The Morning Call
2/4/16
The
Market
Technical
The indices
(DJIA 16336, S&P 1912) bounced around like a basketball on crack yesterday,
ending up on the day; though the NASDAQ was down. Volume rose, breaking the recent pattern of lower
volume up days. While it declined, volatility
remained elevated as one might think it would on a very erratic price day.
The
Dow closed [a] below its 100 day moving average, now resistance, [b] below its
200 day moving average, now resistance, [c] below the lower boundary of a short
term downtrend {16825-17580}, [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] below its 100 day moving average, now resistance, [b] below its
200 day moving average, now resistance [c] within a short term downtrend {1910-1999},
[d] in an intermediate term trading range {1867-2134}, [e] in a long term
uptrend {800-2161} and [f] still within
a series of lower highs.
Paying
attention to the 200 day moving average (short):
The long
Treasury bounced back from the upper boundary of its short term trading range,
though most of the debt indices I watch were generally up in price. The dollar got hammered, closing below its
100 day moving average.
On huge volume, GLD blew through the upper boundaries
of both its [a] short term downtrend; if it remains there through the close on Friday,
the short term trend will reset to a trading range and [b] intermediate term downtrend;
if it remains there through the close next Monday, the intermediate term will
reset to a trading range. We have to
wait for our time and distance discipline to confirm these breaks; but we
clearly could be witnessing a significant bottom in GLD.
Bottom line: yesterday was as confusing a day as I have seen
in some time. Prices were all over the map,
the dollar got pummeled, gold roared, oil was up and the long Treasury sort of
snoozed through the session although many fixed income securities were up. I think that it all is best explained by
assuming that the Fed is going to back off interest rate hikes while the rest
of the global banks pursue negative interest rates (stocks are happy, gold is
happy, bonds, in general, are happy and the dollar is unhappy).
All that said,
when the day was done, the S&P had unsuccessfully challenged the lower
boundary of its intermediate term trading range but couldn’t muster the strength
to get back to the 1928 Fibonacci level (resistance)---all done on higher
volume and with little change in the elevated level of volatility. Of very short term importance, the Averages ended
within a very short term uptrend. Translated,
I think this means confusion abounds, that neither bulls or bears control the
board right now but stock prices still have an upside bias. The caveat being that at the current level of
schizophrenia, this all change on a dime.
Of particular
note is the performance of GLD which having traded through its 100 day moving
average is now challenging both its short term and intermediate term downtrends. If successful, GLD should offer an attractive
buying opportunity.
Are
commodities bottoming out? (short):
Subsequent
stock performance following a down January in the eighth year of the presidential
election cycle (short):
Fundamental
Headlines
Yesterday’s
US economic dataflow was discouraging: weekly mortgage and purchase
applications declined and the January PMI services and the January ISM
nonmanufacturing indices were below expectations---the latter for the third
month in a row. Remember a healthy
service sector of the economy is what the bulls have been hanging their rosy
economic outlook on. So these service
sector indicators are likely creating cognitive dissonance among the economic
forecasting crowd. There was one
positive number: the January ADP private payroll report showed greater job growth
than forecast, although it was considerably lower than the December reading.
Overseas,
the January Markit EU PMI manufacturing and services were below estimate and
the price index was the lowest since March 2015.
***overnight
Eurozone officials lowered both their 2016 inflation and growth projections
while the Bank of England lowered its 2016 and 2017 growth forecasts for the
UK.
Other
Market impacting developments:
(1)
comments from NY Fed chief Dudley suggested that the
Fed is considering walking back its plans for additional rate hikes this
year. This seemed to bring joy to
investors; clearly keeping alive the nexus of easy money and investor
attitude. I have speculated that a
reversal in Fed policy back to QE especially one brought on by a change in the
economic outlook so soon after starting a move to monetary policy normalization
would ultimately lead to a loss of confidence in the Fed. At the moment, that thesis appears at risk,
The latest from Bill Gross (medium):
The Fed
basically confirms the economy is in trouble with its second tightening of credit
standards (short):
(2)
plunging further into insanity, the Bank of Japan
stated that it wouldn’t hesitate to take its own interest rates even further
into negative territory. On the heels of
the government having to withdraw a bond offering, this seems ludicrous. But it has to make those QEInfinity induced
euphoria investors happy.
(3)
rumors of an OPEC meeting [to discuss production cuts]
bubbled up again and oil responded enthusiastically---as it did last week. It was also received an upbeat reception from
investors.
The breakeven
price of oil for many fracking companies is much lower than originally
thought. Now what do the Saudi’s do?
(medium and a must read):
Bottom line: the
economic dreamweavers are running out of ammo, yesterday’s ISM nonmanufacturing
index clearly didn’t fit their scenario.
For that matter, neither did the EU PMI numbers. While all this may be lost on investors, it
isn’t on the central banks who are stumbling all over themselves to halt the
slide in economic activity.
Unfortunately, the only solution (more liquidity, lower interest rates) that
they can come up with is to provide another dose of the medicine that has
already been shown not to work.
So now the
global economy is facing shrinking activity and declining solvency in the
banking system caused by and now exacerbated by policies that increase the frailty
of their balance sheets and reduce their ability to generate cash flow to
absorb the problems therefrom. And to
put a cherry on top, corporate earnings are weakening both qualitatively and
quantitatively---which the recent decline in stock prices in no way reflects. In short, equities are overvalued and the
economic forces currently at work will only make them more so.
I am not
suggesting that investors run for the hills.
I am suggesting that in this rally that (1) they take some profits in
winners that have held up during this decline and/or eliminate investments that
have been a disappointment and (2) they lose the notion of ‘buying the dips’.
The
risks of being a doomsayer (medium):
The
number of dividend cuts are rising (short):
Economics
This Week’s Data
The
January services PMI was reported at 53.2 versus expectations of 53.7
The
January ISM nonmanufacturing index came in at 53.5 versus estimates of 55.5.
Weekly
jobless claims rose 8,000 versus forecasts of up 2,000.
Fourth
quarter nonfarm productivity fell 3.0% versus consensus of down 1.8%; the doozy---unit
labor costs rose 4.5% versus projections of a 4.4% decline.
Other
How
long can Saudi Arabia afford to keep the price of oil suppressed (medium)?
Politics
Domestic
International War Against Radical
Islam
Is
the Middle East a new Vietnam (medium and a must read)?
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