The Morning Call
8/26/15
The
Market
Technical
The indices
(DJIA 15666, S&P 1867) pulled an Alfred Hitchcock move yesterday, soaring
in early trading and then plunging in the final hour. The Dow ended [a] below its 100 and 200 day
moving averages, both of which represent resistance, [b] in a short term downtrend
{17060-17957}, [c] below the lower boundary of its intermediate term trading
range {15842-18295}; if it trades there through the close on Friday, it will
re-set to a downtrend 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 which reverted to resistance yesterday, [c] below
the upper boundary of a very short term downtrend, [d] in a short term downtrend
{2033-2096}, [e] below the lower boundary of its intermediate term uptrend {1894-2657}
for the second day; if it remains there through the close Thursday, it will
re-set to a downtrend, and [f] a long term uptrend {797-2145}.
September, the
worst month of the year (short):
Volume was high,
though not quite as much as Monday’s action; breadth was mixed, though the flow
of funds indicator was terrible. The VIX
fell 12% [unusual for a down Market day], finishing [a] above its 100 day
moving average, reverting to support, [b] above the upper boundary of its short
term trading range, re-setting to an uptrend, [c] above the upper boundary of
its intermediate term downtrend; if it remains there through the close today,
it will re-set to a trading range and [d] a long term trading range.
The long
Treasury fell again, but still ended [a] above its 100 day moving average, now
support, [b] within short and intermediate term trading ranges but [c] right on
the lower boundary of a very short term
uptrend.
This helps
explain the unusual pin action in Treasuries recently (medium):
GLD declined,
remaining below its 100 day moving average and in short, intermediate and long
term downtrends. However, it is in a
very short term uptrend, which is close to being challenged. If that is unsuccessful, then it would be a decent
signal that the bottom has been made.
Oil rebounded,
finishing 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’s
pin action was fairly impressive in the sense that (1) there was every expectation of a bounce from a
very deeply oversold condition; and yet the Market could not hold early gains
and (2) more technical damage was done by the Dow closing below the lower boundary
of its intermediate term trading range. As
you may recall, I have made the point that if the intermediate term trends turn
negative, there is not real definable support levels until the Averages hit their
2011 lows (10332/1011)---not something that any of us care about
contemplating. Unfortunately, we must
because both the S&P and Dow intermediate term trends are under
attack. That said, ‘contemplating’ is
the operative word. I am not ready to
throw in the towel just yet.
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
Lots
of news yesterday, both here and abroad.
At home, month to date retail chain store sales improved slightly, the
June Case Shiller home price index fell versus expectations of an increase, July
new home sales were up less than estimates, August consumer confidence was well
above consensus and the August Richmond Fed manufacturing index was disappointing. In sum, weighed to the negative side, supporting
our forecast but also keeping alive concern that I may have to lower our
outlook again.
Overseas,
China made its anticipated move by easing its monetary policy though apparently
declining to attempt to directly control its stock markets---seemingly
demonstrating that it has learned nothing from either its own experience or
that of other central banks. http://www.bloomberg.com/news/articles/2015-08-25/china-said-to-halt-stock-market-support-amid-intervention-debate-idr2sxku?curator=thereformedbroker&utm_source=thereformedbroker
Unfortunately, it
appears that even those enhanced polices may be for the wrong reasons (medium):
Stephen Roach on
China’s problems (medium):
The problem for
the Chinese central bank (short):
Another
entrant in the currency wars (medium):
In other news, China
reported a strong improvement in electric power generation (though many experts
doubt that number) and an increase in leading economic indicators (though they
were powered by higher bank loans), Japan’s market was off 4% and German August
business confidence was ahead of expectations.
So mixed but debatable results.
Half the
emerging markets are in bear markets (short):
All that said,
the big news was the Market reversal that I discussed above.
Mohamed
El Erian on the selloff (medium):
The
mysterious sell off (medium):
Question
of the day. If stocks keep getting
drubbed, does Yellen have a plan? (medium);
Bottom line: I
was really surprised that the lower key interest rates implemented by the
Chinese central bank didn’t have a positive impact on the Market and seems to
support my theme of loss of faith in central bank failed policies. However, as I noted in yesterday’s Morning
Call, it is likely that the technicals will tell us if that notion has validity
before it becomes manifest.
In the meantime,
the recent selloff in stock prices has only marginally narrowed the gap between
valuations and fundamentals; and 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.
As
a final note, sometimes I violate my own Price Discipline. This almost always occurs in a panic type
Market when selling is more related to Market fears versus individual company
fundamentals---in other words, while the mean price reversion process may have
only begun for stocks, in general, it is happening with a vengeance in some
stocks. I point this out because a
number of the stocks in our Portfolios are starting to violate their Stop Loss
Prices.
My rationale for
violating my Discipline is that (1) unlike a violation of a Stop Loss Price as
a single incident when individual company’s fundamentals are
changing/deteriorating, in a plunging market, nobody is looking at an
individual company’s fundamentals, they just want out, (2) we already have huge
cash positions (53-55%) that provides plenty of stability of principal, so we
don’t need to be forced to sell just to get that stability and can afford to
sit back and allow prices to become even better values than represented in our
Buy Value Ranges. So don’t get alarmed
as these price breaks occur. We have
plenty of price stability in our Portfolios and the Market may be giving us the
opportunity at better value.
Lance
Roberts on what happens next (medium):
Economics
This Week’s Data
Month
to date retail chain store sales was slightly better than the prior week’s
reading.
The
June Case Shiller home price index fell 0.1% versus expectations of a 0.1%
increase.
July
new home sales were up 5.4% versus estimates of up 7.0%.
August
consumer confidence came in at 101.5 versus forecasts of 94.0.
The
August Richmond Fed manufacturing index was reported at 0 versus consensus of
10.
Weekly mortgage
applications rose 0.2% while purchase applications were up 2.0%.
July
durable goods orders were up 2.0% versus expectations of -0.4%; ex
transportation the number was +0.6% versus estimates of +0.4%.
Other
Another
unmitigated positive of lower oil prices (medium):
Politics
Domestic
A problem of
trust (medium):
Example: Lois
Lerner (short):
International War Against Radical
Islam
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