The Morning Call
4/23/18
The
Market
Technical
Last
week, the S&P challenged both the upper boundary of its very short term
downtrend and its 100 day moving average on heavy volume and failed. That leaves it in the narrowing gap between
its 200 day moving average and the upper boundary of its very short term
downtrend. A break of either level would
suggest a move in the direction of the break.
Talk
about a sharp reversal, TLT got hammered Thursday and Friday. The
very short term uptrend was negated, leaving downward pressure from its 100 and
200 day moving averages and its short term downtrend. A big test appears to be near as TLT
approaches the lower boundary of its long term uptrend. A successful challenge will break a thirty
year plus bull market in bonds and would have major implications for Fed policy
(it will be very difficult to lower short rates when long rates are rising) and
stock valuations (higher yields make bonds more competitive with stocks).
The
dollar broke above the upper boundary of its intermediate term downtrend (if it
remains there through the close on Wednesday, it will reset to a trading range),
finished right on its 100 day moving average and is close to pushing out of the
current three and a half month trading range.
That the dollar would rally hard as bond yields are spiking is very
consistent with historical trading patterns (bonds become a more attractive
investment for foreigner; so they have to buy dollars in order to buy bonds).
Gold
was hit hard Thursday and Friday on decent volume. Again that is not surprising in the face of
rising interest rates. The good news
(for gold investors) is that it is holding above its 100 and 200 day moving
averages and the lower boundary of its short term uptrend. Whether it can stay in an uptrend depends of
why yields are up: if it is due to strong economic growth, gold should decline;
if it is due to inflation fears, it should rise or, at least, hold its own.
The
VIX challenged its 100 day moving average and was unsuccessful. So for the moment, volatility is not going
away; and that suggests some downward bias to the Market.
More
charts:
Oil
breaking to the upside (short):
More
on oil prices (medium):
The
Markets are speaking and no one is listening (medium):
Bottom
line: the big question at this moment is, was the Thursday/Friday pin action
across all asset classes a sign of a major shift in the economic/Market
narrative (i.e. weaker growth and higher inflation) or was it just a short term
worry that will soon pass.
Fundamental
Headlines
Last week’s
dataflow was mixed including the results of three primary indicators. Score: in the last 132 weeks, forty-four were
positive, sixty-two negative and twenty-six neutral.
Say boys and
girls, can you say ‘stagflation’? (medium):
The Fed released
its latest Beige Book; the bottom line of which was (1) consensus that the
economy is continuing to expand at a moderate pace and (2) heightened worries
about the potential impact of tariffs on inflation.
Overseas,
the numbers weren’t as upbeat with most of the poor data coming from the EU and
China.
Problems
in Germany (medium):
Was
2017 the economic growth peak for the EU? (medium):
Draghi
admits EU economic growth may have peaked (short):
Chinese
bond yields declining (medium):
US/China
trade war truce? (medium):
IMF
sounds the alarm on global debt (medium):
Morgan
Stanley and B of A believe that the end of the credit cycle is near (medium):
Bottom
line: the long term secular economic growth rate is being pulled in both
directions. Deregulation and a potential
improvement in trade are positive forces while the endless, massive deficits
will act as a drag. On a shorter term
basis, the economic growth rate is slowing as tax cuts are not having the
positive impact that originally thought and the global economy appears to be
losing steam.
In
the meantime, the Fed is tightening monetary policy---not a plus in the face of
economic weakness. Even worse, the Fed
may not have the option to switch back of easing as inflationary forces seem to
be increasing.
A
weakening economy and a tightening Fed is not a combo historically beneficial
to stock prices.
News on Stocks in Our Portfolios
Revenue of $4.59B (+17.4% Y/Y) beats by $100M.
Revenue of $2.76B (+8.7% Y/Y) beats by $50M
Revenue of $16.28B (+4.3% Y/Y) beats by $60M.
Revenue of $7.83B (+13.6% Y/Y) beats by $20M.
Kimberly-Clark (NYSE:KMB): Q1 EPS of $1.71 in-line.
Revenue of $4.7B (+4.9% Y/Y) beats by $90M.
Economics
This Week’s Data
US
The
March Chicago national activity index was reported at .10 versus expectations
of .29.
International
The
April Markit EU manufacturing PMI came in below estimates, however the services
and composite PMI were above.
Other
What
I am reading today
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