The Morning Call
The Market
Technical
The
indices (DJIA 15542, S&P 1685) stumbled a bit yesterday. The Dow traded back below the upper boundary
of its short term trading range (14190-15550), which invalidates Tuesday’s
break. The S&P remained within its
short term uptrend (1600-1756); however, it did close below the former upper
boundary (1687) of a short term trading range---which should be acting as
support.
While
the pin action wasn’t terribly negative, nonetheless, the fact that the Dow
break out of its short term trading range was negated and the S&P traded
below that 1687 level does raise the possibility that the S&P break out was
a false one and the short term trading range remains in tact. I noted in yesterday’s Morning Call that
Tuesday’s trading seemed a bit sickly for the Averages having broken out of
their short term trading ranges. That
said, this Market has had such a strong bid since last November, I wouldn’t be
making any bets that this is all part of a topping process---at least not just
yet. The good news is that stock
performance over the next couple of days will likely bring clarity.
Volume
was flat; breadth was down. The VIX
surged and closed within its short term trading range and intermediate term
downtrend.
GLD
price declined but held above the upper boundary of that former very short term
downtrend and remained within its short and intermediate term
downtrends.
Bottom line: the
challenge process of the Averages short term trading ranges hit a snag yesterday. The Dow break was negated and questions were
raised about the validity of the S&P’s break---although I am not changing
my call on that break. This following
what I thought under the circumstance was very weak pin action on Tuesday. So, the technical picture has been clouded a
bit. So we just need to be patient as
the Market works things out.
Fundamental
Headlines
The
US economic
stats yesterday tilted to the plus side: weekly mortgage and purchase
applications were weak; however, new home sales were well ahead of expectations
and the Markit flash US PMI came in ahead of
estimates.
Overseas,
we got some surprisingly positive news as the Eurozone reported its flash PMI
up and into positive territory for the first time in 18 months. On the other hand, China ’s
flash PMI came in at an 11 month low and
employment was at a four year low.
Overall,
I don’t think that cumulatively this data moves the needle on our
forecast. Although if there is follow
through on the positive EU PMI numbers, it
could portend some lessen of pressure on the southern European
economies/sovereigns/banks.
There
was one political event. Obama kicked
off His new economic campaign. It sounded a lot like the same old ‘tax and
spend’ policies that both parties have pursued for the last three decades. So I am not rating it as a positive event;
more likely it will turn out to be an irrelevant event.
Earnings
reports continue to garner much of investor attention. As you know, to date this season has been
something of a pleasant surprise; although not so much so to warrant raising
our 2013 corporate profits outlook.
Nevertheless, this has to be viewed as a modest positive.
The
other item which apparently weighed heavily on stock prices yesterday was
rising interest rates---which, of course, brings us back to the Fed. Since the start of this latest rally, the
bullish pundits (who clearly have the upper hand) have been divided over the
correct interpretation of Bernanke’s walk back of his ‘tapering’ comments. One school took him literally and believe that
QEInfinity will last forever (i.e. the economy will remain sluggish thereby
necessitating QE---bad news is good news); the other assumes that he meant it and
will in fact ‘taper’ but investors are now acclimated to the thought of
‘tapering’ because ‘tapering’ means are improving economy and an improving
economy is good for stocks even though it means higher interest rates (i.e., we
don’t need no stinkin’ QE, we got growth---good news is good news). Either way, they seemed to stop worrying about the Fed.
However,
with rising interest rates in the last couple of days, stock investors are
getting a bit jittery, again. Without
belaboring the point, (1) if the rates do continue to levitate, investors
should be nervous because every asset in the world is now priced off of
interest rates and (2) big money has been bet on stocks via the carry trade
[borrow very low interest cost money and invest in higher yielding securities];
if interest rate increases severely impact the carry trade, a lot of stock is
going to be sold, I don’t care how improved the economy may be.
Bottom
line: yesterday’s EU PMI
number was the first positive stat out of Europe in some
time. Of course, one datapoint doesn’t
make a trend. In addition, the blogs
were full of skeptics; so the number was not without controversy. I am agnostic about its veracity. Much more important will be whether new data
backs up the PMI or turns it into an
outlier. The better than expected US
profit reports is also a plus. So the
evidence continues to accumulate that the US and global economy are slowly
healing. But that is our forecast so it
just makes it more likely that our Models have the economy and valuations
correct.
***over night,
German business confidence improved, Spanish unemployment and the UK second
quarter GDP was stronger than expected;
while the ECB credit creation fell and private credit creation hit a record
low.
That said, the
rise in interest rates could very well be an indication that my original
thesis, i.e. the Market had an ‘emperor’s new clothes’ experience, and hence
forth it will be less confident of the Fed and began to price the transition
from easy to tight money into the Market (i.e. higher interest rates). Again, I know that I am talking my book. Rates could go down and stocks rebound
tomorrow. Time will tell.
In
the end, I am sticking with our discipline, focusing on lightening up on those
stocks that hit their Sell Half
Range
The
latest from Van Hoisington (medium):
Chart
of the day---Fed balance sheet, S&P and S&P revenues (short):
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