Thursday, May 31, 2018

The Morning Call--The 'buy the dip' crowd still has muscle


The Morning Call

5/31/18

The Market
         
    Technical

The Averages (DJIA 24667, S&P 2742) recovered most of Tuesday’s loses.  Volume declined and breadth improved.   The Dow finished below its 100 day moving average for the third day, reverting to resistance.  The S&P ended back above its 100 day moving average, voiding Tuesday’s break.  Both remained above their 200 day moving averages (now support).  The Dow is in a short term trading range, the S&P in a short term uptrend. 

The resistance from the 100 day moving average is having, at least, a short term impact on upside momentum.  Until that barrier can be overcome by both indices, stocks are at stall speed.  Longer term, the assumption is that stocks are moving higher.
               
                The VIX declined 12%, but still finished above its 200 day moving average for the second day (now resistance; if it remains there through the close on Friday, it will revert to support), above the upper boundary of its short term downtrend for a second day (if it remains there through the close today, it will reset to a trading range).  However, it did bounce down from its 100 day moving average.

The long Treasury was down ½ % on high volume, ending over its 100 day moving average for the second day (now resistance; if it remains there through the close today, it will revert to support), but back below its 200 day moving average, voiding Tuesday’s break (now resistance).  It remained within its long term uptrend and short term downtrend.

The dollar fell ¾ %, but still closed in both short term and very short term uptrends as well as above its 100 and 200 day moving averages (now support).
               
GLD was up slightly, but not enough to impact major trends: ending below its 100 and 200 day moving average (now resistance) and in a short term downtrend.
               
Bottom line: clearly, the ‘buy the dips’ crowd still has some muscle, though they  need to push the Dow above its 100 day moving average to confirm any return to short term upside momentum.  That said, I think confusion/uncertainty best describes the pin action since mid-May.  Plus, notwithstanding yesterday’s performance in stocks, the action in all the indices that I follow suggests to me that the underlying Market narrative is becoming more muddled.

            More on the leverage in the Market (medium):


    Fundamental

       Headlines

Yesterday’s economic stats were tilted to the downside: weekly mortgage and purchase applications fell, the April ADP private payrolls report was disappointing while the second estimate of first quarter GDP was in line and the April trade deficit was less than anticipated.  Nothing earth shaking here.

The Fed released its latest Beige Book which read much like the April edition: economic activity rising moderately, prices rising moderately and concern about trade.  The interesting part is the discussion of the tight labor market and how companies are dealing with it (see the below link).  Bottom line: nothing here to alter expectations on Fed policy.

Overseas, the data was better (for a change).  April German unemployment fell slightly and April Japanese retail sales were up strongly.

            In addition, the political turmoil in Italy subsided, at least, for a day.  As I noted yesterday, there is no way of knowing whether this is just a lot of smoke or if there is really a potential/economic disaster in the making; and we won’t know for some time.  Meanwhile, our Markets will likely still be subject to the volatile politics of that country.

            ***overnight developments in Italy (medium):

            Will turmoil in Italy derail Fed plans? (medium):

            Bottom line: equities are overvalued as a part of the whole thesis of the mispricing and misallocation of assets.  In my opinion, that condition won’t be corrected by a recession; although currently the Street economic forecasts are overly optimistic.  That condition could be corrected by the unwind of QE; but that assumes that the Fed will continue tightening even when the bond market decides it doesn’t like that.  Or that condition could be corrected following some exogenous event that wakes up investors to economic/valuation reality.  I have no idea what triggers the correction.

***overnight, tariffs on EU steel and aluminum will likely go into effect today (medium):

            ‘Noise’ in the investment process (medium and a good read):

    News on Stocks in Our Portfolios
 
Donaldson (NYSE:DCI): Q3 EPS of $0.53 beats by $0.01.
Revenue of $700M (+15.1% Y/Y) beats by $17.32M.
           

Economics

   This Week’s Data

      US

            Weekly jobless claims fell 13,000 versus expectations of down 10,000.

            April personal income rose 0.3%, in line; personal spending was up 0.6% versus estimates of +0.4%.

     International

    Other
           
            Truck tonnage is rising (short):

            Entitlements and the US deficit/debt (medium):

            Here is a rundown of legislation that partially rolls back portions of Dodd Frank.  This is in distinction from measures that the Fed is considering that would allow an expansion of banks’ prop trading activity (medium):

What I am reading today

            How much do you need to save for retirement? (medium):

            Fossilized skull of half mammal, half reptile may re write history (medium):

            The ongoing battle over the US’s Iranian sanctions (medium):

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