Friday, December 21, 2018

The Morning Call--Subscriber Alert


The Morning Call

12/21/18

The Market
         
    Technical
               
The Averages (DJIA 22859, S&P 2467) got hammered again yesterday. They both finished below both moving averages and are now in a pronounced very short-term downtrend.   The Dow finished below its February low, while the S&P ended below the lower boundary of its short-term trading range (also its February low) for a second day; if it remains there through the close today, it will reset to a downtrend.

Volume was up; breadth was terrible but is now extremely oversold. 

The VIX was up 11%, returning to its normal (inverse) relationship to stocks.

The long bond was down ¼ % on huge volume, closing above its 100 DMA (now support), above its 200 DMA (now support) and in a short-term trading range.  It appears that the rise in long term interest rates (decline in bond prices) is over. 

The dollar was down ¾ %, ending below the lower boundary of its very short term up trend; if it remains there through the close today, that trend will be voided.  It still finished above both MA’s and in a short-term uptrend. So, the chart continues to be technically strong.

GLD was up 1 ½ % on big volume, closing above its 100 DMA as well as its 200 DMA (now resistance, if it remains there through the close next Tuesday, it will revert to support). 

 Bottom line: the Averages continued their plunge but have become so oversold that some kind of rally seems inevitable.  That said, barring a monster rally today, the S&P short term trend is going to turn down.  That doesn’t mean a bear market is inescapable, but clearly the odds are rising.  Further, as I noted previously, the next major support level for the S&P is ~1800. P.S. don’t forget that today is quad witching.

            The long bond is in trading ranges across all timeframes, suggesting the end of the 2016-2018 rise in rates.
           
            The dollar took a hit likely the result of the sudden reappearance of a government shutdown.  Even if that occurs, I don’t think that it will alter the upward trajectory of the dollar as long as there are increasing dollar funding (liquidity) problems. 

GLD’s pin action likely reflected its role as a safety trade.  

                Algos are starting to short the Market.

                Thursday in the charts.

    Fundamental

       Headlines

            Yesterday’s stats were weighed to the negative side: while weekly jobless claims fell less than anticipated, the December Philly Fed manufacturing index was abysmal, and the revised October/November leading economic indicators were weak.

            However, other issues dominated the headlines.

            Of course, the disappointing results of the FOMC meeting were front and center.    As you know I have opined for years that QE didn’t help the economy all that much, so ending it wouldn’t damage the economy all that much.  On the other hand, I believe that QE was in a large way responsible for the gross mispricing and misallocation of assets and when it ends, the return to real price discovery will be painful for the Markets. 

            Here are a couple of articles addressing the former issue:

(1)   While I have always thought this analyst a bit too cheery, he nonetheless conveys my point that the economy is doing fine [not great] in the face of rising rates and QT.

(2)   The risk of recession.

            And here is a look at the latest money supply numbers.

            Meanwhile, back at the White House.  Apparently, house republicans have given the Donald some backbone on the funding of the wall. Last night, they voted to fund it.  Now it looks like he will unblink.  It goes to the senate today, where Schumer insists that it won’t pass.  If not, then Trump says that he will shut down the government.

            Finally, the US has indicted two Chinese hackers and it appears several our allies will support this move.  I think that the latter is a big plus because it alerts China that it is just not the US that is tired of their cheating.  Knowing that others could be joining the US is attacking their unfair trade practices (assuming they follow through with actions that penalize the Chinese) will almost surely add pressure for the Chinese to clean up their act. 
           
Bottom line: I am not surprised that the securities markets are reacting negatively to shrinking liquidity; and I will not be surprised if the securities continue to react negatively if liquidity continues to shrink.

            The prospects of a government shutdown appear to be giving some investors heartburn.  As you know, I wish that they would shut down Washington permanently; so, I guess a temporary one is better than nothing.  Wishful thinking aside, any shutdown is not apt to do much if any damage to the economy.  However, Markets tend to not like them especially when the prevailing mood is negative.

I believe that if our allies really get on board with penalizing the Chinese for unfair trade practices, it will have a much greater impact on their behavior than if the US was acting alone.  Indeed, the Donald and his minions probably should have had them in on the whole sanctions/tariffs program before the US started it.  Better late than never; but it still a plus if the allies mean it. It will be interesting to see how the Chinese respond. 

            Dealing with hyperbole.

    Subscriber Alert

            At the Market open:

            The Dividend Growth Portfolio will Add to its position in Tiffany (TIF).  TIF is 46% off its high.

The High Yield Portfolio will establish a new position EQT Midstream Partners (EQM).  EQM is 50% off its high, yields 10%+ and carries the high credit rating (B++) among the MLP’s.

The ETF Portfolio will establish a new partial position in the ishares Russell 2000 value ETF (IWN).  IWN contains a large number of small cap stocks many of which have been hammered.  It is down 22%.
                  
           My strategy at this point is to just focus on the stocks that have been trashed and are down much more than the indices.  That is not to say that they won’t go lower; but as you know my Model is always gets me out early and in early.  Also remember that in a bear market, my Stop Loss discipline gets a little squishy because the downside can get so overdone.

    News on Stocks in Our Portfolios
 
            Nike (NYSE:NKE): Q2 GAAP EPS of $0.52 beats by $0.07.
Revenue of $9.37B (+9.6% Y/Y) beats by $200M.
           

Economics

   This Week’s Data

      US

            The November economic indicators rose 0.2% versus expectations of unchanged; however, the October number was revised from +0.1% to -0.3%.
                      
November durable goods orders rose 0.8% versus estimates of +1.4%; ex transportation, they were down 0.3% versus forecasts of up 0.3%.

The final Q3 GDP report showed growth of 3.4% versus consensus of 3.5%; the price index was up 1.8% versus projection of up 1.7%; corporate profits were +6.1% versus the prior estimate of 5.9%.

International

            November UK retail sales rose 1.4% versus consensus of +0.3%.

    Other

            ***overnight, China announce plans for more fiscal and monetary stimulus.

What I am reading today

            Investing ideas that changed my life.

            Saturn is losing its rings.

            How to get your retirement plan on better footing.


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