Friday, September 22, 2017

The Morning Call--Stocks can go down?

The Morning Call

9/22/17

The Market
         
    Technical

Surprise, surprise, the indices (DJIA 22359, S&P 2500) can actually decline.  Volume fell; breadth weakened.  Both remain above their 100 and 200 day moving averages and are in uptrends across all time frames. 

The VIX (9.6) fell again (despite a down Market day), leaving it below the upper boundary of its short term downtrend, below its 100 day moving average (now resistance) and below its 200 day moving average (now resistance).  It is now below the lower boundary of its long term trading range, drawing near its former all-time low (8.8).  The question as to whether or not the VIX has bottomed is about to be answered.

The long Treasury was down pennies, but still finished above its 100 and 200 day moving averages (both support) and the lower boundaries of its short term trading range and its long term uptrend.  Conversely, yields on shorter term maturities are rising.  That means that the yield curve is flattening.  Historically, that has pointed to a weakening in the economy---not the consensus view right now and certainly not in line with the reasons the Fed gave for the start of its balance sheet unwinding.

The dollar declined, remaining in short term and very short term downtrends and below its 100 and 200 day moving averages and in a series of seven lower highs. 
           
GLD continues to fall, but still ended above its 100 and 200 day moving averages (both support) and the lower boundary of a short term uptrend.

Bottom line: long term, the indices remain strong viz a viz their moving averages and uptrends across all timeframes. Short term, they are above the resistance level marked by their August highs, meaning that there is no resistance between current price levels and the upper boundaries of the Averages long term uptrends.

On the other hand, all those gap openings among the major indices still need to be closed. 

Finally, the first two days of trading in the major indicators I track following the Fed tightening suggests that its move was pretty much discounted---except for GLD and TLT.  My bet is that this state of affairs isn’t going to last---the operative words being ‘my bet’.

I remain uncomfortable with the overall technical picture.

    Fundamental

       Headlines

            Yesterday’s US economic stats were upbeat: weekly jobless claims fell versus expectations of an increase; plus the September Philly Fed manufacturing index and the August leading economic indicators were ahead estimates.

            Overseas, the Bank of Japan left monetary policy unchanged---not unexpected.   Moody’s downgraded China’s credit rating due to soaring debt growth.   Pardon me for mentioning Reinhart/Rogoff again, but if their thesis is correct, then the high growth rate of the Chinese economy may be about to ratchet down. 
           
            ***overnight, the September EU manufacturing and services flash PMIs’ were above forecasts; North Korea ups the ante, threatening to detonate a hydrogen bomb in the Pacific; Kurdish referendum adding fuel to Middle East internecine battles.

            Aside from the expected debates on the meaning of the Fed’s change in policy and the likely results, the big event of the day was another ramp up in sanctions against North Korea.  Unfortunately, the more severe these sanctions get, the more they put the US in a position of confronting Korea’s major sponsors---China and Russia.  The risks of a misstep with these guys has much larger consequences than with the poorest, most backward nation on the planet.
           
            Bottom line: the economy is not as healthy as the Fed’s action would indicate; and the bond market (i.e. the flattening yield curve) is telling us so.  As you know, I have a lot more confidence in the forward judgement of the bond market than the stock market.  As long as bonds are telling me that my forecast is correct, I am sticking with it.

More on investor optimism (medium):

       Investing for Survival
   
            Make your point and get out of the way.
           

    News on Stocks in Our Portfolios
 
            McDonald's (NYSE:MCD) declares $1.01/share quarterly dividend, 7.4% increase from prior dividend of $0.94.

Economics

   This Week’s Data

            August leading economic indicators rose 0.4% versus expectations of +0.2%.

   Other

            Household wealth hits record high (medium):

Politics

  Domestic

  International

           
           


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