Friday, March 23, 2018

The Morning Call---Is China leaving an opening for negotiations?


The Morning Call

3/23/18

The Market
         
    Technical

The indices (DJIA 23957, S&P 2643) were hammered yesterday.  Volume rose, and breadth was negative.  Both of the Averages closed below their 100 day moving averages; if they remain there through the close next Monday, they will revert to resistance.  In addition, the Dow finished below the lower boundary of its short term uptrend; if it remains there through the close next Monday, it will reset to a trading range.  Finally, they are still in a very short term downtrends. 

The question that I have posed the last couple of days: if there is more downside, will it be big enough to begin successfully challenging those moving averages and uptrends?  Clearly, the answer is that it has.  However, yesterday’s challenges have yet to be successful; and there is still plenty of support lower down.  In short, it is way too soon to be predicting that a high has been made or that momentum is reversing to the downside.

The VIX soared 31%, ending above its 100 and 200 day moving averages and the lower boundary of its short term trading range.  However, despite yesterday’s moonshot, it has not yet established a very short term uptrend.

The long Treasury was up 1% on big volume, enough to confirm the break of a very short term downtrend.  Indeed, if the recent uptrend continues a couple more days, it will establish a very short term uptrend.   The pin action of the last two days suggests investors are moving into Treasuries either as a safety trade or the belief that rates are going lower.  Based on equities performance, you would think that their motivation was the safety trade.  But neither GLD’s nor the dollar’s action support that notion.  That said, TLT is still below its 100 and 200 day moving averages and in an intermediate term downtrend.  So like stocks, at the moment, bonds are just in a short term countertrend movement.

The dollar was up fractionally.  Certainly not an indication that it was being sought out as a safety trade.  While it is struggling to stabilize, the trend remains down.

GLD was down ½ %, again not what you would expect if investors were running for cover.  Further, there may have been some profit taking after Wednesday’s big move up.  It does remain above its 100 and 200 day moving averages and within a short term uptrend, which would indicate a bet on lower interest rates and a softer economy. 
               
Bottom line: while the technicals of the equity market point higher for the long term, some cracks are starting to appear in that thesis.  Granted these may only be short term issues; but clearly, investors have to be on alert especially given the recent switch in investor psychology from ‘buy the dips’ to ‘sell the rips’.  

I am confused by yesterday’s aggregate pin action in TLT, UUP and GLD.

            Timing the consensus fade (medium):

            Yesterday in charts (medium):

    Fundamental

       Headlines

            The economic releases yesterday were negative in total: weekly jobless claims and the March Markit flash PMI’s were disappointing, the March Kansas City Fed manufacturing index was flat and the February leading economic indicators were above expectations.  However, like Wednesday, the positive indicator was primary; so the reading wasn’t so bad.

            There were lots of other news to consider.

(1)    we got more details on the new spending bill [I mistakenly stated that the bill had passed.  In fact, the house approved it yesterday afternoon and the senate last night.]  That aside, investors are starting to focus on the impact of higher deficits/debt on economic growth.

                  Is ‘crowding out’ returning with a vengeance? (medium):

(2)    US trade rep announced details of China trade tariffs (medium):

China, of course, responded with indignation.  But what did it do?  It raised tariffs totally $3 billion against US goods---as opposed to Trump’s $50 billion.  Sounds to me like they are leaving lots of room for negotiations.

And speaking of negotiations, Trump suspended the steel/aluminum tariffs on multiple nations.
           
                       Trump and tariffs (medium):

(3)   it is finally dawning on investors that higher interest rates and the runoff of the Fed balance sheet might not be such a great thing.

                       Powell raises doubts about the value of the yield curve as a recession predictor
                  (medium):

                 More thoughts on the Fed meeting (medium):

                The Fed doesn’t know what causes inflation (medium):

    The latest from Bill Gross (medium):

               The LIBOR rate blowout moves to investment grade credit (medium):
           
(4)   not helping matters is Trump taking off the gloves with Mueller (medium):

Bottom line: I guess we have reached the point where bad news is definitely bad news.  Investors got a snoot full of it yesterday.  The problem is that many of the issues facing the Market are not going to be reversed anytime soon: the deficit isn’t going away---and if I am correct, its effect will hinder economic growth; there is no indication that the Fed is going curb its quantitative tightening anytime soon.  Indeed, if Market rates keep rising, the Fed will be forced to follow---just as it has so many times in the past; Trump is not going to get less aggressive with Mueller---that may only get worse. 

The only shot for better news is if the Trump/Chinese trade faceoff dissipates; and that is the issue that is presently causing the most heartburn.  Given what is now happening with NAFTA, the steel/aluminum tariffs and China’s initial response that doesn’t seem that farfetched.  Investors (and I) can only hope.               

                Cash no longer trash (medium):

    News on Stocks in Our Portfolios
 
Nike (NYSE:NKE): Q3 EPS of $0.68 may not be comparable to consensus of $0.53.
Revenue of $8.99B (+6.6% Y/Y) beats by $140M.
           

Economics

   This Week’s Data

      US

            The March Markit flash manufacturing PMI came in at 55.7 versus expectations of 55.4, services PMI 54.1 versus estimates of 55.7 and composite 54.3 versus forecasts of 55.2.

            The February leading economic indicators rose 0.6% versus consensus of up 0.3%; January was revised down from 1.0% to 0.8%.

                        The March Kansas City Fed manufacturing index was reported at 17, unchanged for February’s reading.

                        February durable goods orders rose 3.1% versus forecasts of +1.7%; ex transportation, they were up 1.2% versus projections of up 0.6%.

     International

    Other

What I am reading today

            How much savings do you need? (medium):

            The demise of easy pickings (medium):

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