The Morning Call
7/7/15
The
Market
Technical
The indices
(DJIA 17683, S&P 2068) retreated yesterday on the news of a Greek No vote---but
not much. Both finished below its 100
day moving average. In addition, the Dow
once again closed below the lower boundary of its intermediate term uptrend; if
it remains below this trend line through the close on Thursday, the trend will
be negated. The S&P closed above the
lower boundary of its short term uptrend.
Longer term, the
Averages are in uptrends across all timeframes: short term (17505-20311, 2064-3043),
intermediate term (17706-23848, 1856-2624) and long term (5369-19175, 797-2138).
Volume increased
slightly; breadth was negative. The VIX rose,
ending above its 100 day moving average and within a short term trading range
and an intermediate term downtrend.
Not
surprisingly, the long Treasury lifted (safe haven), closing below its 100 day
moving average and the upper boundary of its short term downtrend. However, it broke above the upper boundary of
its very short term downtrend; if it trades above this boundary through the
close on today, the trend will be negated.
GLD edged
higher; but certainly didn’t trade like a safe haven. It finished below its 100 day moving average
and the neckline of the head and shoulders formation. The dollar also rose slightly, but, like gold,
didn’t demonstrate any characteristics of a safe haven. Oil got hammered on the prospects of a
US/Iranian nuke deal (meaning lifting sanctions and therefore, renewed exports
of Iranian oil).
Bottom line: after
some initial weakness, the indices basically yawned at the Greek No vote. I am not sure I agree with that judgment; but
it is pointless to argue with price.
Given that response and assuming all other things are equal, I would
expect the Averages to take another run at their highs.
But all other
things aren’t equal; specifically, the turmoil in the Chinese securities
markets is causing some investor heartburn.
Plus, the indices have suffered some technical damage, particularly they
have been unable to regain their 100 day moving averages---which I have often
pointed out had offered strong support in the preceding two years.
So right now, the
Averages are in very short term downtrends and below those 100 day moving
averages which have to be honored until they are successfully challenged.
Fundamental
Headlines
Yesterday’s
US economic news was mixed to slightly negative: the June PMI services index
was below estimates while the ISM nonmanufacturing index was in line. (as an aside, this follows an evenly balanced
data flow last week). So the stats
continue to support our forecast.
Overseas,
May German factory orders were disappointing.
Not what we want to see from the strongest economy in an EU that is
supposed to be recovering.
***overnight,
June UK manufacturing came in below estimates while industrial production was
above.
Once
again though the headlines were dominated by Greece, specifically the surprising
strong Sunday No vote on the last Troika bail out offer. At the moment, everybody is meeting everybody
else trying to figure out what to do next.
In other words, the eurocrats are still working on a new ‘kick the can down
the road’ strategy. So this story isn’t
over. But once again the probability of
disruptions from a default or Grexit seem to have inched higher. Ratching up that likelihood, yesterday the
ECB raised the ‘haircut’ Greek banks must take on the assets they pledge as
collateral (short):
Nevertheless,
there remains several possible outcomes each of which has a number of
conceivable consequences---all of which are now subject to some pretty intense ongoing
debate. Rather than dealing with all the
alternatives myself, I offer the following discussions by experts well above my
pay grade.
Mohamed
El Erian on Greece (medium):
Stratfor
on Greece (medium):
Naked
Capitalism on Greece (which has been more right than most through this
crisis---medium):
Barry
Ritholtz on Greece (must read)
A
reminder of what happened in Cyprus (medium):
***overnight,
Tsipras is making what may be his last set of proposals for a bail out
(medium):
Also
weighing on investors’ minds is the present mayhem in the Chinese stock
market. Because the Chinese own the vast
majority of the shares experiencing the turbulence, there is limited impact on
investors outside of that country. So in
that sense, there is little danger of a direct spill over into other markets. However, there are macroeconomic
consequences should this market suffer a severe selloff---and that is where the
spill over impact comes. That is, a
significant economic slowdown resulting from severe capital losses could
influence global growth.
More
on the financial (market) problems in China (medium):
And
(medium):
Who
gets hurt, or not? (short):
China
bans stock selling by pension plans (medium):
***overnight,
despite efforts by the Chinese government to prop up the stock market, it is
off again today.
Bottom line: the
Greek NO vote, eliminated one unknown but simply opened up more possible
unknowns. 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.
Of course, if
Monday’s pin action is any guide, the Market was essentially unphased by the
Greek vote. That in turn suggests all
the possible bad news on this situation has been discounted. And it may.
However, just because everyone is yakking about a problem doesn’t mean
that its consequences are properly reflected in prices. Nor does it mean that in evaluating the
likely outcomes, investors won’t began to question their perspective on current
stock valuations.
In other words, the
outcome of the current Greek crisis may not be terribly impactful from an economic
point of view. And indeed, it may have
little effect on stock prices. However,
given the present extraordinary gap between current prices and historical
valuation metrics, I believe that some incident or number ultimately will
result in an ‘emperor’s new clothes’ moment that leads to the recognition of
the aforementioned gap. While that doesn’t mean that a
Greek default or Grexit triggers that ‘new clothes’ moment, it also doesn’t’ mean
that it won’t.
Too
late for the Fed to raise rates? (medium):
Economics
This Week’s Data
The
June PMI services index was reported at 54.8 versus expectations of 55.1.
The
June ISM nonmanufacturing index came in at 56.0, in line.
The
May US trade deficit was $41.9 billion versus estimates of $42.7 billion.
Other
Politics
Domestic
International War Against Radical
Islam
Update
on the US/Iranian nuke talks (medium):
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