The Morning Call
7/9/15
The
Market
Technical
The indices
(DJIA 17515, S&P 2046) got hammered yesterday. Both finished below both their 100 and 200 day
moving averages. The Dow closed below
the lower boundaries of both its short and intermediate term uptrends. If it remains below its short term uptrend
through the close on Friday, the trend will be negated; if it remains below its
intermediate term uptrend through the close next Monday, that trend will be
negated. The S&P ended below the
lower boundary of its short term uptrend; if it remains below that trend
through the close on Friday, that trend will be negated.
Stock
performance in cyclical and structural bull/bear markets (medium):
Longer term, the
Averages are, for the time being, in uptrends across all timeframes: short term
(17531-20337, 2084-3047), intermediate term (17733-23875, 1858-2626) and long
term (5369-19175, 797-2138).
Volume fell but
that was likely due to the three hour suspension in trading at the NYSE. Breadth was negative. The VIX rose 22%, ending above its 100 day
moving average and within a short term trading range and near the upper
boundary of its intermediate term downtrend.
The long
Treasury was up again, apparently still attracting the ‘safe haven’ trade. However, it remained below its 100 day moving
average and the upper boundary of its short term downtrend.
GLD was up
slightly---but still no sign of investors seeking it as a safe haven. It finished below its 100 day moving average
and the neckline of the head and shoulders formation and very near the lower boundary
of its intermediate term trading range.
One theory on
gold prices (medium):
The dollar fell
slightly, like gold, not demonstrating any characteristics of a safe
haven. Oil was down 2.5%, finishing
below its 100 day moving average and near the lower boundary of its short term
trading range.
Bottom line: can
you say ‘volatility’? After the dramatic
intraday reversal Tuesday, indices headed south at the outset yesterday and
continued down throughout the day.
Investors apparently not quite so sanguine about the Greek bail out
dilemma or the potential fallout from the plunging Chinese stock market.
As noted above,
the Averages blew through numerous support levels. The key, as I so often point out, is the
follow through. On the positive side,
stocks are oversold. Plus ‘buying the
dips’ has been the ‘go to’ strategy for the last six years and it has
worked. Clearly, with all those broken
support levels, it needs to work again and rather quickly. The negatives are the aforementioned broken
trends; and the plunging Chinese markets are starting to impact investor
psychology. Strap on your flak jacket.
Fundamental
Headlines
Two
minor US economic indicators was released yesterday: weekly mortgage and
purchase applications were up while May consumer credit rose less than
anticipated.
More
important was the release of the minutes from the latest FOMC meeting. While they read very similar to the closing statement
of that meeting, they nevertheless were a touch more hawkish than that
statement that a rate hike in September appears to have remained on the table.
Which
Fed whisperer Hilsenrath seems to echo.
That
said, there is no way anyone can postulate what the Fed is going to do, given present
confusion over developments in both Greece and China. Now both situations may be resolved by
September, giving the Fed a much less troublesome picture going forward than
they have at present. But if they aren’t,
I can’t believe that the Fed would make any move towards tightening.
Speaking
of Greece, in early headlines yesterday, Tsipras indicated a willingness to
meet the austerity demands of the Troika in order to gain bailout funds. However, we later learned that he apparently also
asked for the renegotiation of the terms of Greece’s current debt. That got mixed and some highly emotional
responses.
Germany says ‘nein’
The
IMF says ‘oui’
Meanwhile,
Greek businesses start pricing in drachmas
So my bottom line here hasn’t changed: I don’t
know how this ends and I don’t know what it means for the markets if it ends
badly; but I do believe that there will be unintended consequences; and since
those are by definition unknowable, this situation demands some caution.
On
the other side of the globe, the Chinese markets continue to slide; and in
another desperate move, the Chinese government made stock sales by major
shareholders illegal and over one half of the listed companies asked for a
trading halt their stocks (short):
***overnight,
China blaming Soros for sell off (medium):
The
steep decline is concerning enough; but I am also bothered by (1) given the
controls that the government has attempted to exercise over the markets, what
is occurring now, bad as it is, can’t be characterized as price discovery. The point being, what happens when the
markets, in an attempt at price discovery [like all stocks being traded],
overwhelm government moves [like the government determining who can buy and
sell]? and (2) given that you can’t believe anything that is reported in China
anyway, you have to wonder how leveraged up the market participants really are and
if there are other forces driving prices
down that we don’t even know about.
China’s
worrisome financial crash (medium):
Which
is causing problems for the yen carry trade (short):
Bottom line: about
the best that can be said at the moment is that conditions are confusing in both
Greece and China. Yesterday’s pin action
suggested that at least for a day, investors have taken notice. I don’t see way of reasonably forecasting
whether circumstances improve or deteriorate in either. We may wake up tomorrow and all will be
well. On the other hand, both have the
potential to turn to s**t.
This is a time when
there is nothing to do but await the outcome of disruptive events. Given the current spread between prices and
Fair Value (at least as determined by our Model), I believe that there is more
downside. Even if I am wrong, it is way
too soon to be buying weakness. But it
is time to be glad that our Sell Half Discipline has pushed our Portfolios to
own some cash.
Economics
This Week’s Data
Consumer
credit rose less than expected in May.
Weekly
jobless claims rose 15,000 versus estimates of a 6,000 decline.
Other
The
latest Atlanta Fed second quarter GDP growth estimates has now risen to 2.3%
Median
household income rose in May.
Politics
Domestic
International War Against Radical Islam
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