The Morning Call
2/3/16
The
Market
Technical
The indices
(DJIA 16153, S&P 1903) retreated broadly yesterday. Volume rose continuing the pattern of high
volume down days and lower volume up days.
Volatility remained elevated and breadth stunk.
Bank risk is
soaring (short):
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] below the lower boundary of its a
short term downtrend {1914-2003}, [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.
The long
Treasury roared ending pennies below the upper boundary of its short term
trading range. This pin action continues
to suggest declining economic activity and/or the attraction of US yields in a
world of more and more negative interest rates.
GLD (108) rose slightly,
remaining [a] above its 100 day moving average, now support [b] right on the upper boundary of its
intermediate term downtrend {108} and [c] very near the upper boundary of its
short term downtrend {108.5}.
Bottom line: so
much for the support at 1928 marked by a Fibonacci retracement level. Yesterday’s whackage was troublesome. Many investors pointed at sharply lower oil
prices as a primary causal factor, given its the recent correlation with
stocks. On the other hand, the improving
Treasury and gold markets may be signaling something much bigger---that things
are amiss in the economy. That said,
both of the indices remain above the lower boundary of very short term uptrends. Until those levels are violated, this retreat
could be nothing more than a sell off from an overbought condition.
As I noted
above, GLD continues to attempt a turn around.
It is above its 100 day moving average and making a run at busting
through two proximate resistance levels which will likely not be an easy
feat. Still the challenge is on; if
successful, GLD should offer an attractive buying opportunity.
An
early March interim bottom? (short):
Fundamental
Headlines
Yesterday
was a slow on economic stats. In the US,
month to date retail chain store sales grew at a slower rate than in the prior
week. On the other hand, January light
vehicle sales were fractionally ahead of expectations. Overseas, EU unemployment came in at 10.4%
versus estimates of 10.5%. Nothing here
to alter opinions.
***overnight,
the January Markit EU manufacturing PMI was the lowest reading in four months,
the services PMI was also weak and the price index was the lowest since March
2015.
Getting
increasing investor attention are the potential balance sheet and income statement
problems in global the banking system.
Clearly, declining oil prices are lowering the loan quality of their
energy portfolios.
S&P
downgrades credit of ten large energy companies (medium):
In addition,
bank margins are not helped by low interest rates (lending spreads); so you can
imagine the impact of negative interest rates.
As I have tried to make clear, I don’t
think that a 2008/2009 scenario is possible for US banks. But (1) that doesn’t mean they won’t
experience some pain, (2) overseas, the foreign banks are more leveraged and
hence are more at risk and (3) we still don’t know the magnitude of risk posed
by the massive derivative portfolios of virtually all major banks.
Ooops;
the unintended consequences of negative rates (short):
But
never mind, if first you don’t succeed……….. (short):
The
ultimate consequence of negative rates (medium):
John
Mauldin on the new Japanese negative interest rates (medium):
Negative
rates on a possibility for the Fed (medium):
Bottom line: falling
oil prices, narrowing lending spreads and a weakened industrial sector are
having an impact on the economy. It is
manifest in the lousy trend in the dataflow.
Despite all the happy talk about the service sector and the consumer
being immune to the aforementioned forces, those trends can’t diverge
forever. Sooner or later, the energy,
banking and manufacturing sectors have to improve or they will drag the
remaining sectors with them.
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’.
Hedge funds were
selling the rally (medium):
Updates
on valuation:
One
more (short):
Economics
This Week’s Data
Month
to date retail chain store sales grew less than in the prior week.
January
light vehicle sales were slightly better than forecast (17.6 million versus
17.5 million).
Weekly
mortgage applications fell 2.6% while purchase applications were down 7.0%.
The
January ADP private payroll report showed an increase of 205,000 jobs versus
expectations of up 190,000; the December reading was an increase of 267,000
jobs.
Other
The
cautious outlook for capital spending (medium):
Politics
Domestic
Hillary’s emails
put lives at risk (medium):
Wednesday
morning humor (sort of): The best reason
for voting for Trump (short):
International
Is
a Grexit back on the table? (medium):
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