Tuesday, May 15, 2018

The Morning Call--My biggest question


The Morning Call

5/15/18

The Market
         
    Technical

The Averages (DJIA 24899, S&P 2730) got off to a great start yesterday, then gradually gave much of it back throughout the day.  Breadth continued to improve; volume was up.   The S&P ended above its 100 day moving average for a third day, reverting to support; the Dow finished right on its 100 day moving average.  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. 

With the S&P moving above their 100 day moving averages, the last piece of resistance is the Dow’s 100 day moving average; though it seems highly likely that challenge will be successful.  That done, the short term technical outlook will be positive with an objective of their former all-time highs.    Longer term, the assumption is that equity prices will continue to rise.
               
                The VIX was up 2 ¼ %, but remained below its 100 day moving average (now resistance) as well as its 200 day moving average for the fourth day, reverting to resistance.  It also finished below the lower boundary of its short term trading range for the third day, resetting to a downtrend. Clearly, the VIX is trading in line with a surging Market.

The long Treasury fell ½ %, falling back from a minor resistance level.  It seems that the weight of its 100 and 200 day moving averages and its short term downtrend are impacting it.  It now appears that another challenge of its long term uptrend is in the offing.

The three month Treasury now yields more than stocks (short):

The dollar was up fractionally, finishing close to the upper boundary of its newly reset intermediate term trading range and above its 100 and 200 day moving averages (now support).

            Plus rising dollar = tighter monetary policy (medium):

GLD continued to decline, falling back from its 100 day moving average (now resistance) but above its 200 day moving average (now support) and in a newly reset short term trading range.
               
Bottom line: once the Averages clear their 100 day moving averages (and we are now half way there)  the next visible resistance level is their former all-time highs.  I see no reason why those levels won’t be tested.

The other indicators that I follow aren’t breaking resistance (support) levels.  TLT backed off the lower boundary of its long term uptrend, the dollar felled back from the upper boundary of its intermediate term trading range.  That continues to point to a narrative that includes an improving economy but with little inflationary pressure.  Goldilocks.

    Fundamental

       Headlines
                       
                No economic data releases yesterday, either here or abroad.

                The news item of the day was Trump seemingly backing off the sanctions imposed on Chinese electronics firm (ZTE Electronics).  The pundits spent most of the day trying to figure out Trump’s motive.  Here is one from a (progressive/liberal) skeptic (medium):

                     Wilbur Ross on the subject (short):
                              
                   The other subject of debate was Trump’s new drug plan.

                    The cons of Trump’s drug plan (medium):

            The pros of Trump’s drug plan (medium):

Bottom line: free trade is good for the economy and ultimately good for the Markets.  Trump may not be going at it in a conventional manner; but nothing he does is conventional.  If he can achieve a freer and fairer trade regime, that is a plus.

Rationalizing our healthcare system to make it less expensive, absent bureaucratic oppression, is also good for the economy.   To be sure, virtually every piece of legislation foisted on the American electorate attempting to cut healthcare costs has ended up doing just the opposite.  So it is way too soon to assume Trump’s effort will turn out any different.  But if he is successful, it would be a positive.

                The question I try to answer every day is whether deregulation and the potential benefits from a revised trade regime and now perhaps improvement in the administration of our healthcare system are enough to offset the ill effects of an outsized national debt/deficit and an irresponsible Fed?  The answer is that there is almost surely some, but I don’t know by how much.  In my opinion, it is the biggest question with regards to the long term secular growth rate of the economy.

            Thoughts on valuation (medium):

            More (medium):

            And still more (short):

            Thoughts on bank debt (short):

    News on Stocks in Our Portfolios
 
Home Depot (NYSE:HD): Q1 EPS of $2.08 beats by $0.02.
Revenue of $24.95B (+4.4% Y/Y) misses by $270M.

Economics

   This Week’s Data

      US

            April retail sales rose 0.3%, in line; ex autos, they were up 0.3% versus expectations of +0.5%.

            The May NY Fed manufacturing index came in at 20.1 versus estimates of 15.5.

     International

            First quarter German GDP was up 0.3% versus forecasts of up 0.4%.

            April Chinese industrial production rose 7.0% versus consensus of up 6.4%; retail sales were +9.4% versus projections of 10.0%; fixed investment was up 7.0% versus expectations of up 7.4%.

    Other

            Cryptocurrencies and central banks (medium):

                Cleveland Fed head says may be going to 3% soon (short):

                St Louis Fed had worried about the yield curve inverting (medium):

                China makes hay on Trump’s Iran action (medium):


What I am reading today

            Quote of the day (short):

            Thoughts from a professional investor (medium):

            Following five healthy life style habits could add a decade to your life (medium):


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