Thursday, May 3, 2018

The Morning Call---That was then, this is now

The Morning Call


The Market

The indices (DJIA 23924, S&P 2635) ended down on the day. Volume was flat; breadth poor.   That puts them back near their 200 day moving averages.  The S&P finished below the upper boundary of its very short term downtrend (the Dow ended below the upper boundary of its former very short term downtrend).    Both closed below their 100 day moving averages (now resistance).  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 rose 3 %, but still ended below its 100 day moving average (now 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 fractionally, leaving it just above the lower boundary to its long term uptrend.  It remained below its 100 and 200 day moving averages and in a short term downtrend.

Are corporations adding to pressure on interest rates? (medium):

The dollar was up another ½ %, pushing it close to the upper boundary of its newly reset intermediate term trading range, above its 100 day moving average (now support) and above its 200 day moving average (now support).

GLD fell fractionally, finishing below its 100 day moving average for a third day, reverting to resistance.  It closed right on its 200 day moving average (now support) and in a newly reset short term trading range.

Bottom line: the Averages continue to bounce around inside a narrowing range bounded by their 200 day moving averages on the downside and the upper boundaries of their very short term downtrends on the upside (I know, the Dow negated this trend; but remained there for only one day.  So I think that there is a good argument that the break was a false flag.).   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 is nearing another challenge of the lower boundary of its long term uptrend, having lost most of its recent upside momentum.  A break would point to higher long term interest rates.  That explains the pin action in both the dollar (which is soaring) and gold (which is challenging several support levels).  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.


            There was only two economic releases yesterday.  One tertiary---weekly mortgage and purchase applications were down; and one secondary---April ADP private payroll report was upbeat.

            Overseas, the numbers continue to be neutral to negative: the April UK manufacturing PMI was below estimates, the Japanese manufacturing PMI was above; while first quarter EU GDP grew at one half the rate as fourth quarter 2017.
            Of course, everyone was waiting for the results of the FOMC meeting.  As expected, it left rates unaltered.  The narrative in the following statement didn’t change all that much, though (1) it was a bit less enthusiastic about economic growth [what? what?; it is actually looking at the numbers?] and (2) it did suggest that even if inflation were to modestly exceed its 2% target, the Fed would be unlikely to adjust its policy.  In other words, it wasn’t going to do anything to upset the Markets by more aggressively tightening unless really provoked.  On short, it was a mildly dovish.

            The statement:

            Street reaction:
                One other noteworthy item, Apple reported very good earnings after the close on Tuesday; and that had a positive impact of Apple stock yesterday but had no influence on the Market.
            Mnuchin is on his way to China to begin negotiations on resolving the trade issue; that is the good news.  The bad news is that the rhetoric between the US and China grew more heated,

            Bottom line: a year ago, a Fed statement that played down the rate of economic growth rate and was dovish regarding rate hikes would have had the Dow up 200 points.  

To be sure, back then, the implication of lower economic growth was that the Fed would be very accommodative; now it appears that what economic growth we got was as good as it was going to get and that it may be maxing out.  Back then, an accommodative Fed meant no rate increases; now it looks like the Fed will go slow in raising interest, but implicitly telling the Market that it is going to do everything it can to avoid upsetting investors. 

A year ago, if a high tech company (Apple) reported a great quarter, the entire Market not just the stock of the company, would have reacted positively.

 I recognize that conditions change; and that is my point. We are no longer in a goldilocks environment.  The economy may be rolling over.  Inflation is rising and the Fed is scared to death that it could get out of control and force its hand. 

At the moment, it is not certain that economic growth has peaked or that inflation will push well passed 2%.  But the evidence is increasingly pointing in that direction.  And that is, in my opinion, why investors may have the willies.    

            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.  

            The stats on April dividends (short):

            Update on the Buffett indicator (short):

    News on Stocks in Our Portfolios
Becton, Dickinson (NYSE:BDX): Q2 EPS of $2.65 beats by $0.02.
Revenue of $4.22B (+42.1% Y/Y) beats by $100M


   This Week’s Data


            The April ADP private payroll report showed job increases of 204,000 versus expectations of 190,000.

The March US trade deficit was $49.0 billion versus expectations of $49.9 billion.

            Weekly jobless claims rose 2,000 versus estimates of up 25,000.

            First quarter nonfarm productivity was up 0.7% versus forecast of up 0.9%; however, fourth quarter 2017 was revised from 9.9% to +0.3%.

            First quarter unit labor costs rose 2.7% versus consensus of +3.0%.


            April EU CPI was up 1.1% versus projections of up 1.2%.

            April UK services PMI came in at 52.8 versus expectations of 53.5.


            The US economy is losing steam (medium):

            Some evidence that the tax cut did stimulate capital spending (short):

What I am reading today

            IAEA refutes Israel’s claims regrading Iran’s nuclear program (medium):

            24 rules for success (medium):

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