The Morning Call
12/2/16
The
Market
Technical
The indices
(DJIA 19191, S&P 2191) diverged again yesterday (Dow up, S&P down). Volume declined; breadth strengthened keeping
it at very overbought levels. The VIX rose
5 ½%; while it remained below its 100 day moving average and in a short term
downtrend, it closed above its 200 day moving averages (if it remains there
through the close on Tuesday, it will revert to support).
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 {18093-20153}, [c] in
an intermediate term uptrend {11568-24418} 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 uptrend {2111-2453},
[d] in an intermediate uptrend {1995-2597} and [e] in a long term uptrend {881-2419}.
The long
Treasury took another big hit (-1.25%) on big volume (again), closing below its
100 day moving average (now resistance), below its 200 day moving average (now
resistance), below a key Fibonacci level and in a very short term downtrend. Plus it is now approaching a challenge of its
short term trading range, with the lower boundary of its intermediate term
trading range not that much further down.
GLD was down
again, ending below its 100 day moving average (now resistance), below its 200
day moving average (now resistance), below another Fibonacci retracement level
and below the lower boundary of its short term downtrend.
The dollar sold
off, finishing back below the upper boundary of its former short term trading
range (it had reset on Monday, then fell back below it Tuesday, then pushed
over it on Wednesday and is now back below it), putting the challenge of the
short term trading range back into question.
Bottom line: the
Averages continue to futz around, consolidating from the recent post-election
run up. I have been talking about this development
for a week; therefore, I am not surprised by the pin action. To date, it has been a bull’s dream (sideways
action versus a sharp decline). Until or
unless it turns into something different, my assumption remains that a challenge
of the upper boundaries of the indices long term uptrends is in our future.
The sharp
retreat in bond prices is a growing concern in that the higher rates go, the
bigger challenge they pose to stock valuations.
If TLT successfully challenges the lower boundaries of its short and
intermediate term trading ranges, I think that equities will pick up a
headwind.
Fundamental
Headlines
Lots
of data released yesterday and with a negative tilt: the November Markit
manufacturing PMI and the ISM manufacturing index were better than anticipated,
while November light vehicle sales, November retail chain store sales, October
construction spending and weekly jobless claims were below estimates.
Overseas,
November Chinese Markit manufacturing and services PMI’s came in better than
expected; the November EU Markit manufacturing PMI was in line; the November UK
Markit manufacturing PMI was below estimates.
Overall,
a mixed performance. Once again, I was
focused on other news events:
(1)
ECB surprised by stating that an end to its bond buying
program was in sight. To be sure, it
suggested a long time horizon. But I still
thought it a bit unusual right ahead of the Italian referendum which could lead
to liquidity problems in the already troubled banks---to which the ECB has
already said it would step in with additional bond purchases if needed.
(2)
China imposes another layer of currency controls. No one seems the least bit concerned about
this. But it is another form of monetary
tightening which the Fed and now the ECB have already stated that they intended
to do. As you know, I believe that global
monetary tightening will be the driving force behind equity price mean
reversion.
More:
(3)
finally, yesterday, the Donald stated in a speech that
if any company moved jobs overseas there would be ‘consequences’. Not what I want to hear in the ‘new atmosphere’
of positive structural changes in the US economy. In my opinion, trading one form of regulation
for another is not progress. Now this
may be the Donald once again shooting his mouth off and not really meaning it. After all, we can’t expect him to do a
complete turnaround in a few short weeks.
That said, if he means it, that will certainly dampen investors’
enthusiasm.
Bottom line: in
the midst of all the upbeat US economic data and the Trump rally, I think the
currency/dollar funding problems in China are being overlooked. Plus for the first time the Donald sounded a
sour note. Investors didn’t seem to
care; and to be fair, they have had a lot to be positive about. But you know me, I always have to have
something to worry about.
That said, I
still believe that longer term, if the Donald/GOP delivers on their promises, the economy will be better for it. The question is, will valuations? And that is where the rub comes. In my opinion, current valuations can’t be
justified even in an improved secular economic environment. Stocks may challenge their long term uptrends
in the short run fueled by Trumponomics.
Longer term, the numbers just don’t work.
The
latest from Jeff Gundlach (short):
Latest
on valuation.
More:
Investing for Survival
Mental
scar tissue.
News on Stocks in Our Portfolios
Economics
This Week’s Data
November
light vehicle sales were down from October but slightly more than expected.
November
retail chain store sales growth was less than in October.
The
November Markit manufacturing PMI came in at 54.1 versus estimates of 53.9.
The
November ISM manufacturing index was reported at 53.2 versus forecasts of 52.3.
October
construction spending was up 0.5% versus consensus of up 0.6%.
November nonfarm payrolls
grew 178,000 versus projections of 170,000; however, the October number was
revised from 161,000 to 142,000; the unemployment rate registered 4.6%.
Other
Private
fixed investment at recessionary levels (short):
Missing
the big economic picture (medium):
A
view of corporate profits from an optimist (medium):
Politics
Domestic
Trump’s
businesses and the Constitution (medium):
Trump’s
Secretary of Defense nominee (medium):
International War Against Radical
Islam
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