The Morning Call
9/2/15
The
Market
Technical
The indices
(DJIA 16058, S&P 1913) got whacked hard again yesterday, though their
intermediate term trends are still holding.
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] 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
{1900-2673} and [e] a long term uptrend {797-2145}.
Volume rose;
breadth was negative. The VIX was up another
10% closing [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 rose, ending [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 rose again,
remaining below its 100 day moving average, within short, intermediate and long
term downtrends but it a very short term uptrend. The odds of a bottom having been made continue
to go up.
Oil was strong
again, re-setting its short term trend from down to a trading range and ending below
its 100 day moving average and within intermediate and long term downtrends.
The dollar fell,
finishing below its 100 day moving average, now resistance, and within short
and intermediate term trading ranges.
Bottom line: the
Averages are clearly re-testing their August lows. On the plus side, they have yet to challenge their
intermediate trends. On the negative
side, on the rally late last week, (1) neither index got remotely close to
undoing the trends that had been previously broken, (2) the S&P pushed
decisively below that 1970 level and (3) the VIX is going nuts. Still my ultimate conclusion remains that as
long as volatility continues at present extremes, it is almost impossible to
make any meaningful comment on the Market’s direction.
History
points to a rough September (medium):
More
on margin debt (medium):
Fundamental
Headlines
Yesterday’s
US economic data was weighed to the negative: August light vehicle sales were
ahead of estimates, August Markit manufacturing PMI was in line and the month
to date retail chain store sales, the August ISM manufacturing index and July
construction spending were below estimates.
Overseas,
the news flow was like the Nightmare on Elm Street: two August Chinese
manufacturing indices fell to the lowest levels in three years; the Chinese
government continued its campaign to intimidate ‘sellers’ and manipulate its
currency; EU August Markit PMI declined; South Korean exports declined the most
in six years; Brazil sinks toward recession, raising speculation of a credit
rating downgrade; and to put a cherry on top, Russian military forces at being
deployed in Syria.
Leaving aside the
geopolitical risks associated with a Russian physical presence in Syria, the
above stats boil down to two points:
(1)
global economic growth continues to falter,
(2)
if you think that our government/central bankers
demonstrate a hopelessly inadequate grasp of economics, just look at how the
Chinese are mucking things up---but at least they have an excuse, i.e. they
have never been exposed to the workings of a free market economy. These guys are [a] trying to control what is
in theory, at least, a free trading price discovery mechanism, [b] spending
beau coup currency reserves defending their currency without apparently understanding
that this a deflationary process, [c] while at the same time, doing everything
possible to disguise a slowdown in economic growth which itself has
recessionary/deflationary implications.
The Markets seem to be suggesting that this effort will not end well; I
agree.
In China, conditions just got worse (medium):
Why China is finding it hard to
buck the Market (medium):
***overnight, nine
Chinese brokerages pledged thirty billion yuan to purchase stocks.
Unfortunately,
as I implied above, the Chinese aren’t the only bureaucrats whose collective weenies
are flopping in the wind. Our Fed is on
the sidelines watching its QE efforts unravelling as the Chinese and emerging
markets push long rates higher and money supply lower via Treasury sales---and its
only defense is QEIV. In other words,
the Fed has done what we feared---put themselves in a position in which they
have no good policy options. I have
believed that the QEInfinity program imposed on the US economy would not end
well. I still do.
Central
bankers’ new clothes (medium):
The
biggest risk to the Fed (medium):
Goldman:
expect more foreign reserve sales (medium):
The
odds of new QE’s now rising (medium):
Bottom
line: the fundamentals aren’t so hot;
but then they have never have been that great since the current recovery began.
Plus, at least as measured by our
Valuation Model they haven’t justified stock valuations since late 2013 based on
the most positive assumptions that I could make. Unfortunately, I have already had to lower
our economic growth forecast once this year; and I may have to do it
again. So I am going to postulate that
the valuation gap remains.
What could be
occurring now is that others are starting to revise their Valuation Models
based on much less optimistic fundamental assumptions. It could also be that their revised valuation
gap is sufficiently large to prompt the recent aggressive selling. Is that actually what is happening? I don’t know.
On the other
hand, it does seem to me that the level of emotion has escalated to the point
that no one is focusing on fundamentals. The point being that we are back at a
position that the technicals are what matter the most---at least on a short
term basis. The key to watch is whether
the indices will challenge their intermediate term trends and whether or not
those challenges are successful.
While we are
waiting do nothing.
A
bull’s case (medium):
Update
on Market valuation (medium):
Economics
This Week’s Data
Month
to date retail chain store sales grew less than in the prior week.
The
August Markit manufacturing PMI came in at 53.0, in line.
The
August ISM manufacturing index was reported at 51.1 versus expectations of 52.8.
July
construction spending was up 0.7% versus estimates of up 0.8%.
August light vehicle
sales were ahead of forecasts.
Weekly mortgage
applications rose 11.3%, while purchase applications were up 4.0%.
The
August ADP private payroll showed an increase of 190,000 jobs versus
expectations of up 210,000; the July reading was revised down.
Second
quarter nonfarm productivity was up 3.3% versus consensus of up 2.8%; unit labor
costs fell 1.4% versus estimates of -1.2%.
Other
Politics
Domestic
On the release
of the latest batch of Clinton emails (medium):
International War Against Radical
Islam
The
Iranian nuke side deal (medium):
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