is improving; but a lot more is needed before I get enthused again.

Bottom line: the recent volatility of the VIX finally showed up in stock prices.  The S&P closed below the recent tight trading range, though the DJIA held.  Still that does not augur well of equities near term. 

The TLT didn’t move much price-wise, but volume expanded dramatically and other sectors of the fixed income market were hammered.  As I noted previously, the bond guys are voting with their feet---meaning expectations for a Fed rate hike are rising among this group of investors.  I am weakening in my resolve that the Fed won’t raise rates in December.  We will get some potentially important information today in the form of the narrative in the statement following the close of the FOMC meeting.  A more hawkish tone will likely push me to alter my opinion.
           
    Fundamental

       Headlines

            Yesterday’s US economic data improved from Monday: month to date retail chain store improved, the October Markit manufacturing PMI and the ISM manufacturing index were both better than expected while September construction spending was very disappointing.

            The two speeds of this economy (medium and a must read):

            Overseas, the October UK manufacturing PMI was down, the October Chinese manufacturing and services PMI’s were better than expected and the Bank of Japan left policy measures unchanged but the inflation rate continued to decline.
           
            ***overnight, the October EU manufacturing PMI came in better than anticipated; German unemployment hit a record low.

Bottom line: stocks may have decided that the next direction is down---‘may’ being the operative word because while the S&P pushed down from its recent tight trading range, the Dow did not.  We did get some additional information on the litany of uncertainties that I have been discussing of late:  (1) the great data out of China provided more rationale for the Fed to hike rates in December and the bond market acted accordingly.  Higher interest rates are not a plus for stocks, (2) the latest voter polls indicate a much narrowing gap between Clinton and Trump, with the odds of a Trump victory going up.  For better or worse, Wall Street wants Clinton as the next president.  Hence, those polls are not viewed positively by the stock boys. 

Note: remember Wall Street gave us the tech bubble, the mortgage finance crisis and QEInfinity euphoria; hence, wanting a Hillary presidency is not exactly a great endorsement. Of course, save for Trump’s view on trade, most of his proposed economic policies would be better for the economy than Hillary’s---which would make you think that an objective investor be giving Trump the benefit of doubt on that score.  But we know from her ‘private’ position, she is in bed with the Wall Street crowd who have gotten filthy rich under Obama.  Clearly, she has their vote.   Indeed, I wonder if a Trump presidency would be the exogenous event that triggers the mean reversion that I have been talking about.  I am not saying it will happen, I am just wondering.



I am making no predictions on whether there is any follow through to the downside and, if so, how much.  However, 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.

            Update on valuation (medium):

            My thought for the day: yesterday I focused on our Stop Loss (Sell) Discipline---the point of which is to keep your losses small.  I wanted to expand on that thought.  There
are many investors who think that if they buy a stock at X, then if it declines by 10%, then it, by definition, must be a better value.  I totally disagree with that notion.  No matter how much homework you may have done on a stock, you still don’t know everything.  But the Market does.  If it is telling you that you are wrong, listen.  Never throw good money after bad.  Adding to a losing position is a prescription for turning a small loss into a big one.

       Investing for Survival
   
            Faulty Wall Street assumptions.

    News on Stocks in Our Portfolios
 
            Emerson Electric (NYSE:EMR) declares $0.48/share quarterly dividend, 1.1% increase from prior dividend of $0.475.

Automatic Data Processing (NASDAQ:ADP): FQ1 EPS of $0.86 beats by $0.10.
Revenue of $2.92B (+7.7% Y/Y) in-line
Economics

   This Week’s Data

            Month to date retail chain store sales were stronger than in the prior week.

            The October Markit manufacturing PMI was reported at 53.4 versus consensus of 51.5.

            The October ISM manufacturing index came in at 51.9 versus expectations of 51.6.

            September construction spending was down 0.4% versus estimates of an increase of 0.6%.

                October light vehicle sales totaled 18.0 million versus projections of 17.8 million.

                Weekly mortgage applications were down 1.2% while purchase applications fell 0.4%.

            The October ADP private payroll report recorded a 147,000 increase in jobs versus expectations of 170,000; however, that was more than offset by the revision in the September number of up 154,000 to up 202,000.

   Other

            What is missing in this economy (medium)?

Politics

  Domestic

Number of doctors accepting Obamacare patients drops 20% (medium):


  International War Against Radical Islam


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