The Morning Call
10/12/18
The
Market
Technical
The carnage in
the Averages (DJIA 25052, S&P 2728) continued. The S&P traded below (1)
the lower boundary of its very short term uptrend, negating that trend, (2) the
100 DMA for a second day (now support, if it remains there through the close today,
it will revert to resistance) and the 200 DMA (now support; if it remains there
through the close next Tuesday, it will revert to resistance). Its next support level is the lower boundary of
its short term uptrend (2664).
The Dow ended
below its 100 DMA (now support, if it remains there through the close next Monday,
it will revert to resistance) and its 200 DMA (now support; if it remains there
through the close next Tuesday, it will revert to resistance). Its next support level is the lower boundary of
its short term trading range (21691).
I noted yesterday the prior strength the 200
DMA’s has provide over the last two years.
If these are taken out, then (1) my assumption that the Averages will
challenge the upper boundaries of their long term uptrend goes away and (2) it
is likely that there is much more downside.
Some perspective.
More.
Margin calls mean more
pain.
Hedge funds are getting
destroyed.
Volume was up
dramatically; breadth got uglier. Clearly,
the technical strength of the indices is being challenged.
The VIX rose another
9%, ending above its 100 DMA (now support) and its 200 DMA now support and the
upper boundary of its short term trading range (if it remains there through the
close today on Friday, it will reset to an uptrend). A negative for stocks.
The long bond
spiked 1 ¼% on big volume, though it remained in an intermediate term downtrend
(it failed to even recover the lower boundary of its former intermediate term
trading range) and a long term trading range and below both MA’s. While
still a negative technical picture, my guess is that yesterday’s rally was more
related to TLT’s value as a safety trade than anything to do with interest
rates.
Mortgage rates are
rising.
Will China cut
purchases of US Treasuries?
The dollar was
down ½ %---clearly not indicative of a safety trade. UUP retains its positive technical standing
but failing to challenge its August high is a bit of a negative. However, I continue to believe that UUP will
move higher as long as the dollar funding problem persists.
GLD spiked 2 ½%
on massive volume, which, like the long bond, I interpreted as a safety
trade. It did manage to finish above the
upper boundary of its short term downtrend (if it remains there through the
close next Monday, it will reset to a trading range. This is the first positive technical
development for gold in a long, long time.
Follow through.
Bottom line: well, so much for one day’s
pin action. Clearly, the follow through
was to the downside---which is not good.
Indeed, despite the oversold condition of the Averages, they could
barely muster any activity above Wednesday’s close. Now they are even more oversold; plus yesterday
both indices pushed through their 200 day moving averages which, as I have
noted, have offered major support for the last two years. Both provide a reason why some kind of rally
makes sense. How powerful that move is would give an idea about near term
direction.
***at this
writing, it looks like a strong opening for the indices. How they close will be more important,
especially viz a viz their 200 DMA’s
Taking a step
back, it is important to view the last two days with some perspective---that is,
that they are barely off their all-time highs.
So it is no time to get beared up.
Even though I have thought that stocks were overvalued for over the last
two years and that a selloff was due, it doesn’t mean that mean reversion has
started. On the other hand, every
journey starts with a single step.
Bonds, the dollar and gold turned into a
confusing performance yesterday. TLT and
GLD looked like safety trades; the dollar not so much.
Fundamental
Headlines
Yesterday, the
numbers were mixed: September CPI was lower
than forecast while weekly jobless claims were above.
What
was interesting was that we got two positive pieces of news: (1) the CPI report
would give clear cover to the Fed to ease off tightening and (2) the announcement
that Trump and Xi would meet at next month’s G20 meeting, promising the hope of
a decline in trade tensions.
China
will not be listed as a currency manipulator.
Yet stocks still
took it in the snoot. Coupled with the
technical factor that the Averages showed little hesitation breaking below
their 200 DMA’s, I think points to lower prices---a potential short term
oversold rally notwithstanding.
Bottom line: I think
the growing realization that the Fed no longer has the Market’s back is the
most important factor bearing on stock prices right now. Sure trade difficulties, weakening foreign
economies, poor earnings guidance from US companies aren’t helping. But the current Market has endured a number
on economic problems throughout its ten year run and still managed to advance---for
one simple reason. Because, in my
opinion, Markets/investors knew there would always be easy money that could be
leveraged in the pursuit of higher yields/returns (mispricing and misallocation
of assets).
The Fed is
intent on raising rates, irrespective of the Market’s reaction.
It is not just the Fed.
I want to repeat my thesis for the last four
or five years: QE did little to help the
economy growth, so it absence will do little to hurt the economy---I believe
that the economy will continue to grow, just not as much as has been consensus;
but it pumped up asset prices and that is what will pay the price from an
unwinding.
I am not saying that this forecast is becoming
manifest, though QE is unwinding and its impact on the financing of assets is trending
negatively. At the moment, I don’t know
if I am going to be right. (But
Wednesday’s and) Yesterday’s pin action
may be an indication that we are closer to finding out.
Finally, as you
know, I look at the charts and review the Valuation Models of all the companies
in my Universe every day; and, at this point, few stocks are breaking down
technically and no stocks, not already on my Buy List, have moved into their
Buy Ranges. In other words, prices have
to go a lot lower before I start putting my cash to work.
And:
Words
of caution from Ed Yardini.
And from Ray
Dalio.
News on Stocks in Our Portfolios
Economics
This Week’s Data
US
September
import prices rose 0.5% versus estimates of up 0.2%; export prices were flat
versus forecasts of up 0.3%.
International
The
September Chinese trade surplus with the US hit a record $34.1 billion
(remember, these guys lie a lot).
Other
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on student loans.
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I am reading today
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Turkey may release North Carolina
preacher.
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