Wednesday, May 30, 2018

The Morning Call--Yesterday was just one day


The Morning Call

5/30/18

The Market
         
    Technical

In case you didn’t hear, the Averages (DJIA 24361, S&P 2687) got hammered yesterday, expectedly on higher volume and poor breadth.   The Dow finished below its 100 day moving average for the second day (now support; if it closes there through the close today, it will revert to resistance).  The S&P ended below its 100 day moving average for the first day (now support; if it remains there through the close on Thursday, it will revert to resistance).  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, stocks are at stall speed.  Longer term, the assumption is that stocks are moving higher.
               
                The VIX exploded up 29%, finishing above its 200 day moving average (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 (if it remains there through the close on Thursday, it will reset to a trading range) and right on its 100 day moving average.

The long Treasury was up 2% on high volume, ending over its 100 day moving average (now resistance; if it remains there through the close on Thursday, it will revert to support), above its 200 day moving average (now resistance; it if remains there through the close on Friday, it will revert to support) but remained within its long term uptrend and short term downtrend.

The dollar was up ½ %, closing in both short term and very short term uptrends as well as its 100 and 200 day moving averages (now support).
               
GLD was down two cents, ending below its 100 and 200 day moving average (now resistance) and in a short term downtrend.
               
Bottom line: earlier this month, stocks were breaking resistance levels on the upside while bonds and the dollar were challenging support level on the downside.  Now the reverse is occurring.  To be sure, the fundamental headlines have been somewhat volatile.  But we have just been through an eight year period in which good news was good news and bad news was good news and the underlying investment thesis was ‘buy the dips’.  That narrative seems to be changing. 

Whether this is a sign that further advances are going to be more labored or that a top is being formed is unclear.  Clearly, the degree to which support levels that are successfully challenged will provide the answer.  At this moment, the key is follow through on the current challenges.  Remember yesterday was just one day.

            More on the leverage in the Market (medium):

    Fundamental

       Headlines

            Yesterday’s economic data was positive: the March Case Shiller home price index rose less than anticipated and the May Dallas Fed manufacturing index was better than expected.  May consumer confidence came in below forecasts.

            Everything took a backseat in the headlines to the Italian political crisis and the turmoil it is causing in its bond market (lower prices).  The concern being that Italian government bonds represent not only a substantial portion of the country’s own banking system’s capital (i.e. solvency) but also a big enough portion of other EU countries’ banking capital to cause problem---that being a price decline in those Italian government bonds which in turn decrease capital.  It is too soon to know whether this situation is just ‘Italians being Italians’ or if a real crisis is coming.  

However, two observations: (1) as long as this remains a problem and is disruptive to EU securities market, the ECB will almost surely remain accommodative and spurn any talk of quantitative tightening and (2) while I remain a critic of the US banking system’s policies and the potential reversing of the Volcker rule, our banks’ capital structure is stronger than it has been in a decade; plus they have very little balance sheet exposure to Italian bonds.  The point being that even if Italy exits the EU and its bond market crashes, (1) that is not likely to have a big impact on our banks and (2) indeed, there will likely be capital exiting EU securities and the US market would be a recipient.

            Great summary of the Italian political situation (medium):

            Bottom line: remember that I have never been a bear on the US economy.  And I don’t think any fallout from an Italian crisis would alter that forecast.  On the other hand, I have been insistent that ultimately the mispricing and misallocation of assets (securities’ prices) would be corrected.  The question has always been ‘what is the trigger event’?  Could it be an Italian crisis?  Sure. Will it be?  I have no clue.

    News on Stocks in Our Portfolios
 
Bank of Nova Scotia (NYSE:BNS): Q2 EPS of C$1.70 beats by C$0.03.
Revenue of C$7.06B (+7.3% Y/Y) beats by C$120M


Economics

   This Week’s Data
           

      US

The March Case Shiller home price index rose 0.5% versus estimates of up 0.7%.

            May consumer confidence came in at 128.0 versus expectations of 128.6.

            The May Dallas Fed manufacturing index was 26.3 versus forecasts of 23.7.

            Weekly mortgage applications fell 2.9% while purchase applications were off 2.0%.

            April ADP private payrolls rose 178,000 versus expectations of 187,000 plus the March number was revised down.

            The second estimate of first quarter GDP came in at +2.2%, in line; the price deflator was up 1.9% versus estimates of up 2.0%; corporate profits were down 6%, in line.

            The April trade deficit was $68.2 billion versus consensus of $71.0 billion.

     International

            April German unemployment fell slightly.

            April Japanese retail sales rose 1.4% versus projections of up 0.5%.

    Other
           
Recession 2020? (medium):

            Oil prices (medium):

            The next edition of John Mauldin’s analysis of the current debt problem (medium):

            Soros on the EU (medium):

            Latest on China trade talks (medium):

What I am reading today

            How to respond to a notice from the IRS (medium):
                       
            How the sanctions against Iran may work (medium):

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