The Morning Call
6/14/16
The
Market
Technical
The indices
(DJIA 17732, S&P 2079) followed last Friday’s lead, declining sharply and
thus creating another down Friday, down Monday pattern. Volume increased. Breadth weakened. The VIX was up another 24%, finishing well
above its 100 day moving average. If it remains
there through the close on Wednesday, it revert from resistance to
support---not a positive for stocks.
The Dow closed
[a] above its rising 100 day moving average, now support, [b] above its 200 day
moving average, now support, [c] within a short term trading range {17498-18726},
[c] in an intermediate term trading range {15842-18295} and [d] in a long term
uptrend {5541-19413}.
The S&P
finished [a] above its rising 100 day moving average, now support, [b] above
its 200 day moving average, now support, [c] below the lower boundary of the recently
reset short term uptrend {2083-2306}. Last
Friday as well as yesterday, I raised the question about which was the head
fake (1) the break out above the short term trading range or the plunge one day
after the reset? I think yesterday’s pin
action gave us the answer, to wit, I have returned the short term trend to a
trading range {2037-2110}, [d] in an intermediate term trading range
{1867-2134} and [e] in a long term uptrend {830-2218}.
The long
Treasury was up again, ending above the upper boundary of its intermediate term
trading range for the third day; if it remains there through the close today,
the intermediate trend will reset to up.
Given the poor performance of other US fixed income securities, I am
assuming this action reflects primarily TLT’s function as a safe haven.
GLD (122.6) was
up. It is now well above the lower boundary
of its short term trading range and its 100 day moving average and is nearing
the upper boundary of its short term trading range (124.2). Resting right above that boundary is the
upper boundary of its intermediate term trading range. So clearly, GLD has a lot resistance to overcome
near term. If it breaks above these
boundaries, it is apt to either take a lot of work or a significant unexpected
negative event.
Bottom line: in
the aftermath of Friday and Monday’s pin action, I returned the S&P short
term trend to a trading range---the thesis being that it simply took one day
longer than usual to unsuccessfully challenge that trend. That doesn’t mean that it still won’t make
another challenge that would ultimately be successful; but this time it is a no
go.
The TLT is in
the midst of a challenge of its intermediate term trading range. If successful, it would clearly point to
higher prices/lower yields. I had
wondered out loud whether the bond guys were betting on a weak US economy or
events that would make the US a safe haven.
Yesterday’s price decline/rising yields in other US fixed income sectors
suggest the latter alternative.
Fundamental
Headlines
There
were no US stat releases yesterday, though this will a big week for data. There were some international numbers reported:
May Chinese industrial production was in line while fixed investment and retail
sales were below expectations. Fitch lowered the Japanese government credit
outlook (not the rating but the outlook for the rating) from stable to
negative. Need I say, more of the same?
It
is also another week in which the central banks will again be in the news: the
FOMC meets today and tomorrow and the Bank of Japan meets on Thursday. Heretofore, that has generally been a plus
for the Markets. I noted last week that
central banks monetary policies were being disparaged by some pretty heavy
hitters and wondered if that meant that, what has become the ‘everything is
awesome’ reflect reaction by investors, was about to change. I am not smart enough to know whether it has
or not; but it probably pays to be a bit more cautious until we know if the recent
round of criticism is gaining traction.
$12
trillion in QE and this is what we get (medium and a must read):
More collateral
damage from zero interest rates (medium):
Another
blistering critique on the Fed from David Stockman (medium):
The
other event that will likely remain in the forefront of investor consciousness
is the upcoming Brexit vote, scheduled for June 23. Right now, the polls aren’t going so well for
the ‘remainers’ and that is prompting more harangues from that crowd about the
dire consequences if the ‘leavers’ win.
It will likely only get worse as the vote approaches. I have no clue about the magnitude of any economic
impact of a Brexit and likely neither does anyone else. But the horror stories will continue and that
seems likely to put a governor on bullish enthusiasm at the very least.
One
observer’s reason for a ‘leave’ vote (medium):
Why
a ‘leave’ vote may not lead to a Brexit (medium):
Bottom line: it
is still too soon to know if central bank credibility is starting to slip; but
we should have a better idea by the end of the week as to whether this thesis
holds any water. I am not making any
bets on the outcome.
My
thought for the day: I have harped and harped in these pages on the mispricing
of assets caused by QE and negative interest rates. Most of that criticism has been from a macroeconomic
perspective.
So I want to
take it down to the individual investor level.
In this case, it involves individuals reaching for yield, i.e. incurring
extra risk in order to achieve a higher dividend/interest payment. This tendency is made all the worse in today’s
Market because of those aforementioned zero/negative interest rate policies conducted
by the central banks.
What
investor wouldn’t be tempted to invest in higher yielding securities when safe
investments are providing virtually no return at all? Unfortunately, while available low risk
securities have disappeared, the laws of economic haven’t; and one such law is
you don’t get something for nothing.
And, in this case, the ‘something’ is yield and its price is higher
risk.
If you don’t think that the risks
aren’t higher, ask the guys who chased yield by buying those mortgage backed
securities back in 2006. Also remember
the math. If you buy a riskier security
that pays a 3% yield instead of staying with a quality investment that yields
1%, how much price depreciation does that 3% yielding security have to
experience before that incremental yield is wiped out by loss of principal? Before engaging in yield chasing you better understand
the exact risks you are taking, and what that might mean when, as and if things
go awry.
Speaking of which (short):
Investing for Survival
What
is risk?
News on Stocks in Our Portfolios
Economics
This Week’s Data
The
May small business optimism index was reported at 93.8 versus expectations of
93.5.
May
retail sales rose 0.5% versus estimates of up 0.3%; ex auto, they were up 0.4%,
in line.
May
import prices were up 1.4% versus forecasts of up 0.8%; export prices were up
1.1% versus consensus of up 0.2%. Will
this make the Fed happy?
Other
Mortgage
fabrication is alive and well (medium):
Update on student loans
(short):
Politics
Domestic
Saudi Arabia and
Hillary (medium):
Quote of the day
(short):
17 facts about
the Orlando bomber (medium):
International War Against Radical
Islam
Thoughts from a former CIA terror
expert (medium):
Visit Investing
for Survival’s website (http://investingforsurvival.com/home)
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