The Morning Call
6/1/16
The
Market
Technical
The indices
(DJIA 17787, S&P 2096) had a volatile day, selling off firmly through mid-day
then rallying into the close to cut losses in half. Volume spiked while breadth continued weak. The
VIX was up 8%, bouncing off the lower boundary of its short term trading range
for the fourth time. That pin action
suggests that the recent rally may be over; however, strong follow through to
upside is necessary before giving up on stocks moving higher.
The Dow closed
[a] above its 100 day moving average, now support, [b] above its 200 day moving
average, now support, [c] within a short term trading range {17498-18736}, [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 100 day moving average, now support, [b] above its 200
day moving average, now support, [c] in a short term trading range {2039-2110},
[d] in an intermediate term trading range {1867-2134} and [e] in a long term
uptrend {830-2218}.
The long
Treasury managed a move to the upside, bouncing off its 100 day moving average. It is encouraging that TLT seems little
impacted by the threat of a coming Fed rate hike. However, it still has much work to do on the upside
in order to break out of the current trading range.
GLD was also up,
rebounding off the lower boundary of its short term trading range and recovering
back to the level of its 100 day moving average. As I noted in yesterday’s Morning Call, it is
on the verge of a significant breakdown.
Yesterday’s pin action halted that process---at least for a day. Now we need follow through to the upside to
get comfortable that the worse is over.
Bottom line: the
Averages appear to be digesting recent gains.
Yesterday’s intraday recovery, even though stocks didn’t fully recoup
earlier losses, was a decent sign that there could be a further move
higher. At this point, my assumption is
that the indices will at least challenge the upper boundaries of their short
term trading ranges.
A break in GLD
below its 100 day moving average and the lower boundary of its short term
trading range will likely lead to a paring of the Aggressive Growth Portfolio’s position in GDX.
Fundamental
Headlines
Yesterday’s
US economic news was discouraging: April personal income and core PCE were in line
while personal spending was up more than expectations; the March Case Shiller
home price index rose more than forecast; the May Chicago PMI was disappointing; May consumer confidence was very
poor; the May Dallas Fed manufacturing index dropped substantially. Not much for the economic bulls to hang their
hat on. But if you are in the everything-is-awesome-so-a-rate-hike-is-just-what-the-doctor-ordered
camp, the Case Shiller home price number had to make your legs tingle.
Overseas,
the data was surprisingly upbeat: May EU inflation fell but April Japanese
factory orders, household spending and job availability were better than estimates.
That is as good a day as we have gotten in the last year. At the moment, it is simply an aberration;
but if more positive stats follow, then I would have to consider that the
global slowdown as stabilized.
***overnight,
things returned to normal: May Japanese manufacturing PMI declined; May Chinese
manufacturing PMI was unchanged while the services PMI slowed in growth and the
Caixin manufacturing PMI fell for the 15th consecutive month; the EU
manufacturing PMI was flat; Swiss first quarter GDP was below expectations.
Bottom
line: yesterday’s US datapoints did nothing to support the notion that the
economy is improving. That said, there
are enough mixed signals that no one should be too hard line in their
forecast. On the other hand, even if the
US economy has ceased shrinking, that does not mean one should expect anything
more than a continued below average growth.
Greenspan
agrees (medium):
In
addition, the Fed has now set the Market up for an interest rate increase in
June or July based on an improving economy.
If that doesn’t occur, investors will likely experience a further loss
of confidence in our central bank---something well deserved but would be too
long in the coming.
On
the other hand, stocks are priced for perfection, have been for 18 months but conditions
have been anything but perfect. I
continue to believe that every portfolio should own more than a token cash
position.
The
latest look at the Market’s long term performance (short):
Two
important questions facing the Market (medium):
Must
watch interview with Jim Grant:
My thought for the day comes
from Joseph Schumpeter, an economist and political scientist, who wrote that an
economic “recovery is sound only if it does come of itself. For any revival
which is merely due to artificial stimulus leaves part of the work of
depressions undone and adds, to an undigested remnant of maladjustments, new
maladjustment of its own…” A reminder
that while Fed stimulus---through low rates or other measures---may be an attempt
to help the economy in the near term, ultimately it does not actually solve
problems. It simply relocates (asset mispricing, misallocation, pulling forward
future demand) and defers the day of reckoning.
Yet today investors look to the Fed
to solve the economic problems when in fact the Fed bears a major
responsibility for those problems in the first place. By pursuing QE after QE instead of allowing the
system to cleanse itself, needed adjustments have been deferred to later
periods and possibly even handed it off to subsequent generations.
Investing for Survival
Two
rules.
News on Stocks in Our Portfolios
Economics
This Week’s Data
The
March Case Shiller home price index rose 0.9% versus expectations of up 0.7%.
The
May Chicago PMI came in at 49.3 versus estimates of 50.7.
May
consumer confidence was reported at 92.6 versus consensus of 97.0
The
May Dallas Fed manufacturing index dropped substantially from the April reading
to -13.1.
Weekly mortgage
applications were down 4.1%, while purchase applications were down 5.0%.
Month
to date retail chain store sales improved markedly from the prior week.
Other
China
remains a problem (medium):
Corporations
are debt bingeing (medium):
What
QE has bought us (medium and a must read):
Politics
Domestic
International
The
Battle of Britain (medium):
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for Survival’s website (http://investingforsurvival.com/home)
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