Friday, June 26, 2015

The Morning Call---Another last (really) 'take or leave it' offer

The Morning Call

6/26/15

The Market
           
    Technical

The Averages (DJIA 17890, S&P 2102) fell again yesterday.  The S&P remained above its 100 day moving average; but the Dow finished below its comparable level for a second day.  Both ended below their prior highs (18295, 2135).  My very near term focus continues to be on indices behavior around those 100 day moving average support levels.

Longer term, the Averages remained well within their uptrends across all timeframes: short term (17445-20251, 2053-3032), intermediate term (17638-23788, 1849-2617) and long term (5369-19175, 797-2138).  

Volume declined; but breadth was mixed.  The VIX (14) was up another 6%, finishing near but below its 100 day moving average and within a very short term downtrend and a short term trading range.  Anything below 13, I believe offers value as portfolio insurance.

Percentage of stocks above their 50 day moving averages (short):

The long Treasury made a slight comeback, but still closed below its 100 day moving average and the upper boundaries of very short term and short term downtrends. I remain a little concerned about the differing pin actions in the equity and bond markets.  Barring a meaningful pickup in longer term economic activity, TLT shouldn’t be 15% off its high.  Of course, I could be wrong on economic growth; but if so, why is the stock market vacillating?  Or maybe it is the Greek bail out problem.  However, if it is going to rescued which our bond (gold and dollar) market seems to reflect (which investors selling safe haven assets would imply), why aren’t the stock boys equally convinced?   Whatever the scenario, I worried about the reason(s) stock prices are flat but bond prices are down double digits.

GLD declined again [no safe haven here either], remaining below its 100 day moving average and the neck line of the head and shoulders pattern.  Oil was down, ending below the upper boundary of its short term trading range. The dollar also sank and remained below its 100 day moving average and within a very short term downtrend and a short term trading range.

Bottom line: the Averages continued to drift within a very tight range marked by their former highs and their 100 day moving averages. However, the Treasury bond, gold and dollar markets are trading near their 2015 lows.  I don’t have a clear explanation that encompasses a reason for this pin action---which is why it makes me nervous.  However, as long as the indices trade within uptrends across all timeframes, there is no point in getting to beared up for technical reasons.

            The Chinese market continues to get hammered.  As I noted last week, there is not a lot correlation between our Averages and their Chinese counterparts.  However, we need to be aware of what is going on and watchful for any spillover effects (medium):

            A short term limit to S&P advance? (medium):

            A crash risk index for the Market (medium and interesting):

    Fundamental
   
        Headlines

            Yesterday’s US economic numbers were mixed: weekly jobless claims and May personal income and spending came in above estimates while the June Markit Flash services PMI and the June Kansas City manufacturing index were lower than anticipated.  However, the personal income and spending stats were certainly the most important.  So I have to score the day as a plus for the economy, which in turn makes the aggregate data releases this week the best so far in the year.  That isn’t enough to rethink the recent downwardly revised forecast, but it does help take recession off the table.

            Overseas, (1) South Korea lowered its 2015 economic growth forecast which hardly helps the global outlook and (2) China eased monetary policy again which only adds to the excessive level of financial liquidity and the potential problems it spawns (see above). 

            ***overnight, May Japanese inflation barely budged off extremely low levels, but household spending eked out a small gain for the first time in a year.

            But, of course, investors seemingly remained focused on the Greek bail out or the lack thereof; and the news flow took a still more negative turn.  There was no agreement in the Wednesday meeting, the Thursday and Friday meetings were cancelled, Merkel said that she wanted an agreement by Monday and ECB said that it was ending liquidity injections in the Greek banks.   That sounds like a snoot full of bad news---and it is, if they all mean what they say.  The question is will the eurocrats pull another rabbit out of its hat and kick the Greek solvency problem down road or have Greek’s finances reached the point of no return? 

            The latest on Greece as of the last night (medium):

            Behind the scene in Germany (medium):

            ECB threatens to end liquidity injections into Greek banking system (medium):

            ***overnight, it looks like we have another ‘take it or leave it’ offer to the Greeks from the Troika.  At this time, there is no details of the offer (medium):
            http://www.zerohedge.com/news/2015-06-26/troika-offers-greece-third-bailout-program-prepares-emergency-plan-if-no-deal

Bottom line: yesterday’s economic stats cap off the best week for this dataflow this year (all that is left is today’s consumer sentiment report)---and we only had to wait six months.  That backs up our forecast.

On the other hand, the Greek financial dilemma remains a problem that only seemed to get worse yesterday.  The US market’s fate seems to be tied to the Greek deal; although,   I am not sure what kind of upside there is since our Models incorporate a ‘muddling through’ assumption for the global economy.  That said, I am not sure what the downside is either.  However, the difference is that the downside (which as aside, I have no idea how to quantify) whatever it is, is not in either our Economic or Valuation Models. 

   
Economics

   This Week’s Data

            The June Markit flash services PMI was reported at 54.8 versus expectations of 56.6.
           
            The June Kansas City Fed manufacturing in came in at -9 versus the May reading of -12.

   Other

            Here is the optimist’s view of Fed policy.  It focuses mainly on why and how the Fed pursued QEInfinity.  However, the key going forward is how it unwinds it.  In the last three paragraphs the author assumes that the Fed will execute a perfectly controlled exit, which, as I have pointed out more times than you probably cared to hear, the Fed has never, ever been able to do successfully (medium);
           
Politics

  Domestic

More on the passage of the ‘fast track’ trade bill (medium):

The Supreme Court upheld Obamacare.  Justice Scalia’s dissenting opinion (medium):

  International

            Is Portugal the next problem? (medium):








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