The Morning Call
12/4/15
The
Market
Technical
The indices
(DJIA 17477, S&P 2049) sold off hard again yesterday, again on multiple, disparate
news events. The Dow ended [a] above its
100 moving average, which represents support, [b] below its 200 day moving
average, now support; if it remains below this MA through the close on Tuesday,
it will revert to resistance, [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 remained below the prior lower high.
The S&P
finished [a] above its 100 moving average, which represents support, [b] below
its 200 day moving average, now support; if it remains below this MA through
the close next Tuesday, it will revert to resistance, [c] in a short term
trading range {2016-2104}, [d] in an intermediate term uptrend {1973-2766} [e]
a long term uptrend {800-2161}, [f] and below the prior lower high.
Volume rose;
breadth was down. The VIX (15.9) was up 15%,
ending [a] right on its 100 day moving
average, now resistance, [b] above the upper boundary of its short term
downtrend; if it remains there through the close on Monday, it will reset to a
trading range and [c] in intermediate term and long term trading ranges.
The long
Treasury plunged 2.75%, finishing below its 100 day moving average one day
after reverting to support; given the magnitude of this move, I am leaving it
as resistance. It finished within very
short term, short term and intermediate term trading ranges. As I note below, this move was likely the
result of the unwind of a very crowded long the dollar/long bonds, short the
euro/short euro bonds trade which had been set up in anticipation of a Draghi
bazooka at yesterday’s ECB meeting.
GLD rose 1.0%,
ending [a] below its 100 day moving average, now resistance and [b] back above the
lower boundary of its short term downtrend and [c] within intermediate and long
term downtrends.
Oil was up 2% on
rumors of production cuts out of OPEC. The
dollar was down 2.25% for the same reason as the TLT decline.
Bottom line: volatility
was king yesterday on the back of a number of surprises (Draghi, OPEC). Unfortunately, most of it was to the downside
with both indices (1) experienced strong follow through to the downside, (2) challenging
its 200 day moving average and (3) firmly establishing a lower high. None of this suggests higher prices near term.
That said, stocks still have a strong seasonal bias working for them; so I don’t
think there is a lot of downside from here.
But the Averages proximity to their all-time highs argues against big
upside.
Fundamental
Headlines
Yesterday’s
US economic remained mixed: November services
PMI was up as was October factory orders; on the negative side, the November ISM
nonmanufacturing index was disappointing and was the stat that investors appear
to have focused on.
Ditto mixed in
the global economy: EU November services and composite PMI’s came in below
expectations while the Chinese November composite PMI was above.
Normally, mixed data
elicits little response from the Markets; but the ISM nonmanufacturing index
shortfall got a lot of attention because the bulls have been arguing that
manufacturing could decline (which it has) as long as the service sector held
up. Ooops.
Still,
the Market was dominated by a number of independent but significant events yesterday
that likely accounted for the volatile pin action:
(1)
Yellen testified before congress but her narrative didn’t
change. However, following the ECB meeting,
Draghi pulled out a pea shooter versus the expected bazooka: rates were lowered
10 basis points, less than anticipated and he did nothing with respect to
additional bond purchases. Markets went
nuts following the meeting and Draghi’s news conference because a major monetary
weakening had been anticipated. Indeed,
it may have been one of the most expected events of this year; and, hence, a
lot of money had been bet on a weaker euro, a stronger dollar and higher bond
prices (pushing EU rates down would prompt investors to sell euro denominated bonds
and buy dollar denominated bonds)---so a lot of bets got unwound in a hurry,
hence the volatility.
At the risk of
being too cynical, it seems logical to me that with Yellen seemingly committed
to raising rates, that she would ask Draghi to go slow on easing so as to not
make the divergence in monetary policy (Fed tightening, ECB easing) quite so
pronounced---at least until after the Fed rate hike. In other words, we may still see the ECB pull
out that bazooka in the next couple of months.
(2)
there were rumors swirling around today’s OPEC
meeting---production cuts, no production cuts.
No one knows what is going to happen; but clearly potential production
cuts would likely have a profound impact on energy and energy related companies.
(3)
finally, concern over an increase in domestic terrorism
rising out of the California shootings acted as a weight on stock prices. Historically, these type of Market impacting events
tend to have a short term shelf life.
Here
is a chart showing the Market’s reaction to various news events (short):
Bottom line: the
volatility and cross currents in yesterday’s pin action were very confusing. I am not sure anyone, me included, knows
exactly what drove stock, bond, currency and commodity prices. But here is my take: (1) the Fed is
determined to raise rates, (2) one of the biggest problems it has is the strong
dollar [strong dollar = weakening economy], (3) a bazooka move by Draghi would
exacerbate that problem, (4) so whether she pleaded with Draghi to delay a
major easing or he did on his own, it happened.
However, none of
this central bank mischief changes the facts on the ground: (1) the US economy
continues to weaken, so a rate hike will in retrospect look like either
bureaucratic hubris or sheer lunacy, (2) on the other hand, if the Market
continues to get whacked, based on its historical behavior, there is a decent
probability the Fed could back out of its rate increase, (3) the EU economy
continues to weaken, so Draghi’s pea shooter move yesterday move was a hat tip
to Yellen; in retrospect, it is likely to be viewed as such. None
of these will enhance the investor confidence in the central bankers which will
likely increase both volatility and risk premiums---in short not a plus for
stocks.
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.
One
analyst opinion on why a 25 basis point rise in the Fed Funds rate may be more
significant than we may have thought
(medium):
Citi
sees 65% of a recession in 2016 (medium):
Investing for Survival
Everything
you think that you know about happiness is wrong:
News on Stocks in Our Portfolios
Economics
This Week’s Data
The
November services PMI was up versus the prior month.
The
November ISM nonmanufacturing index came in at 55.9 versus expectations of
58.2.
October
factory orders rose 1.5% versus estimates of up 1.4%.
November
nonfarm payroll rose 211,000 versus consensus of 190,000.
The
November US trade deficit came in a $43.7 billion versus projections of $40.6
billion.
Other
Truck
loadings plunge (medium):
Inside
auto sales in the US (medium):
Politics
Domestic
International
Danes
reject more EU integration (medium):
No comments:
Post a Comment