The Morning Call
1/5/16
The
Market
Technical
It looks like no
Santa Claus rally this year. Yesterday,
the indices (DJIA 17148, S&P 2012) took it in the snoot. The Dow ended [a] right on its 100 moving
average, which represents support, [b] below its 200 day moving average, now
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 has now made yet another lower high.
The S&P
finished [a] below its 100 moving average, which represents support; if it
remains below this MA through the close on Wednesday, it will revert to
resistance, [b] below its 200 day moving
average, now resistance, [c] below the lower boundary of its short term trading
range {2016-2104}; if it remains there through the close on Wednesday, it will
reset to a downtrend, [d] in an intermediate term uptrend {1995-2788}, [e] a
long term uptrend {800-2161}, [f] and while it made a higher high last week,
its short life make it of little value when considering the trend to lower highs.
Volume was up; breadth
declined. The VIX (20.7) rose 14%,
ending [a] above its 100 day moving
average, now resistance; if it remains there through the close on Wednesday, it
will revert to support, [b] within short term, intermediate term and long term
trading ranges.
And:
The long
Treasury was up, closing right on its 100 day moving average, now resistance
and within very short term, short term and intermediate term trading ranges.
GLD lifted 1.4%,
finishing [a] below its 100 day moving average, now resistance and [b] within
short, intermediate and long term downtrends.
Bottom line: yesterday’s pin action was a bit unsettling
with several key support levels in the S&P being challenged. In addition, the absence of the Santa Claus
rally is concerning, at least in the short term. However, longer term, the continuing development
of a topping formation, the numerous Market divergences and our belief that
stocks are very richly valued are much bigger worries. That said, the key for the moment is, as always,
follow through and whether or not the Averages can successfully challenge
support levels.
Fundamental
Headlines
Yesterday’s
news flow matched the somber tone of the Market---manufacturing PMI, the ISM manufacturing
index and construction spending numbers were all dismal.
Overseas,
it was not much better. While the EU manufacturing
PMI was encouraging, China’s was terrible (actually showing contraction) and
the UK’s was weak. Other bad news out of
China included a further decline in the yuan and stock trading was halted after
circuit breakers were tripped. Putting a
cherry on top, Saudi Arabia and Iran are now rattling their sabers---which
could lead to some sort of Sunni/Shi’a showdown. Remember, these guys have radical
mentalities.
Bottom
line: the most positive assumption about
the economy is that it could be bumping along at a reduced rate of growth. Last week’s data kept that hope alive; though
yesterday gives one pause. The Fed is
now less accommodative; the trend in global data has been abysmal, yesterday’s EU
December manufacturing notwithstanding; and the economy is not apt to get any
help from the political class any time soon given their attention will likely be
dominated by re-election. In short, the
US may avoid a recession but not because of anything other than the ingenuity
and hard work of American business and labor.
The Fed and
productivity (medium and a must read):
More important,
the Market has smoked under the QE regime; and I continue to believe that it
will be negatively impacted by the demise of QE. It may take some time; after all, the
beginning of the end of QE is a pretty pathetic attempt toward
normalization. Nevertheless, I think
that the stock market is so overvalued, its internals are so broken and that
the high yield debt market has deteriorated too such an extent that mean
reversion will begin to weigh heavily on the stock market.
I am not
suggesting that investors run for the hills.
I am suggesting that they use the Market strength to take some profits
in winners and/or eliminating investments that have been a disappointment.
More
on valuation (short):
The
latest from John Hussman (medium):
Kyle
Bass on energy and China (medium):
ETF Highlight
The
Vanguard High Dividend Yield ETF (VYM) tracks the FTSE High Dividend Yield
Index. The index selects high-dividend-paying US companies, excluding REITS,
and weights them with a multifactor method. VYM offers excellent exposure in a
low-cost wrapper. The fund’s broad basket stems partly from its comparatively
lax dividend screens: Any company paying an above-average dividend and a great
choice for those looking for cheap, easy-to-trade access that is forecast
to pay a dividend in the next 12 months qualifies, although firms with high
yields, thanks to falling stock prices, get lower weightings. This broad
portfolio aligns well with other benchmarks by firm size and by yield. The
similarities extend to sector breakdowns as well. In all, VYM looks very much
like other segment benchmarks. Investors can access VYM at a very low
round-trip cost, making it a great choice for those looking for cheap,
easy-to-trade access. VYM’s expense ratio is .1% and its yield is
2.74%. The ETF Portfolio owns a 25%
position in this ETF.
In
the chart, you can see why profits have been taken and position size reduced.
Investing for Survival
Faulty
assumptions of investors:
News on Stocks in Our Portfolios
Economics
This Week’s Data
The
December Markit manufacturing PMI declined from November.
November
construction spending was down 0.4% versus expectations of an increase of 0.7%
The December ISM
manufacturing index came in at 49.2 versus estimates of 49.2.
Other
BofA
on China’s problems, echoing Kyle Bass’s comments above (medium):
Politics
Domestic
International War Against Radical
Islam
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