Wednesday, May 2, 2018

The Morning Call--Random volatility or are changes coming?


The Morning Call

5/2/18

The Market
         
    Technical

Yet another roller coaster day; the indices (DJIA 24099, S&P 2654) started the day with a big selloff, then rallied in the afternoon to close mixed on the day (Dow down, S&P up). Volume was down; breadth poor.   Intraday, the S&P traded near its 200 day moving average, then bounced.  It ended below the upper boundary of its very short term downtrend (the Dow ended below the upper boundary of its former very short term downtrend).  That leaves the Averages out of sync with respect to this one indicator, meaning that there is little informational value on direction/momentum.  Both finished below their 100 day moving averages (now resistance) but above their 200 day moving averages (now support).  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. The short term technical picture remains cloudy.  Longer term, the assumption is that equity prices will continue to rise.
               
                The VIX fell 2 ¾ %, ending below its 100 day moving average for a third day, reverting to resistance. It finished above its 200 day moving average and the lower boundary of its short term trading range.  This action is pointing to higher stock prices.
               
The long Treasury sold off ½%.  It remained below its 100 and 200 day moving averages and in a short term downtrend and back near a challenge of the lower boundary of its long term uptrend. 

            A flatter yield curve is no reason for concern (medium):

Is corporate debt the next ‘big short’ (medium):

The corporate yield curve is now flat (medium and a must read):


The dollar was up another ½ % on huge volume, remaining above the lower boundary of its newly reset intermediate term trading range, above its 100 day moving average (now support) and above its 200 day moving average for the fourth day, reverting to support.

GLD was pounded another ¾ %, falling below its 100 day moving average for a second day (now support; if it remains there through the close today, it will revert to resistance), right on its 200 day moving average (now support) and in a newly reset short term trading range.

Bottom line: my focus remains on the Averages’ pin action as they continue to bounce between the upper and lower boundaries of an ever shrinking range.  Yesterday witnessed yet another move toward the lower boundary, then a bounce.   Sooner or later (and given the narrowness of the range, sooner is the more likely alternative) that range will be broken; history suggests a strong follow up move in the direction of the break. 

TLT investors appear to have backed off the thought of rising interest rates; although short rates continue to have an upward bias.  That explains the pin action in both the dollar (which is soaring) and gold (which is getting hammered).  However, as I noted Saturday, the recent price action in all the indicators suggests a good deal of investor turmoil/confusion as multiple support/resistance levels are being challenged.

Price instability/uncertainty remains for the moment.  The question is duration.    Patience.  I love my cash.
           
    Fundamental

       Headlines

            Yesterday’s economic data was a bit disappointing: month to date retail chain store sales growth improved, while the April manufacturing PMI was in line; but the April ISM manufacturing index was below expectations and March construction spending was awful.
           
            There was very little else by way of new news; though investor narrative through the day focused on not just the schizophrenic pin action in the equity markets but also in the bond, dollar, gold and oil markets.  Of course, all of this may be nothing but random price moves accentuated by higher volatility.  On the other hand, it could be that the times, they are a’ changin’.  Whether they are or not, I have no clue.  And I won’t know until, as and if the Markets clearly tell me so.           

            Bottom line: I believe that sooner or later the gross mispricing and misallocation of assets will be corrected.  It seems logical to me that at some point rising short term interest rates and the unwinding of the Fed’s balance sheet will induce sufficient price pain to alter investors’ optimism.  But generally, the catalytic event is never what seems logical. 

            If I was fully invested, I would definitely lighten my equity exposure.  I continue to appreciate my Price Discipline which forces me to Sell Half when a stock meets its price objective.  

    News on Stocks in Our Portfolios
 
Ecolab (NYSE:ECL): Q1 EPS of $0.91 beats by $0.01.
Revenue of $3.47B (+9.8% Y/Y) beats by $90M.

Apple (NASDAQ:AAPL): Q2 EPS of $2.73 beats by $0.05.
Revenue of $61.1B (+15.5% Y/Y) beats by $160M.

C.H. Robinson Worldwide (NASDAQ:CHRW): Q1 EPS of $1.01 beats by $0.01.
Revenue of $3.93B (+15.2% Y/Y) beats by $120M

Automatic Data Processing (NASDAQ:ADP): Q3 EPS of $1.52 beats by $0.09.
Revenue of $3.69B (+8.2% Y/Y) beats by $20M.

Mastercard (NYSE:MA): Q1 EPS of $1.50 beats by $0.26.
Revenue of $3.58B (+31.1% Y/Y) beats by $330M.

Emerson Electric (NYSE:EMR) declares $0.485/share quarterly dividend, in line with previous.

PepsiCo (NYSE:PEP) declares $0.9275/share quarterly dividend, 15.2% increase from prior dividend of $0.805.

Johnson & Johnson (NYSE:JNJ) unit Janssen Biotech has acquire privately held BeneVir Biopharm for an undisclosed sum.
The Rockville, MD-based biotech develops oncolytic viral immunotherapies to treat cancer.

Economics

   This Week’s Data

      US

            Month to date retail chain store sales growth improved from the prior week.

            The April PMI manufacturing index came it at 56.5, in line.

            The April ISM manufacturing index was reported at 57.3 versus expectations of 58.6.

            March construction spending declined 1.7% versus estimates of a 0.5% increase.

            Weekly mortgage applications fell 2.5% while purchase applications were off 2.0%.

     International

            The April UK manufacturing PMI was reported at 53.9 versus forecasts of 54.8.

            The April Japanese manufacturing PMI came in at 53.8 versus consensus of 53.3.

            First quarter EU GDP was up 0.4%, in line, but down from +0.7% in the prior quarter.

    Other

            Inflation warning lights are flashing (medium):

            The most recent data on median household income (short):

            How much does infrastructure spending improve an economy? (medium):

            The latest from John Mauldin (medium):

            Goldman fined $110 million for rigging FX market (medium):

What I am reading today

            Social security myths (medium):
           
            US de-activates anti-ISIS headquarters in Iraq (medium):

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