Wednesday, March 22, 2017

The Morning Call--Maybe things aren't so awesome after all

The Morning Call


The Market

The indices (DJIA 20668, S&P 2344) had their worse day in months.  Volume popped; breadth was weaker.   The VIX (12.5) was up 11%, bouncing off of the lower boundary of its very short term uptrend and ending below, but very close to, its 100 day moving average, below its 200 day moving averages (now resistance) and in a short term downtrend.  It appears that the thesis that the period of complacency could be ending remains in place.
The Dow closed [a] above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] in a short term uptrend {19104-21431}, [c] in an intermediate term uptrend {11884-24736} and [d] in a long term uptrend {5751-23298}.

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 {2234-2568}, [d] in an intermediate uptrend {2072-2676} and [e] in a long term uptrend {881-2561}.

The long Treasury was up 0.86%, but closing right on its 100 (now resistance) below its 200 day moving average (now resistance) and in a very short term downtrend.

GLD rose 0.82%, finishing above its 100 day moving average (now support), below its 200 day moving average (now resistance) and within a short term downtrend. 

The dollar fell, ending below its 100 day moving average (now resistance), above its 200 day moving averages (now support) and in a short term uptrend.

Bottom line: investors seemed to have realized that everything is not awesome, prompted by indications that Trumpcare isn’t going to occur on schedule (this Thursday); and as a result, tax reform and infrastructure spending won’t either.  Both of the Averages closed well below the lower boundaries of their very short term uptrends. 

If they remain below those boundaries through the close today, the trends will be negated.  However, even if that occurs, investor psychology has been so strong for so long, it is too soon to say anything other than the Market had a bad day.  As always follow through is the key.   If we do get further downside, the next visible support level is the lower boundaries of the indices’ short term uptrends.  While that maybe another 5% lower (1) it is probably unrealistic for investors to have expected the current sustained rally to have continued without some kind of correction and (2) until those short term uptrends are successfully challenged, there is no reason to assume that viability of the current bull market is in question.

            Who are the buyers and sellers? (medium):



            Only two minor datapoints were released yesterday: the fourth quarter current account deficit was less than expected while month to date retail sales growth declined from the prior week.

            Overseas, February UK inflation came in hotter than anticipated; in fact, it was above the Bank of England’s stated goal.

            What appeared to be driving yesterday’s Market was that the ongoing internal GOP battle over healthcare reform seems deadlocked---meaning a possible delay in its enactment which in turn means a delay in tax reform and healthcare reform.  I don’t believe that delay implies defeat.  Indeed, I have repeated opined that we were likely to see healthcare reform, tax reform and infrastructure spending in some form.  My problem has been that I thought that investors were too optimistic regarding both the magnitude and timing of their passage.  That notion looks like it has at long last began to infringe on perceptions. 

            Bottom line: to be clear, the Trump euphoria could return quickly if the GOP works out a healthcare compromise that will insure passage in short order; and Monday may be soon forgotten. However, even if that doesn’t occur, investors recognizing their inflated euphoria about a Trump fiscal/regulatory agenda (if indeed that is what is happening) doesn’t mean the Market is starting to mean revert.  Much more has pushed valuations to current heights than just the post-election happy dance---not the least of which are two decades of fiscal irresponsibility and a decade on monetary irresponsibility.  It is only when Market participants realize the likely consequences of those problems will they return stock prices to Fair Value.  The question is, do they figure it out before the fact or does reality have to smack them between the eyes with a 2x4?

            The latest from Doug Kass (medium):

            More on valuations (medium):

            A look at adjusted EPS (medium):

            My thought for the day: the most important portfolio management decision you can make is how to allocate your assets (how you divide up your portfolio between stocks and bond, between international and domestic stocks and among alternative asset classes, e.g. REITs, MLP’s gold, etc.)  Every portfolio reflects that decision whether it is done consciously or not.  So it is crucial that we objectively see the tactical and strategic choices before us which will allow us to move ahead in a productive way that’s likely to satisfy our specific investment goals. 

This is a subtle but powerful point because if you can recognize the true nature of the portfolio options available, that will help you make intelligent choices.  Thinking in these terms will keep you focused on the risks you’re taking---and as I harp on continually, risk is far and away the most important element to control in portfolio management.  Your choices are almost limitless---I included only a few above.  But making those choices carefully is an important element in keeping you out of trouble; because there’s overwhelming evidence that you can’t earn a decent return in the long run unless you have a solid plan for steering clear of big mistakes in the short term.

       Investing for Survival
            The trick is to survive.

    News on Stocks in Our Portfolios
Nike (NYSE:NKE): FQ3 EPS of $0.68 beats by $0.15.
Revenue of $8.43B (+5.0% Y/Y) in-line


   This Week’s Data

            Month to date retail chain store growth slowed slightly from the prior week.

            Weekly mortgage applications fell 2.7% while purchase applications declined 2.0%.


            Jobs that have been ‘insourced’ into the US (medium):

            More on declining used car prices (medium):

            Here is a much broader look at bank lending (medium):



Current problems with Ryancare (medium):


            Kicking butt at the UN (medium):

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