The Morning Call
11/11/16
The
Market
Technical
The indices
(DJIA 18807, S&P 2167) had a mixed day of sort---Dow up huge, S&P up a
little, NASDAQ down. Volume rose.
Breadth improved and continues in overbought territory. The VIX was up 2 ½%, returning to its pattern
of rising even on up Market days. It closed below its 100 day moving average,
for the second day (now support; if it remains there through the close today,
it will revert to resistance) but still above its 200 day moving average (now
support) and in a very short term uptrend.
The Dow ended
[a] above on its 100 day moving average for the third day, reverting to support,
[b] above its 200 day moving average, now support, [c] above the upper boundary
of its short term trading range {17092-18693; if it remains there through the
close on Monday, it will reset to an uptrend}, [c] in an intermediate term
uptrend {11544-24389} and [d] in a long term uptrend {5541-19431}.
The S&P
finished [a] above its 100 day moving average for the second day, now
resistance; if it remains there through the close today, it will revert to
support, [b] above its 200 day moving average, now support, [c] within a short
term trading range {1995-2193}, [d] in an intermediate uptrend {1978-2580} and
[e] in a long term uptrend {862-2400}.
However, it still has a way to go before it challenges its all-time
high.
The long
Treasury plunged (again) on huge volume, closing below its 100 day moving
average (now resistance), below its 200 day moving average (now resistance),
below a key Fibonacci level, in a developing a very short term downtrend and
below the lower boundaries of its short term uptrend for a second day (if it
remains there through the close today, it will reset to a trading range) and
its intermediate term uptrend for a second day (if it remains there through the
close next Monday, it will reset to a trading range).
GLD was down 1 ½%,
finishing below its 100 day moving average (now resistance), below its 200 day
moving average for the second day (now support; if it remains there through the
close today, it will revert to resistance) and in a short term downtrend. This chart continues to deteriorate.
Bottom line: the
Trump/GOP sweep rally continued yesterday---kind of. The Dow was strong, the S&P not so much
and the NASDAQ not at all. The VIX was up. All of which is a bit
confusing. Still there has been an
enormous uplifting of Market psychology.
So while the current overbought condition of the Market may need a
couple of days of consolidation, the assumption has to be that stocks are going
higher until this explosion of positivity subsides. That could make me wrong that the indices will
not successfully challenge their all-time highs. Even if it does, I continue to believe that
the upper boundaries of their long term uptrends will not be surpassed.
Legend
high frequency trader exits the business (medium):
Fundamental
Headlines
There
was only one economic release yesterday:
weekly jobless claims fell more than expected. Nothing overseas.
Of
course, even if there had been more, they would have been totally overshadowed
by (1) the continuing political love fest and (2) investors rushing to adjust
future economic and corporate profit expectations in light of the Trump
victory/GOP sweep. The latter being
driven by the proposed Trump agenda and the likelihood of achieving given
republican control of congress. I have
spent a lot of time discussing this subject, so I give you the thoughts of
others.
Trump
sets forth policy goals (medium and a must read):
Could
the Trump presidency lead to an even bigger bubble? (medium)
Pause,
reflect and act carefully (short):
The
latest from Stanley Druckenmiller (medium):
Bottom
line: consensus is that the Trump election/GOP sweep election will have a
positive impact on the economy (with which I agree). That is the good news. However, some of the Donald’s proposed
policies are not economically upbeat [trade and increased deficit spending]. In addition, long interest rates are getting
pounded. To be clear, normally, in an
improving economy, stock prices and bond yield can rise together. So on the surface there is nothing unusual or
sinister in this pin action.
But these are
not normal times. Price discovery in the
fixed income market has been distorted by QE, ZIRP etc.; and Trump has made it
clear that he views that as a negative.
So if monetary policy in headed for normalization and the Fed gets out
of the way of interest rate price discovery, no one knows what is going to
happen because no one has ever been in this situation before. But if Newton was correct (for every action
there is an equal and opposite reaction) then the effect on equity prices of an
irresponsibly easy Fed could very well be reversed by a tightening in monetary policy. This has been a potential negative that I
have emphasized continuously over the last four years.
Just to be clear
where I stand: Trump’s proposed economic agenda will have a major positive
impact on the economy. I will almost
assuredly revise our 2017 forecast up. I
might even have to revise the long term secular economic growth rate assumption
in our Models. And that in turn would
shift our Fair Value calculations for the Averages and individual stocks. The problem is, even if I did all of that,
current Market valuations are still way too high largely as a result of central
bank malfeasance. My thesis has been and
remains that once that malfeasance is corrected, equities will get
repriced---down.
My
thought for the day: it is never clear what causes market corrections (witness
my narrative over the last two and half years) but without them many of the
best performing long term investors would never have achieved their outstanding
returns.
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