Wednesday, July 6, 2016

The Morning Call--S&P makes second lower high

The Morning Call


The Market

The indices (DJIA 17840, S&P 2088) fell back from a third lower high. Volume rose; breadth weakened.  The VIX was up 5 ½%, but remained below its 100 day moving average.  It is still within a short term trading range with the big question---will it challenge the lower boundary of that range for a sixth time.

The Dow closed [a] above its rising 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] within its short term trading range {17498-18726; it had confirmed a break of this boundary last week, but bounced dramatically the following day.  So I reset the trend back to a trading range, [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] within its short term 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 another 1.3%.  It is now above its 100 day moving average and well within very short term, short term, intermediate term and long term uptrends.

GLD was also strong, ending above its 100 day moving and within short and intermediate term uptrends.  Next resistance is the upper boundary of its long term downtrend; now at circa 139. 

Bottom line:  after last week’s sharp rally, both of the Averages are back within trading ranges.  Importantly, they have now made two lower highs which suggests that the upside momentum, while still there is starting to weaken.

I am still paying particular attention to GLD.  It has now reset its short term and intermediate term trends to up and will likely challenge its long term trend.  If that is successful, 175 is the next resistance level.



            Only one US datapoint was reported yesterday---May factory orders were down 1.0%; but that was expected. 

Overseas, the news was better---both the June UK composite flash PMI and the June China Markit service PMI were stronger than forecast.  Nevertheless, looking forward the EU could see weakness coming from the impact of the Brexit and the growing crisis in the Italian banking system.
            Europe’s Lehman moment (medium):

            ***overnight, May German factory orders were flat with April.

            Bottom line: the good news is that the US economy may be stabilizing.  The bad news is that (1) Europe continues to push toward recession and the aforementioned problems will only make things worse and (2) as computed by our Valuation Model, stocks reflect an ‘everything is awesome’ scenario which I judge to be high unlikely.

            The latest from Bill Gross (must read):

            Given the current price levels, it is an excellent opportunity to sell a portion of your winners and all of your losers.
            My thought for the day: I have covered this subject before, but with interest rates plunging I thought it appropriate to issue a brief reminder that reaching for yield is one of the primary mistakes made by investors.
            Remember that the fixed income portion of your portfolio is supposed to be your safe money; so your objective should be to insure the return of your money before worrying about the return on your money.
            There are three common ways to chase yield: (1) buy longer term bonds, (2) buy lower quality, i.e. riskier bonds or (3) use leverage.  I understand the motivation to employ one of these strategies.  But it is not worth the risk that you are taking if things go awry.  Just ask all those guys that were buying mortgage backed securities in 2006.
            There is no such thing as a free lunch.
            The latest from John Hussman (medium):

            Update on valuation:

       Investing for Survival
            The downside of past performance:

    News on Stocks in Our Portfolios

   This Week’s Data

            May factory orders fell 1.0%, in line.

            The May US trade deficit came in at $41.1 billion versus estimates of $40.0 billion.

            Weekly mortgage applications rose 14.2% while purchase applications were up 4.0%.


            Three of UK’s largest property funds suspend redemptions (medium):




            First round of voting for Tory leadership just completed (medium):

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