The Morning Call
9/3/15
The
Market
Technical
The indices
(DJIA 16351, S&P 1948) staged a recovery yesterday, although it was nothing
significant, technically speaking. The
Dow ended [a] below its 100 and 200 day moving averages, both of which
represent resistance, [b] in a short term downtrend {17019-17938}, [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 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 {2026-2090, [d] within an intermediate term uptrend {1902-2675}
[e] within a long term uptrend {797-2145} but [e] below the important 1970
level.
Both of the
Averages are developing pennant formations, with three lower highs and one
higher low. Those boundaries may be
early warning systems on Market direction.
Volume declined;
breadth improved. The VIX dropped 17%
but still closed [a] above its 100 day moving average, now support, [b] within
a short term uptrend, [c] within an intermediate term trading range {it remains
well above the upper boundary of its former intermediate term downtrend and [d]
a long term trading range.
The long
Treasury fell 1%, finishing [a] above its 100 day moving average, now support
and [b] within short and intermediate term trading ranges. The question remains, is the recent down move
a function of heavy sales by the Chinese and emerging market central banks or a
sign that the Fed will lift rates in September and/or the economy is
improving? You know my answer.
GLD dropped,
remaining below its 100 day moving average, within short, intermediate and long
term downtrends. However, it ended below
the lower boundary of its very short term uptrend; it is closes
there today, the trend will be negated.
Oil was up 2%, finishing
within a short term trend trading range, but below its 100 day moving average
and within intermediate and long term downtrends.
The dollar also
rose, ending below its 100 day moving average, now resistance, and within short
and intermediate term trading ranges.
Bottom line: yesterday’s bounce was a plus in that the Averages
failed to get down to their August lows. Although the rebound was touch on the
meek side given recent volatility.
Nonetheless, it represents a failed challenge of the lower boundaries of
the indices’ intermediate term trends.
In addition, given that Chinese developments have been the downward
pressure on the Market recently and that its markets are closed till next
Monday, some follow through to the upside is likely. On the other hand, as I said, the bounce was
mild on lower volume and the S&P didn’t get close to that 1970 level.
That said, I am
watching for the Averages to break either the upper or lower boundaries of the developing
pennant I mentioned above as the best near term indication of direction. In the meantime, as long as volatility continues
at present extremes, it is almost impossible to make any meaningful comment on
the Market’s direction.
We
are not in the outlier anymore (medium and a must read):
The
mark of the bear (medium):
Correction
or bear market (medium):
Market
performance after a down August (short):
Fundamental
Headlines
Yesterday’s
US economic data was mixed: weekly mortgage and purchase applications along
with second quarter nonfarm productivity and unit labor costs were better than
forecast while the ADP private payroll report and July factory orders were
disappointing.
In
addition, the Fed released its latest Beige Book report which I would
characterize as upbeat across geographic as well as economic sectors. Investors generally interpreted this
narrative as supportive of the Stanley Fischer comments at last weekend’s
Jackson Hole conference; that is, a September Fed Funds rate hike is definitely
on the table. And it happen just so the
Fed can prove that it can actually raise rates.
However, given what is occurring in the foreign exchange markets
(liquidating Treasuries) and its deflationary impact on the US economy, I think
that it would a foolish move---the Fed has already missed the window to begin
tightening without causing economic disruptions; doing it now will only exacerbate
those aforementioned deflationary forces.
How
is that QE working out for you Mr. Central Banker? (medium):
More
on the odds of QEIV (medium):
QE
in one easy lesson (short):
And
this from Bill Gross (medium):
Overseas,
likely in anticipation of the long celebratory weekend upcoming, the Chinese
government continued its campaign to stabilize its stock market, ‘encouraging’ nine
Chinese brokerages to pledge thirty billion yuan to purchase stocks. That is all fine and great to be sure that
the markets are not a distraction during the pageantry; but that it no way
means that the fat lady has sung.
This
is an ‘in the weeds’ article on Chinese debt and how it gets resolved. It echoes the same theme of Rogoff and Reinhart:
too much debt slows growth (long):
China’s
new local government debt cap (short):
Will
China devalue further (medium):
***overnight,
the August EU Markit composite PMI was slightly above estimates while the
Japanese Markit services PMI was much better than anticipated.
Bottom
line: while the upcoming Chinese holiday
may stem the flow of lousy economic news for a couple of days, it does nothing
to alter the facts on the ground. There are
still huge imbalances in the Chinese economy that have been manifesting
themselves in declining stocks and the yuan.
And they are not going away.
The Fed and the
ECB both have monetary policy problems growing out of the liquidation of
Chinese and emerging market currency reserves; that is, this liquidation
process is acting as monetary tightening in the US and EU. So now the Fed is faced with the unsavory
choice of raising the Fed Funds rate in the midst of an unwanted monetary
tightening or responding to its real near term problem by introducing some new
and improved form of QE and make the unwind of QEInfinity all the more
difficult.
Against that
backdrop, global economic activity is clearly slowing. I would argue that the US economy is also
slowing, though admittedly there remains disagreement on that thesis. However, even if I concede the point, the US
will not remain unaffected indefinitely.
The point being that the gap
between stock prices and valuations is large and there appears to be nothing on
the economic horizon to close that gap.
That said, I remain
of the opinion that near term investors are focusing less on fundamentals and
more on the technicals. The keys to watch are (1) the boundaries of the
developing pennant formation and (2) whether the indices will challenge their
intermediate term trends and whether or not those challenges are
successful.
While we are
waiting, do nothing.
Five
forces driving the market (medium):
Are
stocks sending a recession signal (medium)?
Most
widely read study suggests that portfolios should be cash (medium):
The
latest from Marc Faber (medium):
Economics
This Week’s Data
July
factory orders rose 0.4% versus expectations of up 0.9%.
Weekly
jobless claims rose 12,000 versus estimates of up 2,000.
The
July US trade deficit came in at $41.9 billion versus forecasts of $42 billion.
Other
Most
recent Fed Beige Book report
Politics
Domestic
On $15 an hour
minimum wage (short):
More on Clinton
email problems (short):
International War Against Radical
Islam
Obama’s
Iran nuke deal has the votes (short):
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