The Morning Call
12/15/16
The
Market
Technical
The indices
(DJIA 19792, S&P 2253) moved down noticeably yesterday for the first time
in two weeks. Again volume was huge; breadth
weakened though its remains in overbought territory. The VIX (13.2) was up 3 ½ %, but still remained
below its 200 day moving average (now resistance), below its 100 day moving
average (now resistance) and within a short term downtrend. However, it closed above the upper boundary of
a very short term downtrend---indicating a potential loss of downside
momentum. The lower boundaries of its intermediate term
trading range (10.3) and long term trading range (9.8) are close by---both of
which were set back in 2006.
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 {18192-20242}, [c] in
an intermediate term uptrend {11627-24477} and [d] in a long term uptrend {5720-20271}.
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 {2125-2469},
[d] in an intermediate uptrend {2002-2604} and [e] in a long term uptrend {881-2419}.
The long
Treasury (116.8) got blasted (as did the entire fixed income complex), ending below
its 100 day moving average (now resistance), below its 200 day moving average
(now resistance), below a key Fibonacci level, in a very short term downtrend
and below the lower boundary of its short term trading range. If it remains there through the close on
Friday, it will reset to a downtrend.
Further, the lower boundary of its intermediate term trading range is a
short hair away (115.1).
GLD (108.9) was also
battered (down 1 ½ %), finishing below its 100 day moving average (now
resistance), below its 200 day moving average (now resistance), below the lower
boundary of its short term downtrend and back below a key Fibonacci level. There is not much stopping it from going to
the lower boundary of its intermediate term trading range (100.0).
The dollar soared
1%, closing back above the upper boundary of its short term trading range (for
the fourth time). If it remains there
through the close on Friday, it will reset to an uptrend. Also it is less than 3% away from the upper
boundary of its intermediate term trading range.
Bottom line: yes,
Virginia, stocks can decline. Although
(1) it was not that much, (2) given the indices dramatically overbought
condition, it wasn’t in the least surprising and (3) it will likely have little
impact on the current upward momentum in prices. I am still assuming that before year end the 20000/2300
levels will get taken out and that a challenge of the upper boundaries of the
Averages long term uptrends is a reasonable probability. Though as I suggested yesterday, there is
plenty of time for this consolidation to last a couple of days before stocks
resume their upward trend.
Interestingly on
this down day for stocks, TLT, GLD and UUP resumed their earlier strong directional
moves which had originally occurred when stocks were going up; although, I am
not sure what that means.
Fundamental
Headlines
Yesterday’s
US data flow was not good: weekly mortgage and purchase applications were down,
November PPI was hotter than forecast, retail sales (primary indicator) were
short of expectations, industrial production (primary indicator) was below
estimates while the only bright spot was business inventories/sales.
Overseas,
November Japanese business sentiments was strong while UK employment fell.
***overnight,
the December EU flash manufacturing PMI was better than estimates while the
service PMI was worse.
The
big event of the day was the end of the latest FOMC meeting. As expected the Fed raised the Fed Funds rate
by .25%. Most of the narrative of the
statement following the meeting contained the usual ‘on the one hand, on the
other hand’ Fed speak. However, two
items made it slightly weighed to the hawkish side: (1) the forecast that it
would raise rates three times in 2017 [prior statements proposed two
hikes. Of course. Last December, the Fed
said that it would raise rates four times in 2016] and (2) it expressed a
little bit more concern about inflation.
Here is the text of the press release:
Here
is its updated economic forecast:
In
a related item, the Bank of Japan said that it would step up its bond buying
program (i.e. more QE) after having hinted last week that it was going to start
tightening. These guys clearly haven’t
perfected Fed speak.
Bottom
line: yesterday’s Fed message seemed to have created a little cognitive
dissonance to the Market’s ‘everything is awesome’ thesis (Trumponomics plus a
dovish Fed). And I am sure that the economic
numbers didn’t help. Whether this turns into something significant remains to
be seen. At this point in time, it seems
hard to imagine anything breaking the bullish spell that has been cast over the
Market.
Update
on dividend cuts (short):
My
thought for the day: investors often suffer from cognitive inertia, meaning
that they are unwilling to change their thought patterns in light of new
circumstances. I could be doing this at
the moment, denying to myself that the recent boost to valuations given by the
Trump victory/GOP sweep is warranted. The
simple solution to this problem is to do the homework. In this case, if new fiscal and regulatory
policies will improve corporate profitability, then I have to seriously
question the assumptions in my Economic and Valuation Models. I have done that and based on what could be
termed the ‘best scenario’, equities are still overvalued---not as much as they
were pre-Trump; but still overvalued. Anything
less than the ‘best scenario’, they are grossly overvalued.
Investing for Survival
Expect
risk.
News on Stocks in Our Portfolios
Economics
This Week’s Data
November
industrial production fell 0.4% versus estimates of down 0.2%; capacity
utilization came in at 75%, in line.
October
business inventories declined 0.2% versus expectations of a 0% number; sales
rose 0.8%.
November
CPI was reported up 0.2%, in line; ex food and energy, it was up 0.2%, also in
line.
The
December Philadelphia Fed business outlook survey came in at 21.5 versus
forecasts of 10.0.
The
December NY Fed manufacturing index was 9.0 versus consensus of 3.0.
The
US third quarter trade deficit was $113.0 billion versus its prior reading of
$119.9 billion.
Weekly
jobless claims fell 4,000 versus estimates of a 3,000 decline.
Other
Update
on big four economic indicators (medium):
Greek
bail out hits yet another bump in the road (short):
What
OPEC production cut? They are already
cheating (medium):
Politics
Domestic
Did Obamacare
add 20 million to the insurance rolls?
Not even close. (medium):
US students keep
getting dumber (medium):
International War Against Radical
Islam
Congresswoman
introduces bill to halt US funding of ISIS (short):
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