Thursday, November 8, 2018

The Morning Call--Potential changes in the technical picture


The Morning Call

11/8/18

The Market
         
    Technical

The Averages (DJIA 26180, S&P 2813) did a Titan III shot yesterday, pointing to a potential dramatic change in the technical picture.  The Dow ended above its 100 DMA for a second day (now resistance; if it remains there through the close today, it will revert to support) and above its 200 DMA (now support).

The S&P finished above its 100 DMA (now resistance; if it remains there through the close on Friday, it will revert to support) and its 200 DMA (now resistance; if it remains there through the close next Monday, it will revert to support).

While clearly a potential plus, yesterday witnessed a second gap open to the upside.  Again, tech wisdom is that the gap has to be closed before a longer term trend can continue in the direction of that gap open.  At some point, the pull of those two gaps will exert itself.

Volume was up but didn’t match the levels of October; breadth improved.

The VIX declined 17 ¾ %, re-establishing the (inverse) sync with stocks.  Despite the magnitude of the plunge, it remained above both MA’s and within a short term uptrend.

The long bond was up slightly but is still within very short term and short term downtrends and below both moving averages.   Still a negative technical picture, indicating higher interest rates.

The dollar fell fractionally, closing below its August high but still within short term and very short term uptrends and above both moving averages.  I continue to believe that UUP will move higher as long as the dollar funding problem persists. 

GLD was down one cent, finishing above its 100 DMA.  While the pin action remains a bit confusing, it does seem to be trying to establish a trading range slightly above the former August to October trading range.

 Bottom line: the S&P has begun a challenge of its 200 DMA, which if successful would point to higher prices---the likely next stop being the September/October highs.  That seems a reasonable scenario given the seasonal and post mid-term calendar effects.  However, confusing the technical picture are two gap opens at lower levels that, technically speaking, have to be closed.  I await for the confirmation of the break of the 200 DMA.

While I disagree with this analyst’s take on the fundamentals, he provides the technical bull case based on the calendar.

TLT’s and UUP’s performances both continue to point to higher interest rates (a tighter Fed) which is definitely not a plus for the Markets. 
           
            Peak buy backs?

            Wednesday in the charts.

    Fundamental

       Headlines

            Only one minor datapoint released yesterday: weekly mortgage and purchase applications were down.  Overseas, September German industrial production was very positive.
      
            US GDP growth expected to continue to slow in the fourth quarter.

            Of course, investors spent the day trying to digest the outcome of the elections.  I have provided a number of links from bulls, bears, liberals and conservatives to try to provide a balanced view.

            More post-election analysis.

            And.

            And.

            And.

            And last but not least from Doug Kass.

            Today, we get to deal with this week’s second major development---the FOMC meeting and its ensuing policy statement.  Expectations are for nothing new.

            Bottom line: it is always a plus for the Market when uncertainty if eliminated.  The elections removed a source of doubt.  Not just that but we now have gridlock in DC which, for me, has always been the ideal political construct.  So I expected positive pin action.  However, I was surprised by the magnitude of the up move; especially since the results were generally in line with expectations. 

            However, all the negatives that impact growth and valuation have not been changed by the election results unless you assume that the current irresponsible fiscal policy is somehow going be improved.  On that score, it seems to me that the best scenario is that the deficit is not made any worse by even more irresponsible fiscal policy.  However, it won’t alleviate the problem of servicing too much debt restraining economic growth. 

That leaves (1) a tightening Fed which no one in Washington is going to stop except the Fed itself and (2) trade negotiations, in particular, with China whose leaders were almost surely watching the returns Tuesday night just as closely as the rest of us and who likely were given reason to play harder ball as a result of the outcome.

            I continue to believe that the economy will grow but at a diminishing pace over the next couple of quarters.  I continue to believe that the reform of the post WWII political/trade regime will be a plus assuming that it is not in the model of NAFTA 2.0.  And I continue to believe that the unwinding of QE is a major positive for the economy.  Unfortunately, it will likely not so good for all those assets that advanced on excess liquidity.

            Investing late in the market cycle.

    News on Stocks in Our Portfolios
 
Qualcomm (NASDAQ:QCOM): Q4 Non-GAAP EPS of $0.90 beats by $0.07; GAAP EPS of -$0.35 misses by $0.98.
Revenue of $5.83B (-2.2% Y/Y) beats by $300M.

Economics

   This Week’s Data

      US

            Weekly jobless claims fell by 1,000, in line.

     International

    Other

Some data on the impact of the tariff war with China.

Clock is ticking on China’s oil independence.

Inflation in developed and emerging economies.

The long term trend in light vehicle sales.

Third quarter EU GDP.

Jeffery Snider on the EU economy (must read):
More financial problems for Iran.

Latest in the Italy/EU standoff.


What I am reading today

            The three legged stool of retirement savings.

            Causality of stock price movement.

            Quote of the day.


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