The Morning Call
5/5/17
The
Market
Technical
The indices
(DJIA 20951, S&P 2389) barely moved yesterday; to the extent they did, they
were mixed again (Dow down, S&P up).
Volume fell; breadth weakened. Both remain above their 100 and 200 day moving
averages and the lower boundaries of uptrends across all major time frames---all
of which acts as support. That clearly
means that momentum remains to the upside.
So it is resistance that becomes important. Immediate resistance now exists at their former
highs (21228/2402) and ultimately at the upper boundaries of their long term
uptrends (23390/2591).
The VIX (10.5) was
down, remaining below its 100 and 200 day moving averages. However, it held above the lower boundaries
of its short and intermediate term trading ranges---perhaps indicating that it
has found support.
The long
Treasury and gold were down, the latter noticeably so. The indication here is that investors believe
rates could be going up. But the dollar
was also down, suggesting lower rates.
Likely, this mixed performance mirrors that of the Averages, reflecting
investor uncertainty.
Bottom line: investors
seem stuck on the sidelines---even after the house passage of repeal and
replace. I thought that there would be
some return of positive sentiment even though we know this was just the first
step in a long process. I speculated
Wednesday that they could be waiting for today’s jobs number or this weekend’s
French elections. Or perhaps there is
rising trepidation based on the economic data or the drop in crude oil prices. It would seem confusion/uncertainty has
replaced euphoria.
Short term
aside, the assumption remains that prices head higher, but remembering that
there are two big gaps to fill lower down.
Oil
prices continue to get smacked (short):
Along
with other commodities (medium):
Fundamental
Headlines
The
economic data was mixed again yesterday: weekly jobless claims fell more than
expected and April chain store sales improved from March; on the other hand,
first quarter nonfarm productivity and unit labor costs were very disappointing
and March factory orders were below estimates.
What tips the scale is that the latter two are both primary indicators.
Overseas,
the April UK Markit services PMI hit a four month high, continuing the
sustained improvement in the European economy.
The
big news of the day was the passage in the house of repeal and replace. Here is a great and brief summary of the
legislation’s major provisions:
This is what we
also know: (1) there is a dispute on what these various provisions will mean to
the insured and the taxpayer and (2) the senate will unquestionably change the
bill which will have to be reconciled.
And don’t know: how much the bill’s provisions cost/save and, hence, its
potential impact on the tax bill. But we
will know all this in good time.
Still,
this is a first step. One that many
doubted would ever occur; and for whatever the uncertainties, it was done with
a lot more transparency than Obamacare. Plus,
because the freedom caucus is on board, I am assuming that some of the heavy
handed, expensive, one size fits all aspects of Obamacare are gone or
sufficiently modified to make the plan more workable and less expensive. With that said, I give a polite applause but await
a full vetting of the bill before getting jiggy.
Bottom
line: with all the post-election euphoric investor behavior anticipating a
fiscal revolution encompassing repeal and replace, tax reform and
infrastructure spending, I was surprised by the Market’s muted response
yesterday. Yes, house passage was just a
first step; but everyone has known that from day one. That said, maybe this means that all investors
are now from Missouri---in which case, it is going to take another source of
good news to drive stock prices higher: higher earnings? ---this season is
already about as good as it can get; a great jobs report? ---could be but
remember employment is a lagging indicator and the current trend in leading and
coincident indicators are not encouraging; defeat of Le Pen?---given the rally
after the first round of voting, this has to be largely in prices; lower oil
prices?---remember the last time oil prices went down.
Other’s
reaction aside, I am encouraged by the house action. Not because I believe that repeal and replace
will occur; but because Ryan/Trump have shown they can put together a fractious
GOP caucus to act on a very controversial issue. That suggests to me that tax reform and
infrastructure spending will likely get enacted because they should be easier
issues on which to reach agreement. To
be clear, I am not suggesting big non-revenue neutral tax cuts or huge deficit
enlarging infrastructure spending measures. But I do think that there is a
clearer path to some reform which will still be a positive for the long term
secular growth rate of the economy.
My
thought for the day: a common ailment
of investors is believing something is true only
because other people think it is. People
like being associated with things that are winning, so winners build momentum
not because they deserve it, but because they're winning. This is the
foundation of all asset bubbles.
Investing for Survival
Number
one rule in investing.
News on Stocks in Our Portfolios
Economics
This Week’s Data
March
factory orders rose 0.2% versus expectations of a 0.4% increase.
April
chain store sales rose.
April
nonfarm payrolls were up 211,000 versus estimates of an 185,000 increase.
Other
Domestic
International War Against Radical
Islam
***overnight,
Russia, Iran and Turkey have established four ‘safe zones’ in Syria,
stipulating that US planes cannot fly over these territories.
Saudi
power struggle could bring additional fireworks to Middle East (medium):
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for Survival’s website (http://investingforsurvival.com/home)
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