Wednesday, October 24, 2018

The Morning Call---Good news and bad news


The Morning Call

10/24/18

The Market
         
    Technical

The Averages (DJIA 25191, S&P 2740) ended lower yesterday; but their close was not indicative of the intraday trading.  At one point, the Dow was down in excess of 500 points, but closed down just 125 points.  Volume increased significantly; and while breadth was weaker, it was only marginally so. 

The Dow ended below its 100 DMA for a second day (now support; if it remains there through the close today, it will revert to resistance).  Intraday, it traded below its 200 DMA but finished back above it. 

The S&P finished below 200 DMA for a second day (now support; if it remains there through the close on Thursday, it will revert to resistance).  As you know, this boundary has been a critical support level for the last two years; so any successful challenge is meaningful. 

Perhaps the most important technical aspect of yesterday’s pin action is that both indices gapped down (that is, the opening price was lower than the prior day’s closing price) at the opening.  Technicians generally agree that those gaps get closed (in this case, prices rise to match the prior day’s closing price).  Sometimes, this may take a bit.  But the point is, gaps have historically had a magnetic pull to them that, in essence, constrains the magnitude of a price move in the direction of the gap open.  So if the Averages are really headed down, they would have to retrace and close the gap before doing so.  Yesterday, they did just that, closing the gap intraday before then trading lower.  That leaves open the potential for a further decline without the nagging possibility of a gap closing retracement.  That is the bad news.

The good news is that the Dow remained above its 200 DMA, the S&P remains only 26 points below its 200 DMA (not that big an obstacle to recovery), breadth was not that negative and the VIX was much more tame than I would have expected on such a volatile day.

The VIX was up only 6 %, retaining its positive chart; though as I noted above, not really a lot for a huge intraday swing in prices.  Still, it is, at the moment, a negative for stocks.

The long bond popped dramatically in early trading, rising above the upper boundary of its very short term downtrend, but ended back below it.  TLT remains in short term and very short term downtrends and below both moving averages.   Still a negative technical picture.

                And:

The dollar declined fractionally.  It continues to have a positive technical standing but is also struggling to challenge its August high.  I still believe that UUP will move higher as long as the dollar funding problem persists. 

GLD was up ½ %, finishing above its 100 DMA (now resistance; if it remains there through the close on Thursday, it will revert to support).  Until the 100 DMA is reset, I remain unimpressed with its pin action.

 Bottom line: while yesterday’s pin action was a bit unsettling, there was still good as well as bad aspects.  Longer term, very little technical damage has been done to the Averages, so price direction is still up.  On a short term basis, I have little conviction about Market direction.  But as I have pointed out before, we are getting ever closer to the powerful positive seasonal pattern in November and December---meaning the lower the odds of much lower prices. 

The long bond and the dollar both continued to act like rates are going higher.   Gold remains in never, never land.

Tuesday in the charts.

            Oil prices getting hit.

    Fundamental

       Headlines

            Yesterday’s economic releases were negative: month to date retail chain store sales and the October Richmond Fed manufacturing index were disappointing.

            Trump continued to hammer Powell to lower interest rates.  Those who know Powell say that it will only make him dig in his heels.  Frankly, if I were Trump, I would want to get the tightening over with as soon as possible, i.e. as far ahead of the 2020 elections.

            The other economic headline was the continuing deterioration of corporate profit reports and forward guidance.  To be clear, I am not saying that the numbers are negative; I am saying that they are not as positive as they were in the first two weeks of this earnings season.  Perhaps more important, investors are punishing even those companies that are delivering upbeat comparisons.
      
            Bottom line:  investors are not only hammering the stocks of companies that report disappointing earnings but also selling the stocks of companies that have upbeat profit reports.  Also concerning is the performance of the bank stocks which seem to be telling us that the banks are once again facing problems. 
           
Typically, when good news produces selling that presages negative Market pin action.  However, this is the first time in a while that investors have actually lightened up on good news.  Clearly, the longer this persists, the more likely mean reversion.  But we are not there yet.  So too soon to get beared up.  Not too soon to own some cash.      

            From an ex bull.

    News on Stocks in Our Portfolios
 
Qualcomm (NASDAQ:QCOM) declares $0.62/share quarterly dividend, in line with previous.

General Dynamics (NYSE:GD): Q3 GAAP EPS of $2.89 beats by $0.16.
Revenue of $9.09B (+19.9% Y/Y) misses by $310M.

Boeing (NYSE:BA): Q3 Non-GAAP EPS of $3.58 beats by $0.11; GAAP EPS of $4.07 beats by $0.12.
Revenue of $25.15B (+3.8% Y/Y) beats by $1.26B.

United Parcel Service (NYSE:UPS): Q3 Non-GAAP EPS of $1.82 in-line; GAAP EPS of $1.73 misses by $0.08.
Revenue of $17.44B (+7.9% Y/Y) misses by $50M.

AT&T (NYSE:T): Q3 Non-GAAP EPS of $0.90 misses by $0.04; GAAP EPS of $0.65 misses by $0.07.
Revenue of $45.7B (+15.2% Y/Y) beats by $320M.

Canadian National Railway (NYSE:CNI): Q3 Non-GAAP EPS of C$1.50 beats by C$0.03; GAAP EPS of C$1.54 beats by C$0.07.
Revenue of C$3.69B (+14.6% Y/Y) beats by C$110M.


Economics

   This Week’s Data

      US

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

            The October Richmond Fed manufacturing index came in at 15 versus estimates of 24---though Hurricane Florence may have had an impact on that number.

                        Weekly mortgage applications rose 4.9% while purchase applications were up 2.0%.

     International

The October Markit EU manufacturing PMI came in at 52.1 versus expectations of 53.0.

October German PPI was +0.5% versus forecasts of +0.3%.

October UK new factory orders index was -6 versus consensus of +2.

    Other

            Stephen Roach on Fed policy (must read):
           
            As you are only too aware, one of my economic theses (based on the Rogoff and Reinhart study) has been that when the national debt reaches a certain level adding more debt reduces economic growth because servicing that debt constraints investment and consumption.  The below study calls that conclusion into question in cases when the debt is financed by foreign rather than domestic investors. 
           
An easy money economy is not sustainable.

            The chairman of the house tax writing committee said that if the GOP holds both the senate and house, the GOP would advance a proposal for 10% middle income tax cut.  No politics there.

What I am reading today

            When violence broke out in congress.

                How to keep winning the lottery from ruining your life.

                Oldest intact shipwreck found in Black Sea.

            Like we don’t need another Middle East hot spot.

                        Volcker trashes our ruling class.
           
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