Friday, December 2, 2016

The Morning Call--Bond market performance getting worrisome

The Morning Call


The Market

The indices (DJIA 19191, S&P 2191) diverged again yesterday (Dow up, S&P down).  Volume declined; breadth strengthened keeping it at very overbought levels.  The VIX rose 5 ½%; while it remained below its 100 day moving average and in a short term downtrend, it closed above its 200 day moving averages (if it remains there through the close on Tuesday, it will revert to support).

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 {18093-20153}, [c] in an intermediate term uptrend {11568-24418} 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 uptrend {2111-2453}, [d] in an intermediate uptrend {1995-2597} and [e] in a long term uptrend {881-2419}. 

The long Treasury took another big hit (-1.25%) on big volume (again), 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 very short term downtrend.  Plus it is now approaching a challenge of its short term trading range, with the lower boundary of its intermediate term trading range not that much further down.

GLD was down again, ending below its 100 day moving average (now resistance), below its 200 day moving average (now resistance), below another Fibonacci retracement level and below the lower boundary of its short term downtrend.  

The dollar sold off, finishing back below the upper boundary of its former short term trading range (it had reset on Monday, then fell back below it Tuesday, then pushed over it on Wednesday and is now back below it), putting the challenge of the short term trading range back into question.

Bottom line: the Averages continue to futz around, consolidating from the recent post-election run up.  I have been talking about this development for a week; therefore, I am not surprised by the pin action.  To date, it has been a bull’s dream (sideways action versus a sharp decline).  Until or unless it turns into something different, my assumption remains that a challenge of the upper boundaries of the indices long term uptrends is in our future.  

The sharp retreat in bond prices is a growing concern in that the higher rates go, the bigger challenge they pose to stock valuations.  If TLT successfully challenges the lower boundaries of its short and intermediate term trading ranges, I think that equities will pick up a headwind.



            Lots of data released yesterday and with a negative tilt: the November Markit manufacturing PMI and the ISM manufacturing index were better than anticipated, while November light vehicle sales, November retail chain store sales, October construction spending and weekly jobless claims were below estimates.

            Overseas, November Chinese Markit manufacturing and services PMI’s came in better than expected; the November EU Markit manufacturing PMI was in line; the November UK Markit manufacturing PMI was below estimates.

            Overall, a mixed performance.  Once again, I was focused on other news events:

(1)   ECB surprised by stating that an end to its bond buying program was in sight.  To be sure, it suggested a long time horizon.  But I still thought it a bit unusual right ahead of the Italian referendum which could lead to liquidity problems in the already troubled banks---to which the ECB has already said it would step in with additional bond purchases if needed.

(2)   China imposes another layer of currency controls.  No one seems the least bit concerned about this.  But it is another form of monetary tightening which the Fed and now the ECB have already stated that they intended to do.  As you know, I believe that global monetary tightening will be the driving force behind equity price mean reversion.  


(3)   finally, yesterday, the Donald stated in a speech that if any company moved jobs overseas there would be ‘consequences’.  Not what I want to hear in the ‘new atmosphere’ of positive structural changes in the US economy.  In my opinion, trading one form of regulation for another is not progress.  Now this may be the Donald once again shooting his mouth off and not really meaning it.  After all, we can’t expect him to do a complete turnaround in a few short weeks.  That said, if he means it, that will certainly dampen investors’ enthusiasm.

Bottom line: in the midst of all the upbeat US economic data and the Trump rally, I think the currency/dollar funding problems in China are being overlooked.  Plus for the first time the Donald sounded a sour note.  Investors didn’t seem to care; and to be fair, they have had a lot to be positive about.  But you know me, I always have to have something to worry about. 

That said, I still believe that longer term, if the Donald/GOP delivers on their  promises, the economy will be better for it.  The question is, will valuations?  And that is where the rub comes.  In my opinion, current valuations can’t be justified even in an improved secular economic environment.  Stocks may challenge their long term uptrends in the short run fueled by Trumponomics.  Longer term, the numbers just don’t work.

            The latest from Jeff Gundlach (short):

            Latest on valuation.


       Investing for Survival
            Mental scar tissue.

    News on Stocks in Our Portfolios

   This Week’s Data

            November light vehicle sales were down from October but slightly more than expected.

            November retail chain store sales growth was less than in October.

            The November Markit manufacturing PMI came in at 54.1 versus estimates of 53.9.

            The November ISM manufacturing index was reported at 53.2 versus forecasts of 52.3.

            October construction spending was up 0.5% versus consensus of up 0.6%.

                November nonfarm payrolls grew 178,000 versus projections of 170,000; however, the October number was revised from 161,000 to 142,000; the unemployment rate registered 4.6%.


            Private fixed investment at recessionary levels (short):

            Missing the big economic picture (medium):

            A view of corporate profits from an optimist (medium):



Trump’s businesses and the Constitution (medium):

Trump’s Secretary of Defense nominee (medium):

  International War Against Radical Islam

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