12/17/15
The
Market
Technical
The indices
(DJIA 17749, S&P 2047) smoked yesterday.
The Dow ended [a] above its 100 moving average, which represents
support, [b] above its 200 day moving average, now resistance; if it remains
there through the close next Monday, it will revert to support, [c] within a
short term trading range {16919-18148}, [c] in an intermediate term trading
range {15842-18295}, [d] in a long term uptrend {5471-19343}, [e] and still
within a series of lower highs.
The S&P
finished [a] above its 100 moving average, which represents support, [b] above its
200 day moving average, now resistance; if it closes there through the close on
Monday, it will revert to support, [c] in a short term trading range
{2016-2104}, [d] in an intermediate term uptrend {1982-2775}, [e] a long term
uptrend {800-2161}, [f] still within a series of lower highs.
Volume was flat;
breadth improved. The VIX (17.8) fell 15%,
ending [a] below its 100 day moving average, now support; if it remains there
through the close on Friday, it will revert to resistance, [b] within short
term, intermediate term and long term trading ranges.
And:
And:
The long Treasury
declined again, closing below its 100 day moving for the second day, now
support; if it remains there through the close on today, it will revert to
resistance. It is also within very short
term, short term and intermediate term trading ranges.
GLD rose,
finishing [a] below its 100 day moving average, now resistance and [b] within
short, intermediate and long term downtrends.
Bottom line: I have
to admit I was surprised by the Market’s enthusiastic reception of the Fed rate
decision. As I have noted several time,
this had to have been to most discounted Fed move in a long time; so I had
expected a more muted reaction. That
said, this pin action was also likely influenced by the end of tax loss
selling, the soon to arrive Santa Claus rally and tomorrow’s giant options
expiration. How much so, I have no
idea. It will probably be early next
week before we know the answer.
I continue to have
no feel for the short term direction of the Market. Longer term, the numerous divergences below the
Market surface, the turmoil in the high yield debt market which historically
has anticipated problems in the stock market along with our assessment that
stocks are very richly valued I believe argues against a successful challenge of
the upper boundaries of the indices long term uptrends and for a decline to
significantly lower levels.
Fundamental
Headlines
Yellen’s
upbeat assessment of the economy notwithstanding, yesterday’s stats were not
that great: November housing starts and building permits were stronger than expected;
however, weekly mortgage and purchase applications, November industrial
production and the December manufacturing PMI flash index were all below
forecasts.
Overseas,
the numbers weren’t any better: the Bank
of China lower its GDP growth estimates for 2016 and the December French Markit
composite PMI fell.
***overnight,
the IMF told Ukraine in must negotiate in good faith with Russia over a $3
billion note due on Sunday in order to receive its next round of bailout money;
German December business confidence fell
slightly; the Chinese yuan fell for the ninth day in a row.
Of
course, the big news of the day was the Fed rate decision and the tone of its accompanying
statement---and as in noted above, it kept investors tip toeing through the
tulips. In sum:
(1)
raised the Fed Funds rate by 25 basis points; however,
it took no action to reduce the size of its [bloated] balance sheet,
(2)
reasoned that the economy had, at last, achieved its
objective [ignoring the high level of drop outs from the labor forces and that
inflation is nowhere near its benchmark],
(3)
changed to a [more complicated] formula that would
determine the timing and size of future rate increases or shrinkage of its
balance sheet---though Yellen declined to provide clarity on how the new
criteria will be used to make those judgments.
In short, the
Fed raised rates but its post-meeting statement as well as Yellen’s comments
were very dovish.
The
FOMC statement:
The
Fed’s economic projections:
Fed
whisperer Hilsenrath’s comments (medium):
Bottom line: I remain puzzled by the Fed’s public
assessment of the economy. The trend,
well documented in these pages, is not great.
Indeed, the numbers were better before the last Fed meeting than this;
or said another way, they have deteriorated since the last meeting. And today’s and this week’s stats are just
the most current example. You don’t have
to take my word for it. If you look at
the bond market’s assumptions as reflected in current rates and spreads, it is
much less enthused about the economic prognosis. In fact, it is pricing higher odds of a rate
CUT at the next FOMC meeting than a rate HIKE.
That said, as
long as none of this seems to matter to stock investors, equity prices will
continue to advance. Certainly, the
seasonal bias will help things along. Nonetheless,
I think that the economy has weakened too much, that the stock market internals
are so broken and that the high yield debt market has deteriorated too such an
extent that mean reversion will begin to weigh heavily on the stock
market.
One other
item. My long held belief that an end of
QE will be neutral to positive for the economy but negative for the Market is
now going to be tested, the pitifully weak reversal notwithstanding.
I am not
suggesting that investors run for the hills.
I am suggesting that they use the Market strength to take some profits
in winners and/or eliminating investments that have been a disappointment.
Let me back up
for a second and give an investment strategy view from 30,000 feet. In the last six months the divergences inside
the Market have been as pronounced as I have seen in my career save the 1970 ‘nifty
fifty’---energy, emerging markets and now high yield debt aren’t just showing
signs of weakness, they are getting crushed.
So much so that despite the fact that large segments of the stock market
continue to be dramatically overvalued, the aforementioned have already
experienced their own bear markets, being down 30% to 50% or more.
While I still
believe that stocks in general will eventually catch down, so to speak, our Buy
Discipline still suggests that purchases be made when assets reach their Buy Value
Range, especially if they have suffered price declines on the order of
magnitude noted above. That is why our
Portfolios bought energy related stocks/ETFs several weeks ago and why our ETF
is buying high yield today.
That said, they
could very well suffer more when the rest of the Market follows them down, so
the hedge here is to start buying but average in over time.
Economics
This Week’s Data
November
industrial production fell 0.6% versus expectations of down 0.2%; capacity
utilization fell to 77.0 from 77.4 in October.
Update on big
four indicators (medium):
The
December manufacturing PMI flash index was reported at 51.3 versus estimates of
52.8
Weekly
jobless claims fell 11,000 versus forecasts of down 12,000.
The
December Philadelphia Fed manufacturing index came in at -5.9 versus
projections of +1.2.
The
third quarter US traded deficit was reported at $124.1 billion versus consensus
of $119.0 billion.
Other
Latest
on student loans (short):
Politics
Domestic
International War Against Radical
Islam
The
FBI’s problem with muslim leaders (medium):
US foreign policy becomes ever more
convoluted (medium):
