Friday, July 21, 2017

The Morning Call--How long will investors buy this routine?

The Morning Call

7/21/17

The Market
         
    Technical

The indices (DJIA 21611, S&P 2473) drifted lower on day filled with good news.   Volume was up, but remained at a low level; and breadth continued weak.  The Averages remain firmly in uptrends defined by their 100 and 200 day moving averages and uptrends across all timeframes.  At the moment, I see nothing, technically speaking, to inhibit the Averages’ challenge of the upper boundaries of their long term uptrends---now circa 24198/2763. 

The VIX (9.6) was down 2%, finishing below the lower boundary of its long term trading range for the fifth day, resetting it to a downtrend.  It is now in downtrends across all timeframes.
               
The long Treasury was up on volume, ending well above its 100 and 200 day moving averages as well as the lower boundary of its very short term uptrend.    

The dollar was hammered, pushing it to within a short hair of the lower boundary of its short term trading range.  UUP is also below its 100 and 200 day moving averages, within a very short term downtrend and its chart is getting uglier by the day.

GLD was up slightly, closing above its 200 day moving average (if it remains there through the close today, it will revert to support) and is nearing its 100 day moving average.  So clearly, this chart is improving.

Bottom line: on Wednesday stocks were up on disappointing news (which has been par for the course for the last year and half), but yesterday were down (though admittedly not by much) on very good news.   I am not suggesting that there has been a sudden change in investor psychology.  More likely, all that good news simply was already in the price of stocks.  Nonetheless, the juxtaposition of the two trading days is somewhat curious. 

Meanwhile, TLT, UUP and GLD reacted as you would have expected on a day where two major central banks chirped dovishly.
           
    Fundamental

       Headlines

            Yesterday’s news flow was upbeat.  The US economic numbers were positive: weekly jobless claims fell more than expected, the June leading economic indicators were better than forecast.  On the other hand, the July Philly Fed index was disappointing.  Overseas, the stats were mixed: the June Japanese trade balance shrunk while June UK retail sales beat estimates.

            ***overnight, the IMF finally agreed ‘in principle’ to join in the latest Greek bailout.

            However, the big news of the day was the BOJ and ECB meetings; and both left policies unchanged but provided more dovish narratives than had been anticipated.  Given the Fed’s recent dovish back peddling on its own policy initiatives, we have easy money unanimity.   I am not going to torture you with my usual asset mispricing and misallocation rant, but………..

            Draghi’s confusion

            Bill Gross on Fed policy (medium):

Bottom line: if liquidity is driving this market, then look out above.  Three major central banks have made dovish statements in the last two weeks.  Yes, the Fed said that it would began unwinding its balance sheet later this year; but virtually every statement regarding a ‘normalization’ of monetary policy that it has made over the last two years has turned out to be more hawkish than its ultimate action.  Indeed, it has never in its history acted as hawkishly as its rhetoric anticipating monetary tightening. 

The Market question is, how long will investors buy the current central bank narrative before it once again realizes these guys have wrecked price discovery as a resource allocation mechanism and that they have never, don’t and likely never will manage a smooth transition from easy to normal monetary policy.  Sooner or later, the price is going to be paid for the gross mispricing and misallocation of assets.  I just don’t know when.  I do know that I want to own cash when it happens.

            The easy money is being made.  Enjoy it while it lasts. (short):

            My thought for the day: No one buys a stock expecting to lose money.  But it happens; and unfortunately many investors end up ignoring stop losses or, even worse, throwing good money after bad as part of a post trade rationalization process.  Good investors know how to make money; great investors know how to take a loss.

       Investing for Survival
   
            Ten rules for catching a bottom.
           
    News on Stocks in Our Portfolios
 
Genuine Parts (NYSE:GPC): Q2 EPS of $1.29 misses by $0.02.
Revenue of $4.1B (+5.1% Y/Y) beats by $60M.

BlackRock (NYSE:BLK) declares $2.50/share quarterly dividend, in line with previous.

Microsoft (NASDAQ:MSFT): Q4 EPS of $0.98 beats by $0.27.
Revenue of $24.7B (+9.1% Y/Y) beats by $430M.

Coca-Cola (NYSE:KO) declares $0.37/share quarterly dividend, in line with previous.

Schlumberger (NYSE:SLB): Q2 EPS of $0.35 beats by $0.05.
Revenue of $7.46B (+4.2% Y/Y) beats by $220M.


Economics

   This Week’s Data

            The June leading economic indicators rose 0.6% versus forecasts of up 0.4%.

   Other

            CBO projections are worse than useless (medium and today’s must read):

            David Stockman on the upcoming debt ceiling vote.  I usually like his analysis but I think this dire prediction a bit over the top.  Nonetheless, I include as a worst case scenario as our political class moves toward D day.

            Quote of the day (short):

            Government pension funds aren’t the only ones that are underfunded (short):

Politics

  Domestic

Another ill effect of power (short):

Mueller expands probe into Trump business activities (medium):

  International

            The US apparent diplomatic strategy towards North Korea and China (medium):

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