Friday, June 2, 2017

The Morning Call--How will the Fed react to the nonfarm payroll number?

The Morning Call


The Market

The indices (DJIA 21144, S&P 2430) made a nice move up out of their recent lethargy.   They continued to trade above their 100 and 200 day moving averages and the lower boundaries of uptrends across all major time frames.  Despite the advance, the Dow remained below its recent high (21228).  As I have opined previously in order for me to assume that the next targets for the Averages are now the upper boundaries of their long term uptrends, the Dow has to get through the 21228 level.   Volume fell; while breadth improved.

The VIX (9.9) declined 5%, ending ended below its 100 and 200 day moving averages, now resistance and within a short term downtrend.  It also closed below the lower boundary of its intermediate term trading range (if it remains there through the close next Tuesday, it will reset to a downtrend) and right on the lower boundary of its long term trading range.
The long Treasury was down slightly, remaining between narrowing distances in its 100 and 200 day moving averages and the upper boundary of its short term downtrend and the lower boundary of its long term uptrend. 

The dollar was up fractionally, finishing below its 100 and 200 day moving averages, within a very short term downtrend and a short term trading range. 

GLD was up, closing above its 100 and 200 day moving averages, within a short term trading range and continues to build a very short term uptrend.

Bottom line:  the technical issue remains, will the Dow successfully challenge its former high or will the S&P fall back, making this latest move up a false flag?  Given how well the S&P held 2402 along with its strength yesterday, I have to assume that the answer is the former.  But even if it is not, there is currently little danger of a trend reversal.


            Yesterday’s economic releases were again negative: weekly jobless claims rose, the May Markit PMI, April construction spending, May auto sales and May chain store sales were worse than expected while the May ADP private payroll report and the May ISM manufacturing support were better than estimates.

            Overseas, the European economy continues to improve as the May UK and EU Markit manufacturing PMI’s were above forecasts.
            The main headline of the day was Trump pulling out of the Paris Accord.  I am not going to get into the validity of the science of global warming; but I will say that both sides are predicting negative economic results from staying/opting out of the agreement.  Clearly, they both can’t be right and so far, I have seen little data to support either set of claims. 

I will note that the Market advanced smartly following the announcement, suggesting that investors see more benefits than negatives.  Of course, investors have bid stocks up on both good and bad news.

The Paris Accord:

Bottom line: the economic numbers this week will again be negative which prompts me to revise our short term economic forecast back to our prior position.  That notwithstanding, the Fed will apparently raise interest rates soon and maintains the narrative that more increases are likely in 2017 as well as a start in unwinding its giant economy sized balance sheet.  I continue to believe that this scenario will not end well.

            Regression to trend (short):

More on valuation (medium):

Note: in yesterday’s Morning Call, I mistakenly called Wednesday’s release of the Beige Book as FOMC minutes.  However, that doesn’t change my conclusions.

            My thought for the day.  From Barry Ritholtz, lies we tell ourselves.
We can avoid allowing our emotions impact our thinking and behavior
We don’t have many biases that affect the way we perceive the world around us
We can evaluate fund managers (mutual or hedge funds)
We can predict the future
We are saving enough for retirement
We can pick stocks better than owning a broad index
Even if we have biases, we are smart enough to be aware of them
We are process, not outcome, focused
The Media hasn’t affected our thinking about an investment
We know how well we are doing with our investments
We are making good choices based on empirical evidence, not myths
We don’t allow hype to get us excited and drive us to making bad decisions
We are not easily influenced by experts
We understand the fees, costs, expenses and taxes impacting our portfolio
We do not chase performance
We have a good plan, we understand it intellectually
We have the discipline to follow our plan, and not get distracted
I won’t make the same mistakes this time
We can actively trade in and out and show a profit
We are smarter than most of the people we know, therefore we are smarter than the market
    Investing for Survival
         Investment/general biases

Attribute substitution: if someone is asked a tough question they can’t answer, they’ll give an answer to a related, easier question all the while not answering the more difficult question. Example, if I ask how happy you are these days, you’ll likely respond about your current mood as opposed to my more general question about how you are “these days”. In this case, someone substitutes an easier question.

    News on Stocks in Our Portfolios

   This Week’s Data

            The May Markit PMI was reported at 52.7 versus expectations of 53.0.

            The May ISM manufacturing index came in at 54.9 versus forecasts of 54.6.

            April construction spending fell 1.5% versus an anticipated rise of 0.5%.

            May retail chain store sales came in weaker than April’s number.

            May light vehicle sales were disappointing.

            May nonfarm payrolls rose 138,000 versus estimates of 185,000.

            The April trade deficit was $47.6 billion versus consensus of $46.1 billion.


            S&P and Moody’s downgrade Illinois credit rating to near junk status (medium):

            Meanwhile, the corporate debt appears to be over (medium):



The real collusion (medium):

Quote of the day (short):

  International War Against Radical Islam

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