Thursday, November 1, 2018

The Morning Call--A little more clarity needed


The Morning Call

11/1/18
The Market
         
    Technical

The Averages (DJIA 25115, S&P 2711) followed through from Tuesday’s rally.   The Dow ended below its 100 DMA (now resistance) but right on its 200 DMA (now resistance) and above the upper boundary of its very short term downtrend (if it remains there through the close today, it will negate that trend). 

The S&P finished below both moving averages and right on the upper boundary of its very short term downtrend, but above the lower boundary of a its short term uptrend, negating the current challenge.

Importantly, both indices gapped up on the Market open.  You may remember that three weeks ago, they gapped down on the open.  I noted then that the technical wisdom was that gap had to be closed before assuming any longer term move down.  That gap was closed within a couple of days and the Market continued to the downside.  Now the reverse is the case.  Before assuming much higher prices that gap has to be closed---meaning that the S&P must trade back to ~2681 and the Dow ~24892.

Volume advanced, remaining elevated; breadth improved.

The VIX fell 9 %, bouncing off the upper boundary of its short term uptrend but ending below the lower boundary of its very short term uptrend (if it remains there through the close today, it will negate that trend).  It is still above both MA’s and in that short term uptrend.

The long bond was down another ½ %, closing within a short term downtrend, below both moving averages and below the lower boundary of its very short term uptrend (if it remains there through the close today, it will negate that trend).   Still a negative technical picture.

                Treasury announces record debt sales.

The dollar was down one cent, finishing above its August high and starting to build a very short term uptrend.  I continue to believe that UUP will move higher as long as the dollar funding problem persists. 

China and the dollar funding problem.


GLD fell an additional ½ %, closing below its 100 DMA (now support; if it remains there through the close on Friday, it will revert to resistance) and continuing to fade its recent positive price performance.

 Bottom line: as you can see, there are a number of very short term trends being challenged.  However, (1) those challenges have to be successful, (2) the short term trends as well as most MA’s are trending in the opposite direction, meaning a larger directional move is needed before considering a change in trend, and (3) the technical axiom is that the aforementioned gap needs to be closed.  

On the other hand, (1) most of the damage done by the current correction is very short term in nature; so it won’t take much of a change in sentiment to get prices moving higher and (2) we are now in the seasonally positive Holiday Season.

In short, a little more clarity is needed before assuming the worst is over.

The long bond and dollar continue to trade like interest rates are going higher while GLD returns to its former abysmal performance.
           
            How much more?

            Ralph Acampora’s view.

    Fundamental

       Headlines

            Yesterday’s economic stats weren’t exactly easy reading: weekly mortgage and purchase applications were down, the Q3 employment cost index was higher than expected and the October Chicago PMI was a disappointment.  The bright spot was a good October ADP private payroll number.

            There was also poor data from overseas: the October Chinese manufacturing and nonmanufacturing PMI’s were below estimates as was the Q3 EU (preliminary) GDP report.

            Bottom line: data flow this week has been mixed which basically reflects my outlook---an economy heading back to a below average long term secular economic growth rate after a tax cut induced super charged second quarter.  And there remain three big problems for the economy---none of which are growth positive: (1) a federal deficit/debt running wild, at a time in the economic cycle when they should be shrinking, (2) a tightening Fed which is struggling to undo a massively irresponsible QE policy and (3) the Donald’s determination to recast the US/Chinese relationship. 

            I know, I know.  Third quarter earnings were great.  But to be fair, (1) they were influenced by [a] lower tax rates---the increase of which is not a recurring item and [b] anticipatory buying ahead of the imposition of tariffs and (2) they were largely non-GAAP numbers which allow corporations a lot of leeway in how profits are reported.  True, the GAAP earnings are included in company reports; but the Street is mostly basing its valuations on the more favorable non-GAAP EPS. 

            Finally, and perhaps most importantly, investors have been living in a liquidity induced ‘everything is awesome' environment in which the only operative investment strategy that worked was to ‘buy the dips’.  That psychology may still have life in it; though the recent selling on good news suggests otherwise.

            The bottom line is that the Market has a growing math problem---slowing profit growth and a higher discount factor (i.e. interest rates) at a time when valuations are already at near record highs.  The only way to solve that problem is to boost earnings growth further or lower interest rates.

            I am happy with my cash.
                     
            The latest from John Mauldin.

                The latest from Doug Kass.

    News on Stocks in Our Portfolios
 
W.W. Grainger (NYSE:GWW) declares $1.36/share quarterly dividend, in line with previous.

Exxon Mobil (NYSE:XOM) declares $0.82/share quarterly dividend, in line with previous.

Economics

   This Week’s Data

      US

            The October Chicago PMI came in at 58.4 versus expectations of 60.0.

                Weekly jobless claims fell 2,000 versus estimates of down 3.000.

            Third quarter (preliminary) productivity rose 2.2% versus forecasts of up 2.3%; unit labor costs rose 1.2% versus consensus of up 1.1%.
                   
                   
     International

            The October Chinese Caixin (small business) manufacturing PMI came in at 50.1 versus the September reading of 50.0.

            September German retail sales advanced 0.1% versus projections of +0.5%.

    Other

            To hike or not to hike.

Fed considering lowering liquidity requirements for regional banks.

Chinese yuan testing its low.

What I am reading today

            Financial worries….or not.

            Your only competition is yourself.

            How effective are US financial sanctions?

                How important is accurate timing?

                How to finish rich.

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