Friday, November 18, 2016

The Morning Call--Mixed signals from the central banks

The Morning Call


The Market

So much for consolidation.  The indices (DJIA 18903, S&P 2181) resumed their upward move; however, Wednesday’s brief and shallow selloff hardly corrected the Averages overbought condition.  Volume was up slightly; breadth positive.  The VIX was down 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 today, it will revert to resistance) and ended right on the lower boundary of  a very short term uptrend.  I am assuming this is all part of a ninth challenge of this boundary.

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 {18000-20057}, [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 {1986-2588} and [e] in a long term uptrend {862-2400}. 

The long Treasury got hammered again after a brief respite, finishing 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.  

GLD fell again, ending below its 100 day moving average (now resistance), below its 200 day moving average (now resistance) and on the lower boundary of its short term downtrend.  

The dollar spiked with the UUP (26.0) a hair’s breadth from the upper boundary of its short term trading range (26.13).

Bottom line: the Averages forged ahead, though they remain in very overbought territory.  It does look like the S&P is going to make a run at the upper boundary of its short term trading range; clearly, if successful, it will reconcile its current divergence with the Dow.  Until that happens, we have a directionless market.

            Record ETF fund flows (medium):



            Yesterday was another good one for US economic stats: October CPI was flat, weekly jobless claims were down more than anticipated and October housing starts were awesome. The only disappointing number was the Philly Fed manufacturing index.  So this has been a very positive week.  However, it is still only one week; so about the only possible trend we can discern is that the data seem to be struggling to stop deteriorating.  That would be good news; but it is too soon to tell.  That said, (1) the proposed Trump fiscal/regulatory regime should lead to better numbers and (2) even before that occurs, the dramatic pick up in sentiment may have an uplifting effect of economic activity.  Hence, the risk of recession has declined substantially.  The question before us is, how big a net positive impact (remember possible trade issues and a major increase in deficit spending could be negatives) going forward will these policies have and when?

            The other noteworthy news of the day was Yellen’s testimony before congress in which she sounded a good deal more confident in a December rate hike---undoubtedly influenced by (1) the relief of assuming that the Fed no longer had to be responsible for keeping stock prices up and (2) stock prices being up. 

                ***overnight, Draghi sent a strong signal that the ECB would extend its bond buying program due to the weak EU economy.

            Outlook for muni bonds (medium):

Bottom line:  the economic numbers this week look good, though that really isn’t the news.  The story is better sentiment which itself could drive more economic activity and the potential impact of the Trump fiscal/regulatory renaissance.  As you know, with the caveat of the uncertainty surrounding the timing and magnitude of these more pro-growth policies, I believe their net effect on the economy will be a plus. 

However, as I repeatedly point out, a better economy is not likely to resolve the issue of equity over valuation, I don’t care how much earnings go up.  P/E’s are at the upper end of historical valuations and that is due primarily to carnival of QE/ZIRP/Operation Twist which may be ending.  And frankly, a decline in P/E’s due solely to a normalization in monetary policy could be the good news scenario; because we have no way of knowing the added upward pressure that larger federal deficits will place on rates.  And that ignores the increased tension on rates that seems to be developing as a result of dollar funding problems in foreign credit markets.    In short, earnings may be going up; but that in no way means the stock prices will follow suit.

            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.’

            The latest from Raoul Pal (medium):

            My thought for the day: I wrote the other day about the importance of being able to state why you own a stock as simply as possible.  The corollary to that is if reason that you bought the stock is simple, then so will the reason to sell it.

       Investing for Survival
            Fooled by randomness
    News on Stocks in Our Portfolios
·         PepsiCo (NYSE:PEP) declares $0.725/share quarterly dividend, in line with previous.
·         Nike (NYSE:NKE) declares $0.18/share quarterly dividend, 12.5% increase from prior dividend of $0.16.
·         Home Depot (NYSE:HD) declares $0.69/share quarterly dividend, in line with previous.
·         Brown-Forman (NYSE:BF.A) declares $0.1825/share quarterly dividend, 7.4% increase from prior dividend of $0.17.
Tiffany (NYSE:TIF) declares $0.45/share quarterly dividend, in line with         previous.


   This Week’s Data


            More on the strong dollar (medium):



  International War Against Radical Islam

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