The Morning Call
12/8/15
The
Market
Technical
The indices
(DJIA 17730, S&P 2077) were down, unable to generate any follow through to
Friday’s stellar performance. The Dow
ended [a] above its 100 moving average, which represents support, [b] above its
200 day moving average, now support, [c] within a short term trading range
{16919-18148}, [c] in an intermediate term trading range {15842-18295}, [d] in
a long term uptrend {5471-19343}, [e] and still within a series of lower highs.
The S&P
finished [a] above its 100 moving average, which represents support, [b] above
its 200 day moving average, now support, [c] in a short term trading range
{2016-2104}, [d] in an intermediate term uptrend {1975-2768}, [e] a long term
uptrend {800-2161} and [f] still within a series of lower highs.
A rare pattern
in the S&P (short):
A
point and figure look at the Markets (medium):
Volume fell;
breadth was negative. The VIX (15.8) was
up 7%, ending [a] below its 100 day moving average, now resistance, [b] right
on the upper boundary of its short term downtrend, and [c] in intermediate term
and long term trading ranges.
The long
Treasury was strong again, recovering above its 100 day moving average. You will recall that had been trading below
this MA, then recovered above it and reverted to support; on the next day, it
fell back below this MA and is now back above.
Clearly a battle is going on around this moving average; so I am holding
off even making a call. That said, since
the MA itself is trending upward, I am inclined toward further gains and this
moving average ultimately acting as support---meaning higher bond prices/lower
yields. TLT is within very short term,
short term and intermediate term trading ranges.
Oil got crushed,
falling below the lower boundary of its short term trading range on huge
volume; if it remains below this boundary through the close on Wednesday, the
short term trend will re-set to a down.
GLD gave back part
of its Friday’s gain. It ended [a] below its 100 day moving average, now
resistance and [b] within short, intermediate and long term downtrends.
Bottom line: the
volatility continues and the Averages are setting a series of lower highs. On the other hand, they are also marking a
series of higher lows. So the Market
seems to be in the midst of a bull/bear battle.
Short term, I
still think that seasonal bias will kick in at some point. Whether that leads to a challenge of the upper
boundaries of the indices long term uptrends remains the question.
Longer term, the
numerous divergences below the Market surface along with our assessment that
stocks are very richly valued, I believe argues against a successful challenge
and for a decline to significantly lower levels.
The
power of momentum on pre-Fed meeting days (short):
Fundamental
Headlines
Yesterday
was slow on news. The only US datapoint
was the October report on consumer credit which fell sharply from September;
making matters worse, the only areas of strength were in student and auto loans.
There
was a notable whackage of oil prices, likely due to a follow through to last
week’s OPEC meeting which voted not to reduce production. Key technical levels were broken suggesting
even more downside though we won’t get confirmation until Wednesday. Were this to occur and recent history is any
guide, the economic consequences are likely to be negative---the ‘unmitigated
positive’ crowd having been humbled into silence. Indeed, it will only exacerbate the already
declining trend in corporate earnings.
Here is some
more anecdotal evidence to shame the ‘unmitigated positive’ crowd (medium):
S&P
forward earnings continue to fall (short):
There
was no international economic datapoints.
Although in related news, the Greek parliament passed an austerity
budget---not good news if you are a Greek.
***overnight,
Chinese November exports were down 6.8% while imports were down 8.7%; Japanese
third quarter GDP was up 1%; EU third quarter GDP was up 0.3% but that is a
decline in growth from the second quarter; October UK manufacturing was down
0.4% versus estimates of down 0.2%; and the Bank of France lowered its forecast
for French fourth quarter GDP growth.
Bottom line: the
cross currents in the economy continue to inject confusion. The official numbers are not great while much
of the anecdotal evidence is very discouraging.
The Market narrative seems to be shifting towards to a debate about
whether or not the US is heading into recession (two major banks have suggested
an elevated probability of recession in the last week); and that can’t be good, especially with stocks a
couple of percent off their all- time highs.
In addition, it puts Fed policy under even closer scrutiny at a time
when it is changing direction---the risk being that it starts tightening at the
moment the economy is faltering.
I am still
uncertain about the outcome on the market of a Fed rate hike next week, the
impact of collapsing oil prices, increased violence in the Middle East and
concerns about spreading terrorism.
What I am certain of is that stocks are at historically high valuations
and an unexpected/unintended consequence from any of the aforementioned could
trigger a sudden change price.
The most
important point is that I would use the strength to take some profits in winners
and/or eliminating investments that have been a disappointment.
Assuming
how the Market will react of a Fed rate hike can be tricky (medium):
The
latest from John Hussman (medium):
Investing for Survival
For
those with a 20-30 year time horizon:
News on Stocks in Our Portfolios
Economics
This Week’s Data
October
consumer credit grew ($16 billion) at half the pace of September ($28.6
billion) and was well below consensus ($20 billion).
The
November Small Business Optimism Index came in at 94.8 versus expectations of
96.0.
Other
A
look inside last week’s US trade deficit report (medium and a must read):
Politics
Domestic
International War Against Radical
Islam
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