The Morning Call
7/2/15
I am taking this holiday weekend
off, so no Closing Bell. See you on
Monday. Have a great fourth.
The
Market
Technical
The indices
(DJIA 17758, S&P 2077) made further gains yesterday on the news that the
Greek PM had folded like a cheap umbrella. Both finished below its 100 day moving
average---the Dow for the sixth day, the S&P for the third day. The Dow bounced
back above its 200 day moving average.
In addition, the Dow recovered back above the lower boundary of its
intermediate term uptrend, voiding its current challenge.
Longer term, the
Averages are in uptrends across all timeframes: short term (17491-20297, 2060-3039),
intermediate term (17685-23837, 1853-2621) and long term (5369-19175, 797-2138).
Volume declined;
breadth was mixed. The VIX fell 12%, but
remained above its 100 day moving average and within a short term trading range
and an intermediate term downtrend.
The long
Treasury dropped 1.5%, finishing below its 100 day moving average and the upper
boundaries of its very short term downtrend and short term downtrend.
GLD remained comatose,
closing below its 100 day moving average and the neckline of the head and
shoulders formation. Oil was down big,
reflecting rumors that a draft was being circulated on an Iranian nuke deal
(later denied); it ended below the upper boundary of its short term trading
range. The dollar rose, but still closed
below its 100 day moving average and the lower boundary of a very short term
downtrend.
Bottom line: the
Market’s technical picture improved as both the Averages are now back above the
lower boundaries of uptrends---voiding the challenges to those trends. (This recent pin action is a great
illustration of the rationale behind our time and distance discipline.) In addition, the ‘safe haven’ plays that I have
been watching (Treasuries, gold and the dollar) continued to act as though
Greece, Puerto Rico and China are not
problems (in truth, we did get good news on the first two)---which indicates a
lack of fear in current investor psychology and bodes well for stocks short
term.
On the other
hand, volume was unimpressive, breadth was mixed and both the indices are still
well below their 100 day moving averages.
If the current bounce stops short of those moving averages, that is
likely a sign that there is further downside.
Stock
performance in pre-election years that lag (short):
Fundamental
Headlines
Yesterday’s
US economic news turned mixed. The good
news came in the ADP private payroll report, the June ISM manufacturing index
and May construction spending; the bad news was weekly mortgage and purchase
applications, the June PMI manufacturing index and June light vehicle sales. I don’t think that this has any meaning
beyond an endorsement of our forecast of a sluggishly growing economy.
In
Greece, Tsipras said that he would accept the latest Troika offer with a few minor
modifications and call off the referendum.
The Troika’s response: sorry, Charlie, (1) those modifications are not
minor, (2) our offer is off the table and (3) we want the referendum. In short, the bluff has been called and the
Troika holds the cards. So the Sunday
referendum vote now appears to be the next event (the outcome of which it seems
that the Troika is betting will be that the Greeks want to remain in the euro---although
this crisis remains a minute to minute affair, so I won’t be surprised whatever
happens. Bottom line, Tsipras blinked
and that probably means that the odds of a Grexit have declined.
Here
is a great article on how a Greek default would work, or not (medium):
Here
is an article on how this mess could get resolved, or not (medium):
Puerto
Rico and Greece have the same problem (medium):
In
Puerto Rico, the government met all principal and interest payments on current
debt yesterday. The can has been kicked.
In
China, markets continued to decline (medium):
***overnight,
the Chinese stock market fell again. And
in other news the central bank of Sweden lowered key interest rates.
Bottom line: it now
looks like the odds have increased that Greece will remain in the euro and that
Puerto Rico will continue to service its debts.
That doesn’t mean that they will or even if they do that either’s fiscal
problems have been solved. Indeed, they
will likely only get worse and pop up again at some future date except that
circumstances will be even more dire. Nonetheless,
the risk of a major negative event occurring short term has seemingly
lessened.
Now the question
is, did these recent unsettling events cause investors to stop daydreaming and
make a serious re-examination of their current valuation parameters? If not, then we will likely be see another
challenge of the current all-time highs.
If so, this decline is not over given the extraordinary gap between current
prices and historical valuation metrics.
Update
on valuation:
Private
equity firms continue to be large sellers of stock (medium):
Four
minutes with Robert Shiller:
Economics
This Week’s Data
The
June PMI manufacturing index was reported at 53.6 versus expectations of 53.7.
The
June ISM manufacturing index came in at 53.5 versus estimates of 53.2.
May
construction spending rose 0.8% versus consensus of up 0.5%.
Light
vehicle sales fell in June.
Weekly
jobless claims were up 10,000 versus expectations of a decline of 1,000.
June
nonfarm payrolls increased 31,000 less than in May versus estimates that it
would be 50,000 less; however, May’s job growth was lowered by 26,000.
Other
Politics
Domestic
International War Against Radical
Islam
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