Friday, January 4, 2019

The Morning Call--Was the December low, the bottom?


The Morning Call

1/4/19

The Market
         
    Technical

The Averages (DJIA 26866, S&P 2447) took it in the snoot yesterday as the weak China/Apple data was compounded by a poor US ISM manufacturing index. Both indices finished below both moving averages.   The Dow finished in a very short-term downtrend and a short-term trading range. The S&P is in a short-term downtrend and traded back below the upper boundary of the very short-term downtrend that it negated on Wednesday.  My rule of thumb in instances where there is a very quick reversal of a break is to put the call on hold and wait for follow through.  All that said, both Averages are still well above their December lows.  So, there is still potential downside before we get a read on whether that low represents a bottom.

Volume was up; breadth negative. 

The VIX rose 9 ½ %, ending above both moving averages and in very short-term and short-term uptrends---and is still cheap relative to the intraday stock price moves of late.  Its chart remains strong which is bad on stocks.

The long bond soared 1 1/8 % on huge volume, closing above its 100 DMA (now support), above its 200 DMA (now support) and in short and intermediate-term trading ranges and in a very short-term uptrend.  Not only are long rates down, but short rates are cratering and are now below the Fed Funds rate---which is not supposed to happen.

            And the latest from Jeffery Snider (must read):

The dollar fell fractionally, remaining above both MA’s and in a short-term uptrend.  However, it is still within the mid-November to present consolidation range. It was a bit usual for the dollar to be down on a big risk off-day.

GLD move up 1% on high volume, closing above both MA’s and within a short-term trading range.

 Bottom line: I noted yesterday that the Averages appeared to be losing the velocity of their bounce off the December 26 low.  The question now is follow through and whether the indices will challenge that December low.  We should get a good look at the answer today as Powell is scheduled to speak.

            The long bond continues its advance, accompanied by higher prices at the short end of the curve.  The fixed income markets are clearly worried about something.  (As you know, I believe the bond market is a better read on what is occurring in the economy than the stock market.)        

            The dollar closed at the high end of its recent consolidation range.  Longer term, its chart remains strong and will likely continue to do so if there are increasing dollar funding (liquidity) problems.

            Thursday in the charts.

    Fundamental

       Headlines

            Yesterday’s economic releases were negative: weekly mortgage and purchase applications, weekly jobless claims and the December ISM manufacturing index were disappointing.  There was a bright spot---the December ADP private payroll report was strong.

            These stats set the theme for the day---weakening economic activity (poor data from China on Thursday, disappointing earnings guidance from Apple Thursday after the close and the lousy ISM manufacturing index).  Making investors even more nervous was turmoil across the yield curve, suggesting that a lot of bond money is running for safety---although that may have more to do with liquidity than growth. 

Bottom line: the economy is slowing.  We have known that for months and its primary cause is fiscal irresponsibility.  Sure, the trade dispute with China contributes.  But the US has been, is and will continue to be stuck with a below average secular economic growth rate.  But I still don’t believe recession is in the cards. 

What is in the cards is the repricing of risk brought on by the Fed taking away the punch bowl.  Unfortunately, that means Market disruptions as marginal creditors, inefficient businesses and speculators are deprived of free money.  In my opinion, that is what the bond market is concerned about---the end of the mispricing and misallocation of assets.  And it appears that the stock market may be figuring it out also.

            Lessons learned from Apple’s collapse.
    
            More on valuations.

            And:

            December dividends by the numbers.

            ***overnight, the US and China announced that meeting of the vice-ministers of trade would meet on January 7/8.

    News on Stocks in Our Portfolios
 
           
Economics

   This Week’s Data

      US

            The December ISM manufacturing index was reported at 54.1 versus expectations of 57.9.

            The December employment report showed a gain 36,000 jobs versus estimates of an increase of 25,000; plus, the November number was revised up by 24,000 jobs.

     International

            The December EU composite PMI came in at 51.1 versus the November reading of 52.7.

                The December Japanese manufacturing PMI was 52.6 versus November’s 52.1.

            The December Chinese services PMI was 53.9 versus the prior month’s 53.8; the composite PMI was 52.2 versus November’s reading of 51.9.

    Other

The euro’s wild ride.

            The J.P. Morgan global manufacturing PMI hit the lowest level since 2016.

What I am reading today

            Pelosi says that a sitting president can be indicted.

                        How not to be stupid (must read):

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