Wednesday, February 7, 2018

The Morning Call--Follow through---in which direction?

The Morning Call

2/7/18
The Market
         
    Technical

The indices (DJIA 24912, S&P 2495) staged a big recovery yesterday.  Intraday, both of the Averages touched and bounced off their 100 day moving averages and the lower boundaries of their very short term uptrends.  So all trends remain intact.  That said, this kind of dramatic oversold bounce is not unusual in the midst of a Market waterfall formation. Volume rose; and breadth improved. While it may be too soon to pronounce that the worst is over, the technical assumption remains that stocks are going higher. 

The VIX fell 20%, but still closed above the upper boundary of its short term trading range for a third day, resetting to an uptrend---not a good sign for the bulls. 

The long Treasury declined on big volume.  It remains in a very short term downtrend, a short term downtrend and well below its 100 and 200 day moving averages. It continues in a technical no man’s land---but just barely.  The only remaining support level is the lower boundary of its long term uptrend.

The dollar was up five cents, but did little to improve an otherwise sick chart.
           
GLD dropped 1%, falling out of a very short term trading range.  Like TLT, investors felt comfortable selling a ‘safety trade’.

Bottom line: OK, so stocks have set a very short term low.    What I am focused on now is the extent of the rally; that is, will the indices reach their former highs and take them out or not. If they do, the momentum will remain to the upside, the current stomach churning sell off notwithstanding.  If not, then will any subsequent decline take out Monday’s low?  The results should give us an idea of whether we are in the midst of a hiccup (which was long overdue) or a reversion to a valuation mean.

    Fundamental

       Headlines
      
            Yesterday’s economic data was downbeat---the January trade deficit and month to date retail store sales were both disappointing.

The ruling class continues to jerk itself off.  Yesterday, the house passed its version of a continuing resolution; but to insure the senate dems remained pissed off, Trump says that he is ready to shut down the government over immigration (short):

Bottom line: the Market pin action remained the center of attention yesterday, as everyone breathed a sigh of relief.  If volatility moves lower, investor focus will likely return to earnings reports, the economic data and the clown show going on in Washington.

The net effect of the recent price decline did little to alter the overvaluation of stocks.  So my strategy remains unchanged: own enough cash to sleep well if the Market drops 30-50%.

            Don’t bank on strong earnings growth to sustain this market (medium):

            Counterpoint:

            More good advice (medium):

Economics

   This Week’s Data

      US

            Month to date retail chain store sales grew less rapidly than in the prior week.
           
            Weekly mortgage applications rose 0.7% while purchase applications were flat.

     International

    Other

            Paying the price for the Fed’s experiment (medium):

            The Fed’s QE unwind accelerates (medium):

What I am reading today

            A skeptical look at the Buffett/Bezos/Dimon proposal for healthcare reform (a bit long):

            New technology uncovers Mayan megalopolis (medium):

                In investing, simple is better (short):
  

Boeing’s new hypersonic aircraft (medium):

                The latest out of Syria (medium):

                Update on student loans [defaults] (medium):


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