The Morning Call
9/9/15
The
Market
Technical
The see saw
continues with indices (DJIA 16492, S&P 1969) closing big to the
upside. The Dow ended [a] below its 100
and 200 day moving averages, both of which represent resistance, [b] in a short
term downtrend {17013-17932}, [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 {2022-2086}, [d] within an intermediate term uptrend
{1906-2679} and [e] a long term uptrend {797-2145}.
The three most
notable observations are (1) the Averages voided the break of the lower boundaries
of those developing pennant patterns and then traded above the upper boundaries
of these formations. At the close last
night, the indices were at the point of the pennant; so where they end today
relative to that point would, in technical lore, indicate the short term
direction of prices, (2) the Averages have now weathered the second test of the
lower boundaries of their intermediate term trends. Clearly a big plus and (3) the S&P
remains below the 1970 level---though only be a short hair. In a similar vein, as great as yesterday’s
bounce was, stocks didn’t even get back to last week’s levels. As I continue to note, the extreme volatility
makes any directional call speculative.
Don’t trust big
up days (medium):
Volume was down slightly;
unsurprisingly, breadth improved, though the flow of funds indicator remains negative.
The VIX dropped 10%, still ending [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 1.5%, finished above its 100 day moving average and within short
and intermediate term trading ranges.
GLD rose
fractionally but closed in downtrends across all timeframes and below its 100
day moving average. It can still build a
bottom were it to fail to successfully challenge its July/August lows. But that is yet to be seen.
Oil was up, remains
below its 100 day moving average and within a short term trading range and intermediate
and long term downtrends.
The dollar
declined, closing below its 100 day moving average, which is now resistance,
and within short and intermediate term trading ranges.
Bottom line: the
Averages continue the dramatically churn in something of a no man’s land
between the lower boundaries of their intermediate term trends and the upper
boundaries of the short term downtrends.
Unfortunately the width of that zone is considerable; so stocks can continue
their current volatile trading and not threaten either set of trends. So very short term, direction is to be
determined. That said, as long as the
lower boundaries of the indices intermediate term trends hold, the Market is in
a simple correction in a bull market.
The long
Treasury’s pin action continues to suggest a Fed rate hike and a stronger
economy. As you know, I don’t think that
this scenario will occur.
Fundamental
Headlines
One
minor US datapoint was released yesterday: the August small business optimism
index was slightly below estimates. Not
much information value.
However,
overseas there was lots to digest: August Chinese imports plunged, exports off
5.5%; August German exports and imports improved; second quarter EU GDP was up
0.4% versus expectations of up 0.3%; second quarter Japanese GDP dropped 1.2%. In addition, it was reported that China sold
$94 billion US Treasuries in August, overnight further tightened capital
controls and has spent 600 billion yuan to date in stock market ‘plunge
protection’.
Another
sign of a global slowdown (short):
With
respect to the latter, the Chinese government altered its intervention pattern
on Tuesday. On prior occasions when
their stock market was down in early trading, the government immediately
stepped in to buy stocks only to have the market decline into the close. Yesterday, it waited until the final hour of
trading before it began its effort to push prices back up, resulting in a
positive finish---which the rest of the world then traded on.
***overnight,
finally governments are getting the picture and doing something constructive as
opposed to more QE Infinity, to wit, Abe is pledging to cut taxes by 330 basis
points while China is lowering taxes on small businesses and allocating more
money to infrastructure projects.
Whether this is too little too late is ‘to be determined’; but at least
it is a positive step. Meanwhile in the
UK, their trade numbers, industrial production and manufacturing production all
declined.
Bottom
line: absent the Chinese changed
strategy in ‘plunge protection’, I didn’t see much encouraging in the
information flow yesterday. On the other
hand, one element of anecdotal evidence was quite positive; that was a nice
bounce in commodity prices---which as you know have cratered in recent
times. Whether this means that
supply/demand have reached rough equilibrium or it was just a one day outlier
is yet to be determined.
Nothing above suggests
that, in my analysis, stocks aren’t overvalued. Of course, they have been
overvalued for the last eighteen months in that analysis, so how smart am
I? Being too early is being wrong and I
have been wrong. But being too early doesn’t
mean that stocks aren’t overvalued; it just means that other factors have been
of greater importance to the Market---like QEInfinity. And as long as investors believe in the
infallibility of the Fed, I am going to stay wrong. But once investors realize that the Fed has
been focused on the wrong thing (the Market) and has harmed the economy not
just from QEInfinity but also has botched the exit therefrom, there is only
going to be one ‘first guy out the door’.
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.
More
on valuation (short):
The
latest from John Hussman (medium):
Investing for Survival
Asset
allocation: make it personal (medium):
News on Stocks in Our Portfolios
Economics
This Week’s Data
Weekly
mortgage applications fell 6.5% while purchase applications were down 1.0%.
Other
Politics
Domestic
The Social
Security disability fund will be broke next year (short):
International War Against Radical
Islam
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