The Morning Call
8/27/15
The
Market
Technical
The indices
(DJIA 16285, S&P 1940) put on a light show yesterday, reversing Tuesday’s
trend breaks. The Dow ended [a] below
its 100 and 200 day moving averages, both of which represent resistance, [b] in
a short term downtrend {17044-17959}, [c] back above the lower boundary of its
intermediate term trading range {15842-18295}, negating Tuesday’s break and [d]
in a long term uptrend {5369-19175}.
The S&P
finished [a] below its 100 and 200 day moving averages, both of which represent
resistance, [b] below the upper boundary of a very short term downtrend, [c] in
a short term downtrend {2033-2096}, [d] back above the lower boundary of its intermediate
term uptrend {1896-2659}, voiding Monday’s break, and [e] a long term uptrend
{797-2145}.
Volume was flat
but near Tuesday’s high; breadth spiked, though the flow of funds indicator remains
negative. The VIX fell another 15%, finishing
[a] above its 100 day moving average, now support, [b] within a short term
uptrend, [c] above the upper boundary of its intermediate term downtrend, re-setting
to a trading range and [d] a long term trading range.
The long
Treasury’s pin action remains negative, ending [a] above its 100 day moving
average, now support, [b] within short and intermediate term trading ranges but
[c] below the lower boundary of a very short term uptrend; if it remains there
at the close today, it will re-set to a trading range.
GLD declined
again, remaining below its 100 day moving average and within short,
intermediate and long term downtrends and right on the lower boundary of its very
short term uptrend, starting the inevitable challenge.
Oil was up for a
second day, but still finished below its 100 day moving average and within
short and intermediate term downtrends.
The dollar also
rose, but closed below its 100 day moving average, now resistance, and within
short and intermediate term trading ranges.
Bottom line: yesterday
we got the bounce off an extremely oversold position that most investors had
expected on Tuesday; and it was a doozy, reversing the technical damage done on
the prior day. I would not be surprised
to see follow through to the upside.
That said, assuming the recent decline is all over, there is a lot of
work that must done to prove it---the corollary to that being the recent
decline may not be over. Indeed, the
recent performance of the VIX points to continuing risk to the downside. In
fact, my bottom line is that the volatility has been so extreme in both
directions, I don’t see how any conclusion can be drawn from the recent pin
action---and that suggests it is a time to do nothing unless you are a seasoned
trader.
The long
Treasury is challenging its very short term uptrend, calling into question the no
Fed rate hike and/or a weakening economy scenario. I linked to an article yesterday, pointing to
the negative price impact of Chinese government’s selling our Treasuries. On the surface, that is more of a technical than
fundamental factor; although the Chinese selling is function of trying to
defend the yuan whose decline has potentially deflationary implications. Confusing?
Join the crowd.
China
lets us know that it is in fact selling Treasuries (medium):
Timing
the Market (short):
How
badly has the Market been damaged (medium)?
Fundamental
Headlines
Yesterday’s
US economic news was reasonably upbeat: mortgage and purchase applications were
both positive and July durable goods orders were strong, though they were
heavily influenced by the highly volatile transportation sector.
The
best news was of the anecdotal nature; and that was the announcement that
Schlumberger was buying Cameron Int’l, another oil field equipment company. That a major player in the oil industry was
willing to spend money to grow its exposure to the oil industry provided a
major boost in investor confidence that the oil industry was not descending
into oblivion.
In
other news, NY Fed chief Dudley made comments to the effect that the case for a
Fed rate hike in September had lessened.
Ahhh, to be a true believer in the power of QEInfinity.
Has the Fed
missed its chance to raise rates? (medium and a must read):
It’s
different this time, almost (medium):
The
Fed has been wrong on inflation (medium):
The
latest from Jim Grant (7 minute video):
Overseas,
the Chinese stock market took another 1% hit.
But the Chinese government resumes its hunt for a scapegoat (medium):
And:
It
is also once again intervening its stock market (medium):
Merrill
Lynch on this week’s Chinese rate cut (short):
A
new and scary estimate of Chinese growth (short):
Bottom line: it is unclear to me just how much of yesterday’s
bounce was technical and how much was attributable real long term demand for
stocks. If the technicals are pointing
to fundamental improvement, it is not showing up in the data. But as I have said, the Market will know
before we do. That said, the recent
extreme volatility makes it difficult to make any assumptions about what Market
knows. We really need some stability and
directional clarity to get a handle on that.
On a more
fundamental basis, my theme that the Markets were losing faith in central bank
monetary policy seemingly took a big hit---if yesterday’s rally was in anyway
related to Dudley’s comments and/or the Chinese government’s attempt to cower sellers
of stock.
All considered, stock
prices’ recent decline has only marginally narrowed the gap between valuations
and fundamentals. Even if the latter improved, stocks would still be overvalued. Sooner or later, that spread will mean revert.
At the moment,
patience reigns supreme. I would do
nothing until the technical picture clears and price stability returns.
The
latest from Lance Roberts (medium):
Economics
This Week’s Data
Second
quarter revised GDP was up 3.7% versus consensus of 3.2%; the price deflator
came in at 2.1% versus estimates of 2.0%;
corporate profits were up 7.3% versus the prior reading of up 9.0%.
Weekly
jobless claims fell 6,000 versus forecasts of down 7,000.
Other
Gallup’s
economic confidence index plunges (short):
International
trade continues to contract (short):
Signs
of risk to the US economy (medium):
Iran
prepared to defend its old market share ‘at any cost’ (remember these guys lie)
(medium):
Politics
Domestic
International War Against Radical
Islam
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