Wednesday, July 22, 2015

The Morning Call--Will earnings disappointments continue?

The Morning Call

7/22/15

The Market
         
    Technical

The indices (DJIA 17919, S&P 2119) were down yesterday, seemingly on disappointing earnings reports from two Market biggies (IBM, UTX)---which we got more of after the Market close (APPL, MSFT, CMG, YHOO, GPRO).  The Dow traded back below its 100 day moving average, though the S&P still has a ways to go to confirm that break.  So for now, a challenge of the all-time highs (18295/2135) has been postponed.  I don’t think that means that there won’t be one; but clearly the Averages are at a level where upside progress has been a problem.

Longer term, the indices are within their uptrends across all timeframes: short term (17611-20535, 2080-3059), intermediate term (17827-23968, 1869-2635) and long term (5369-19175, 797-2145).  

Volume rose; breadth remained mixed.  The VIX (12.2) fell; a little unusual for a down Market day---a mirror image on Monday’s action. I continue to believe that a price below 12.0 represents good value as portfolio insurance.

The long Treasury was up, but closed below its 100 day moving average and within its short term downtrend.

Beware high yield ETF’s (medium):

Update on the muni bond market (short):

GLD fell again.  It ended below its 100 day moving average and within short and long term trading ranges and an intermediate term downtrend.

Gold warns again (medium):

Oil was up, but finished below its 100 day moving average and near the lower boundary of its short term trading range.  The dollar took a breather yesterday, ending above its 100 day moving average and within short and intermediate term trading ranges.

Bottom line: those all-time highs remain an elusive target. As long as that remains the case, the thesis that the Market is in a topping formation continues to carry weight---and the more times that stocks can’t muster a challenge, the stronger the argument.  I am not suggesting that a top has been put in; but it is looking more likely.  As always, follow through is key.

    Fundamental
   
       Headlines

            Yesterday was another slow day for economic reports.  In the US, month to date retail chain store sales slowed from the prior week.  Overseas, German June PPI fell 0.1%, in line, but hardly an indication of economic strength.

            ***overnight, Chinese business sentiment plunged 14%, falling into negative territory; Italian retail sales declined.

            The main headline was corporate earnings reports.  IBM’s and United Technologies’ were below estimates and that was followed by more weaker than expected releases after the Market close.  The question is, are the above numbers just a brief aberration or are we starting to get the disappointments that the bears have been looking for the last four quarters?  I have been wrong too often in the last year to venture a guess at this point.  But clearly, this something to which we need to pay attention.
           
            There was one news item out of Greece: the government submitted to parliament legislation enacting terms demanded by the Troika.  The vote on the measure is before parliament today.

In addition, a steady stream of negative narratives continues:

            The problem of corruption in Greece (medium):

            Citi on the need for a Greek debt ‘haircut’ (medium):

Bottom line: earnings reports held center stage yesterday and the viewing was not that inspiring.  This is the first really lousy day in this earnings season and it may be the worst in the last couple of quarters.  However, it was one day of stats, certainly nothing to get beared up over.  There will need to be a number of days like that before anything like a trend appears. 

That said, this is the kind of news that could get investors thinking about valuations---which in my opinion are stretched.  Hence, the risk/reward equation at the moment is heavily weighed to the downside.

I continue to believe that the key investment strategy today is to take advantage of the current high prices to sell any stock that has been a disappointment or no longer fits your investment criteria and to trim the holding of any stock that has doubled or more in price.

            David Stockman on valuations (medium):

            Ed Yardeni on valuations (short):

        
Economics

   This Week’s Data

            Month to date retail chain store sales slowed from the prior week.

            Weekly mortgage applications rose 0.1% while purchase applications were up 1.0%.

   Other

            Update on big four economic indicators (and industrial production):

Politics

  Domestic

  International War Against Radical Islam

            The latest from Iran (short):





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