The Morning Call
11/16/16
The
Market
Technical
All the indices
(DJIA 18923, S&P 2180) had a good day, though volume declined (again). Nonetheless, breadth remains quite strong, pushing
ever further into overbought territory.
The VIX was down 7 ½%, closing below its 100 day moving average (now
resistance), below its 200 day moving average (now support; if it remains there
through the close on Friday, it will revert to resistance) and closed right on
the lower boundary of a very short term
uptrend. This trend has withstood eight
challenges. A break would clearly be
good news for stocks; but if that trend holds, then stocks will likely have
seen their best days.
The Dow ended
[a] above on its 100 day moving average, now support, [b] above its 200 day
moving average, now support, [c] in a short term uptrend {17952-20009}, [c] in
an intermediate term uptrend {11544-24389} and [d] in a long term uptrend
{5541-20148}.
The S&P
finished [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
{1995-2193}, [d] in an intermediate uptrend {1983-2585} and [e] in a long term
uptrend {862-2400}.
The long
Treasury finally bounced after six down days.
This is more likely a sign of correcting an oversold condition versus
anything really positive. It closed
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, in a short term trading range and in an intermediate term
trading range. Not a pretty picture and
one that will require a lot of work to just not be ugly.
GLD also
rallied, finishing below its 100 day moving average (now resistance), below its
200 day moving average (now resistance) and in a short term downtrend. The good news is that it rebounded off the
lower boundary of that short term downtrend.
The bad news is that (1) it’s a short term downtrend and (2) like the
TLT, it is most likely correcting an oversold condition.
Bottom line: investors
remain enthused about a likely turn for the better in the US economy. As you know, I agree with that fundamental
assessment. My question, as it has been
for the last two years, is price. My
answer is that earnings are going to have to improve dramatically and the
discount factor (P/E) is going to have to improve from its current historically
high level to justify these prices.
Shorter term,
stocks are getting more overbought, so some consolidation is in order. Further, yesterday’s positive pin action
notwithstanding, the indices are in diverging short term trends. That needs to be corrected before drawing a
conclusion on direction.
Bonds and gold both
rallied, but that is likely nothing more than a bounce off an oversold
condition.
Fundamental
Headlines
The
US economic data releases yesterday were very upbeat: October retail sales
(primary indicator), the NY Fed manufacturing index, October import and export
prices, month to date retail chain store sales and September business
inventories and sales all were ahead of expectations.
Overseas, the
stats were not so good. Third quarter EU
GDP grew 0.3%, in line but on a recently downwardly revised estimates; German
GDP was below forecasts and UK inflation was below expectations.
In other news, OPEC
is making another diplomatic effort to reach an agreement on production cuts,
sending oil prices higher as investors once again get dazzled by their BS.
Finally,
the dollar continues to surge. I have
mentioned this several times recently; but I haven’t shown you a picture. This rally seemingly has been driven by the
prospects for higher interest rate and a better economy under Trump. Others are suggesting that it is the result
of a dollar shortage. I will leave it to
you to decide which. However, please
note the prior times the dollar has spiked like it is now and compare it to the
S&P chart. It is not encouraging if
you are a bull.
Why is it rising
(medium):
Will
it short circuit the current Market uptrend? (medium):
Bottom
line: one couldn’t have asked for a more upbeat day: the US economic data made
great reading and, I am sure, reinforced investors’ positive attitude about the
economic future under a Trump regime. However,
while I am all in on a better economic outlook, its magnitude and timing are
very much in question. Plus, we have no
idea about the consequences of a more confrontational trade policy and an
expanding budget deficit.
My caution may
be totally misplaced and end up being dead wrong. Certainly, near term, it will
appear that way. But I keep coming back
to the extraordinary level of current Valuations. I can see stocks attacking the upper boundaries
of their long term uptrends which would means a max upside of 6-10%. On the other hand, even if our Valuation
Model is under estimating current Fair Value by 50%, the downside is still
20-25%. 10% up/25% down is not a great
risk/reward equation.
If
you haven’t already, I would build your portfolio’s cash position by selling a
portion of those stocks that have performed well and all of your losers.
The
latest from Ray Dalio (medium):
Analysts’
expectations and Market expectations (medium and a must read):
My
thought for the day: never invest in a stock if you can’t describe why you own
in 25 words or less. Investing is an
extraordinary difficult undertaking. The
more factors you have to consider, the more ways you can be wrong. Keep the investment thesis simple, then it is
easier to recognize your potential mistakes.
Investing for Survival
You
are not Stanley Druckenmiller.
News on Stocks in Our Portfolios
Economics
This Week’s Data
Month
to date retail chain store sales improved from the prior week’s reading.
September
business inventories rose 0.1% versus expectations of up 0.2%; sales increased
0.7%.
Weekly
mortgage applications fell 9.2% while purchase application were off 6.0%.
October
PPI came in flat versus estimates of a 0.3% advance; ex food and energy, it
declined 0.2% versus forecasts of a rise of 0.2%.
Other
The
latest from my favorite optimist (medium):
All
eyes are now on the Bank of Japan (short):
And
(short)
Online
loan defaults are soaring (medium):
Politics
Domestic
The horror of it
all, part 2 (medium):
Some stats on
anti-immigrant memes (short):
http://www.coyoteblog.com/coyote_blog/2016/11/most-of-those-anti-immigrant-memes-are-just-wrong.html
International War Against Radical
Islam
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for Survival’s website (http://investingforsurvival.com/home)
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Service.
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