Thursday, December 6, 2018

The Morning Call--Maybe the China deal isn't so great


The Morning Call

12/6/18

The Market
         
    Technical

            What a difference a day makes.  The Averages (DJIA 25-27, S&P 2700) plunged Tuesday, undoing all the repair work they had done over the last two weeks:

(1)   the Dow traded back below its 200 DMA but only one day after having reverted to support.  My rule of thumb in such circumstances is to weigh the follow through, i.e. if the DJIA continues to move lower, the break of the MA is negated; if it bounces back immediately, the reversion to support holds,

(2)    it also ended back below above its 100 DMA, voiding Monday’s break higher.  It remains resistance.

(3)   it continues in a very short term downtrend,

(4)   the S&P traded back below the upper boundary of the very short term downtrend, one day after voiding it.  The rule of thumb described above also holds true in this instance,

(5)   it also traded back below its 200 DMA, voiding Monday’s break.  It remains resistance.

(6)   both indices have now made a second lower high. 

However, all is not lost.  (1) remember that both of the Averages have also made higher lows.  So they are in a developing pennant formation.  Now the immediate resistance level is the upper boundary of the very short term downtrends; but there is support at the trend line connecting the higher lows, (2) we are in a historically strong seasonal period for stock prices and (3) they both filled Monday’s gap up open, meaning that technically there is nothing holding them back from advancing on their all-time highs. 

Volume rose and breadth was negative.  But neither had any of the characteristics of a selling climax.

The VIX soared 25%, so its chart remains positive (bad for stocks).

The long bond rose 1½ %, on huge volume, finishing above its 100 DMA (now resistance; if it remains there through the close next Tuesday, it will revert to support), above its 200 DMA (now resistance; if it remains there through the close next Wednesday, it will revert to support) and very near the upper boundary of its short term downtrend.  In sum, its chart is being turned on its head.  Follow through is still needed to confirm the aforementioned challenges.  But clearly, bond investors are embracing the flattening yield curve scenario (recession) enthusiastically, at least for a day.

Jeff Gundlach on the yield curve inversion.

The dollar was down a nickel, but ended in very short term and short term uptrends as well as above both MA’s. So the chart remains technically strong.  Usually when long bond yields decline, the dollar follows suit.  However, I think that its role as a safety trade is in play. 

GLD traded up ½ %; not surprising in face of the big drop in yields.  But its chart is still a bit ugly, suggesting that investors’ enthusiasm for gold as a safety trade remains tepid.

 Bottom line: Tuesday’s pin action returned the Averages’ charts to a technical negative.  Of course, given the recent volatility, this whole situation could reverse back to the upside.  However, today, there is nothing in the charts to suggest a challenge by the indices of their all-time highs.

            Counterpoint.

            The trigger for Tuesday’s liquidation.

            Another opinion.

            Tuesday in the charts.

    Fundamental

       Headlines

            The stats over the last two days were upbeat: weekly mortgage and purchase applications, month to date retail chain store sales and November light vehicle sales were better than anticipated.

            The Fed released its latest Beige Book yesterday; and the narrative was reasonably upbeat: growth in all regions, a tighter labor market but some softening in housing and concerns about trade.  I didn’t read this as dovish.

            Overseas, the numbers were more mixed: October EU retail sales were up 0.3% versus expectations of +0.2% but the September reading was revised from 0.0% to -0.5%; the November EU composite PMI came in at 52.7 versus estimates of 52.4.
                                  
            Tuesday, investors apparently woke up to the fact that all the trade truce news was perhaps not as great as the Donald said.  Although that night the Chinese finally commented in a somewhat positive fashion.  The official interview indicated they were moving forward implementing the agreement negotiated over the weekend.  Perhaps it is only a coincidence, but it seems none of the measures will go into effect until late March---just outside the ninety day window deadline for a more permanent accord.

            Reduced auto tariffs don’t seem to be in the mix.

            I finally found someone who makes a decent argument that the US/China cease fire was more than smoke and mirrors.

            ***overnight, the CFO of dominant Chinese tech company arrested at US request.

            Other factors are getting investor attention:

(1)   the vote on funding the government is still to be done.  As you know, Trump has threatened not to sign the legislation unless congress gives him $5 billion for the border wall; and the dems are saying ‘no way, Melvin’.  Bush 41’s death has delayed that showdown for two weeks.  But it is still going to occur.  When the vote comes, Trump either loses face or the government is shut down.  Historically, shutting down the government has not been a winning strategy.

(2)   the internecine Brexit fight has reached the point where it could induce heartburn beyond the UK boundaries.

(3)   tensions are again escalating in the Persian Gulf.

***overnight, oil plunges after Saudi’s propose smaller than expected production cut.
                       
                       
                        Bottom line: Fed policy and trade will likely remain the headline movers over the short term.  At the moment, neither seem especially positive to me.  We still don’t know for sure whether the Fed will continue to wind down its balance sheet at the pre-Powell comment/FOMC minutes rate.  If it does, liquidity will continue to be removed from the financial system; and as the above link (Another opinion) suggests, it is diminishing liquidity that has suddenly began to impact the algo traders.

            Regrettably, I am near giving up trying to discern the difference in what Trump says and reality.  I can’t be the only one; indeed, I may be among the last since I have believed that the Donald would make a big change in the global political/trade regime.  Even if it does eventually occur, the credibility factor (valuations) is apt to hang over the Market until it does.    

            Merrill Lynch’s 2019 outlook.

            Dividends by the numbers for November.

    News on Stocks in Our Portfolios
 
Brown-Forman (NYSE:BF.B): Q2 GAAP EPS of $0.52 beats by $0.01.
Revenue of $910M (-0.4% Y/Y) misses by $30.48M.

General Dynamics (NYSE:GD) declares $0.93/share quarterly dividend, in line with previous.

Economics

   This Week’s Data

      US

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

            November light vehicle sales were ahead of expectations.
           
            Weekly jobless claims fell 4,000 versus consensus of down 9,000.

            The October trade deficit was $55.5 billion versus forecasts of $55.0 billion.

            The November ADP private payroll report showed job gains of 179,000 versus projections of 175,000.

            Third quarter productivity increased 2.3%, in line; unit labor costs advanced 0.9% versus estimates of +1.1%.
           

     International

    Other

            Less inflation gives Fed room to pause.

            OPEC works on deal to cut oil production.

                        But as of last night, there is no deal.


                        Framing lumber prices down year over year.

                Home prices up year over year.


What I am reading today

            When things stop working.
            The law of big numbers.

            Blockchain study shows 0% success.

            Bitcoin miners hold garage sale.

            The opioid epidemic.

                From the census bureau; sixty-three percent of noncitizens are on welfare.

            The octopus is smart as heck.

            Questions about Hanukkah

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