Wednesday, January 17, 2018

The Morning Call---It was just one day

The Morning Call

1/17/18

The Market
         
    Technical

The indices (DJIA 25792, S&P 2776) soared in early trading, reversing intraday and finishing down on the day.  The Dow even traded through the upper boundary of its short term up trend and fell back below it.  Volume was huge.  As expected, breadth weakened but not as much as I would have thought.  Still it was a single day’s pin action.  And as I am fond of saying, one day does not a trend make.  The key is follow through.

  Long term, the Averages remain robust 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 their long term uptrends. The technical assumption has to be that stocks are going higher. 

 The VIX soared 15%.  But it opened higher as the indices sprinted upward and then rose through the rest of the day.  I noted yesterday, it has almost entirely divorced itself from any (inverse) correlation with stocks in the past week.  I think that means one of two things and perhaps both: (1) somebody in stock land is doing serious hedging [of their equity positions] and (2) volatility will likely be much higher going forward than it was in 2017.

The long Treasury slipped fractionally, remaining in the zone between its 100 day moving average and the upper boundary of its very short term downtrend (on the upside) and the 200 day moving average and the lower boundaries of its short term trading range and its long term uptrend---leaving us with little clear directional information. 

The other indicators that I follow continue to point to lower interest rates---GLD up, the dollar down (big).

Bottom line: while big intraday reversals can portend a change in trend, it was still but one day of trading.  Follow through.  The current weight of technical evidence is that stocks appear likely to go higher.  Nevertheless, I remain uncomfortable with the overall technical picture.

    Fundamental

       Headlines

            As has been the case for the last week, the Market was the news yesterday.  The initial spike in the indices was just a continuation of the recent melt up.  What led to the reversal is what was on investors’ minds.  There seems to be four possible reasons:

(1)  rumors regarding Steve Bannon’s testimony before congress.  The worry being that he knows whatever skeletons exist in Trump’s closet---‘whatever’ being the operative word---and that could lead to real turmoil in DC,

(2) the crypto currency got hammered.  Having said that, I have no idea if there is any real price correlation between them and equities.  Their pin action may just be coincidental,

(3) Friday is the deadline for a budget or continuing resolution vote as well as DACA/Wall debate that seems to have attached itself to the budget outcome like a bad case of herpes.  Who knows what the ruling class will do,

(4) stocks were overbought and any excuse would do to start a correction.

            Bottom line: stocks were over bought and that is all the reason needed for a selloff.  However in addition to being overbought, they are also overvalued (in my opinion).  I have no idea whether this condition gets corrected by investors recognizing the math or gets triggered by some random exogenous event, like Steve Bannon congressional testimony.  But I believe that it will occur.  To the extent that you are invested, that is good news.  But if volatility increases (which it has clearly been doing) that may be a less comforting position than it has been for the last year.  I think it wise to own some cash for your own protection.  As you know, I am 50% invested and sleeping well.

            Morgan Stanly on the impact of the tax cut and its effect on valuations (medium):

            The forgotten bull market.  What the author neglected to mention is that this bull market started at P/E levels in the mid-single digits (short).

                As a counterpoint, this article, while a bit long, addresses the issue of likely future returns and thus, why this time is not different (long):

           
    News on Stocks in Our Portfolios
 
            Automatic Data Processing (NASDAQ:ADP) declares $0.63/share quarterly dividend, in line with previous

Economics

   This Week’s Data

            US

            Weekly mortgage applications rose 4.1% while purchase applications were up 3.0%.

            International

             The December EU CPI rose 0.4%, in line.

   Other

            Here an upbeat assessment of the tax bill (medium):

            NY Fed introduces a new inflation measure (short):

            Goldman on the impact of the tax cut on wages (medium):

                Risks of a trade war with China (medium and a must read):

What I am reading today

            Something doesn’t make sense.

            Make yourself useful (short):

            Common scams to take your money and how to avoid them (medium):

            Four social security statistics that will scare you (medium):

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