Wednesday, May 16, 2018

The Morning Call---The key is follow through


The Morning Call

5/16/18

The Market
         
    Technical

The Averages (DJIA 24706, S&P 2711) took it on the chin yesterday---not all that surprising given they were well overbought.  Breadth was lousy; volume was up.   The S&P ended right on its 100 day moving average (now support); but the Dow back off its 100 day moving average (now resistance), having closed right on it on Monday.  As you know, the S&P completed a successful challenge of its 100 day moving average on Monday. Yesterday’s retreat raises the question of a false flag.  In particular in light of the Dow’s performance.  That said, at this point, the assumption is that yesterday’s pin action was merely a normal price reaction to an overbought condition.

Both remained above their 200 day moving averages.  The DJIA closed in a short term trading range but in intermediate and long term uptrends.  The S&P is in uptrends across all timeframes.  Longer term, the assumption is that equity prices will continue to rise.

                The VIX was up 12 ½ %, ending below its 100 day moving average (now resistance) but back above its 200 day moving average which had reverted to resistance on Monday.  Like the S&P, it could be a false flag; still if it remains there through close on Friday, it will revert back to support.  It also finished in a short term downtrend which had reset Monday from a trading range.  Again, Monday could have been a false flag.

The long Treasury plunged 1 1/8 % on huge volume, finishing below the lower boundary of its long term uptrend for the fourth time this year.  If it remains there through the close next Tuesday, it will reset to a trading range.  It continues below its 100 and 200 day moving averages and within a short term downtrend.

            Putting rising rates in perspective (medium):

            The latest from Bill Gross (medium):

The dollar was up ½ %, closing right on the upper boundary of its newly reset intermediate term trading range and above its 100 and 200 day moving averages (now support).

GLD fell 1 ½ %, ending below its 100 day moving average (now resistance), below its 200 day moving average (now support; if it remains there through the close on Friday, it will revert to resistance) and below the lower boundary a newly reset short term trading range (if it remains there through the close on Thursday, it will reset to a downtrend).
               
Bottom line: clearly, there was a lot going on yesterday, technically speaking.  What seemed to be driving it all was the fall in the long Treasury (suggesting higher inflation and a less accommodative Fed), that pushed the dollar higher, gold and stocks lower.  To be sure, one day’s pin action is almost meaningless in the scheme of things; so I see little reason for concern about Market direction. 

That said, if the current challenges by bonds, the dollar and gold to resistance/support levels prove successful, that would suggest an economic scenario (rising interest rates, rising inflation, a tightening Fed) that is somewhat at odds with moderate growth with low inflation narrative being talked up in stock circles.  As always, follow through is key.

    Fundamental

       Headlines

            Yesterday’s economic stats were up generally positive: the May housing market index, month to date retail chain store sales and the May NY Fed manufacturing index were upbeat.  More mixed: March business inventories were below estimates but sales were strong and April retail sales were flat though ex autos they were below forecasts.

            Overseas, the data was mostly disappointing: first quarter German GDP, April Chinese retail sales and fixed investment missed projections while April Chinese industrial production was better than anticipated.
      
            The main political headline was North Korea canceling its meeting with South Korea which probably added some jitters to the Market (short):

                ***overnight:

            However, equity investors seemed primarily focused was on the turmoil in the bond, dollar and gold markets.  I am not going to repeat the above except for the---

Bottom line: 99% of the time, one day’s pin action is meaningless in the long term scheme of things.
           
            Is making money in the stock market becoming more difficult? (medium):

            Results of the latest Fund Managers’ survey (medium):

    News on Stocks in Our Portfolios
 
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Economics

   This Week’s Data

      US

            Month to date retail chain store sales grew faster than in the prior week.

            March business inventories were flat with February versus expectations of a 0.2% increase; however, sales were up 0.5%.

            The May housing market index came in at 70 versus estimates of 69.

                        Weekly mortgage applications fell 2.7% while purchase applications were down 2.0%

            April housing starts declined 3.6% versus forecasts of up slightly.

     International

            April EU inflation was reported at 1.3% versus the ECB target of 2.0%.

            First quarter Japanese GDP fell 0.6%.  Boys and girls can you say ‘global synchronized growth’?

    Other

            Here is another reason why the long term secular growth rate of the economy is and will stay sub-par (medium and a must read):

            Regulators undoing Volcker rule; they never learn (medium):

            Update on big four economic indicators (medium):

            More pros and cons of Trump’s ZTE decision:

            Pro (medium):

            Con (medium):

            Open letter to Trump opposing tariffs (short):

            China and the US are still far apart on trade issues (medium):

What I am reading today

            The difference just 0.5% can make (medium):
            http://awealthofcommonsense.com/2018/05/just-half-a-percent/        

            Quote of the day (short):
           
            The perils of ‘recency’ bias (medium):


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