Tuesday, August 25, 2015

The Morning Call---A bounce in the making

The Morning Call

8/25/15

The Market
         
    Technical

The indices (DJIA 15871, S&P 1893) plunged again, only worse.  The Dow ended [a] below its 100 and 200 day moving averages, both of which represent resistance, [b] in a short term downtrend {17083-17970}, [c] in an intermediate term trading range {15842-18295} and [d] in a long term uptrend {5369-19175}.

The S&P finished [a] below its 100 day moving average, leaving it as resistance, [b] below its 200 day moving average; if it remains below that MA through the close today, it will revert from support to resistance, [c] below the upper boundary of a very short term downtrend, [d] below the lower boundary of its short term trading range, re-setting to a downtrend {2035-2098}, [e] below the lower boundary of its intermediate term uptrend {1894-2657}; if it remains there through the close Thursday, it will re-set to a downtrend, and [f] a long term uptrend {797-2145}. 

Stock performance after two 3% down days in a row (short):

Volume was higher than the option expiration influenced level last Friday; breadth was awful.  The VIX soared another 45%, finishing [a] above its 100 day moving average; if it remains there through the close today, it will revert to support, [b] above the upper boundary of its short term trading range; if it remains there through the close today, the short term trend will re-set to up, [c] above the upper boundary of its intermediate term downtrend; if it remains there through the close on Wednesday, it will re-set to a trading range and [d] a long term trading range.
           
The long Treasury slipped yesterday, ending [a] above its 100 day moving average, now support, [b] within short and intermediate term trading ranges and [c] above the lower boundary of a very short term uptrend.

GLD fell, remaining below its 100 day moving average and in short, intermediate and long term downtrends.  However, it is in a very short term uptrend.  This could be signaling that a bottom has been made; however, that very short term uptrend needs to be challenged, at least once, before I would have any confidence in that judgment.

Oil continues to crash (down 6.5%), finishing below its 100 day moving average and within short and intermediate term downtrends.

The dollar declined, closing below its 100 day moving average, now resistance, and within short and intermediate term trading ranges. 

Bottom line: the wind blew and the s**t flew and I couldn’t see for a minute or two.  Despite a huge down move, only one new trend was being challenged at the Market close---the lower boundary of the S&P’s intermediate term uptrend (the S&P short term trend did re-set from a trading range to down).  And that challenge was just barely.  I said in yesterday’s Morning Call that the levels represented by the lower boundary of the Dow’s intermediate term trading range and the lower boundary of the S&P intermediate term uptrend looked like a reasonable point to bounce; if only because stocks are so oversold.

That said, the Averages’ intermediate term trends are in danger of being re-set to down; and if that occurs, then it is pretty safe to say that this Market has topped and is heading lower.  Unless you are a trader, I would not be buying until and/or if the indices settle down.

Bonds continue to suggest no Fed rate hike and/or a weakening economy---though being off yesterday was a bit puzzling given the equity markets pin action.  Nevertheless, stocks and oil/commodities are also signaling that scenario.

    Fundamental

       Headlines

            One US economic datapoint was released yesterday: the July Chicago Fed national activity index was ahead of expectations; though, the June reading was revised down big.

            Of course, this stat was hardly noticed as international markets were crashing ahead of our own open, then our Markets took us for a ride on the Wild Mouse.  Many investors were disappointed that the Chinese central bank did nothing to intervene in either its stock or currency markets.  My opinion is that there was more to it than that: principally, the rapidly dissipating confidence in central bankers’ ability to influence market and or economies.  If so, then there is a ways to go on the downside if this leads to the mean reversion of prices to value.
           
Fed policy is bankrupt (short):

            Will it have to step in again and rescue the markets? (medium):

            QEIV? (medium):

            ***overnight, Chinese markets were down another 7%; however, (1) there were two upbeat economic reports [a] August electric power generation was up 4%---though many experts doubt the veracity of that number and [b] August leading economic indicators were up---but were led by increased bank{read margin} loans and (2) its central cut key interest rates.

            In other developments, the Japanese stock market was off 4%; August German business confidence was ahead of expectations.

Bottom line: the risks that I list each week in the Closing Bell seem to be coming manifest (1) recession/deflation driven by a slowing global economy and (2) loss of faith in central bank failed policies.  The technicals will likely tell us if thesis is correct or not long before we know the actual level of malaise in China and the emerging markets or a revolt against central bank incompetence surfaces. 

Whether or not these happen in the short term doesn’t change the other part of my thesis which is that there is a disconnect between valuations and fundamentals; and sooner or later, that spread will mean revert.

I would discontinue any effort to sell stocks that have 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.  But I would also not be buying.

            Coping with a correction.  This is a junior form of a Buy Value Range (short):

            The risk of normalization (medium):

            10 reasons why the Market is going lower (medium):

     
Economics

   This Week’s Data

   Other

Politics

  Domestic

  International War Against Radical Islam







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