Wednesday, July 8, 2015

The Morning Call---Tsipras appears to fold, Chinese markets actually fold

The Morning Call

7/8/15

The Market
           
    Technical

In a very volatile day, the indices (DJIA 17776, S&P 2081) ended to the upside.   Both finished below its 100 day moving average.  The Dow closed back above the lower boundary of its intermediate term uptrend, voiding Monday’s break.  The S&P closed above the lower boundary of its short term uptrend. 

The last time utilities and transports lagged (short):

Yesterday’s turnaround should lead to positive month (short):

Longer term, the Averages are in uptrends across all timeframes: short term (17505-20311, 2064-3043), intermediate term (17726-23868, 1858-2626) and long term (5369-19175, 797-2138).  

Volume increased slightly; breadth was mixed.  The VIX fell 5%, but still ended above its 100 day moving average and within a short term trading range and an intermediate term downtrend.

Update on Bloomberg’s smart money flow (short):

The long Treasury rose 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.  On the other hand, it closed above the upper boundary of its very short term downtrend for a second day, negating that trend.

GLD fell substantially---again not trading like 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.  The dollar rose slightly, but, like gold, didn’t demonstrate any characteristics of a safe haven.  Oil was up fractionally ending below its 100 day moving average and the upper boundary of its short term trading range.

Bottom line: the Averages staged a dramatic intraday reversal, trading down big during the day but rallying to finish up.  It would seem that investors remain sanguine about the Greek bail out dilemma as well as any potential fallout from the plunging Chinese stock market.  So the bulls still have some fight in them.

That said, it may have been nothing more than a bounce off an oversold condition.  Plus, the indices remain below their 100 day moving averages (which now constitute resistance) and the upper boundary of very short term downtrends.  So stocks have some work to do before they stage another assault on the upper boundaries of their long term uptrends.
           
    Fundamental
   
       Headlines

            Yesterday’s US economic data was upbeat but it was comprised of two secondary indicators: the May US trade deficit was slightly below estimates and month to date retail chain store sales were higher than the prior week. 

            ***overnight, a Puerto Rican official said that the island will not pursue a reduction in principal on its outstanding debt, but rather will renegotiate the terms of its debt (lower interest rates and extend maturities).
           
            Overseas, the UK released two conflicting measures of its manufacturing sector: the manufacturing PMI was below expectations while industrial production was above.

            Holding center stage:

(1)   the Greeks submitted [supposedly] a new set of proposals for a bail out.  Troika members suggested that it was more like a regurgitation of its prior plan coupled with a request for funding and the promise to negotiate seriously later.  I probably don’t need to report that this was not well received.  Later in the day, it was announced that there would a meeting on Sunday which would be Greece’s [next] last chance to come up with an acceptable blueprint that meets Troika criteria. 

Investors seemingly greeted these development with hope (medium):

Meanwhile, the ECB said that it is ready for any problems from a failed Greek bail out (medium):

At the risk of raining on the Greek solution parade, this is a great description of what caused the Greek problem and why it won’t be solved with another bail out (medium and a must read):

                 How Germany is perceived by many Europeans (medium):

***overnight, Tsipras appears to have folded---but you never know with these guys (medium):


(2)   the Chinese stock market continues to get whacked with the government stumbling all over itself to stem losses

Going so far as to ban certain language discussing the risk (medium):

                 Making sense of the Chinese market, or not. (medium):

                 China or Greece driving the market? (short):

***overnight, Chinese stocks plunge again, followed by agricultural and industrial commodities.  Over one half of all listed companies have now suspended trading in their share (medium):


Bottom line: Tsipras promise to have a better deal shortly if the Greeks gave him a NO vote didn’t quite work out that way.  In fact, the Troika once again gave him a raspberry on his Tuesday proposal and (another) last chance to get his act together and present an acceptable plan later this week which would then be considered on Sunday.  So this Chinese water torture test continues unabated; and who knows how long these guys will keep dicking around until some final decision is made.   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.    Which we now apparently have after last night’s stunner; we now wait to see if Tsipras is really serious this time.

Conditions in the Chinese market didn’t improve despite some pretty desperate measures.  To date there has been no direct spill over into our market, though there are worries that a Chinese bear market could impact its highly leveraged financial system and consumer sentiment (it seems much of this latest rally is being driven by retail speculation)---and that could generate negative repercussions around the globe. So far none of this has seriously diminished US investors’ positive psychology; and until it does, the gap between current prices and historical valuation metrics will remain.  

Another factor that could influence ‘goldilocks expectations is second quarter earnings season which starts today.  Thus far in the current recovery, profits have managed to beat estimated, even though they have regularly have been downwardly revised numbers.  That hasn’t bothered investors either. 

I continue to 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.

       Investing for Survival

            Why our Stop Loss and Sell Half Discipline are so important (short):

    News on Stocks in Our Portfolios
 
Economics

   This Week’s Data

            Month to date retail chain store sales rose again.

            Weekly mortgage applications were up 4.6% while purchase applications were up 7.0%.

   Other

            The reach for yield (medium and today’s must read):

Politics

  Domestic

More of your government at work (short):

  International

            The rise of the failed state and why that is a problem (medium):








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