Friday, September 8, 2017

The Morning Call---The ECB does what it does best---maintains QE

The Morning Call

9/8/17

The Market
         
    Technical

The indices’ (DJIA 21784, S&P 2465) performance was mixed yesterday with the Dow down and the S&P flat.  Volume rose; breadth mixed.  Both remain above their 100 and 200 day moving averages and are in uptrends across all time frames.  But both are still below the resistance offered by their former all-time highs.

The VIX (11.6) fell 0.5%, leaving it below the upper boundary of its short term downtrend, slightly below its 100 day moving average (it reverted to resistance on Friday, then traded back above it Tuesday; so this MA is acting more like a magnet than resistance or support), above its 200 day moving average and the lower boundary of a developing very short term uptrend. The question as to whether or not the VIX has bottomed clearly remains open.

The long Treasury rebounded strongly on volume, finishing above its 100 and 200 day moving averages (both support), the lower boundaries of its short term trading range and its long term uptrend and back above the resistance level marked by its August high.

The dollar was slammed again, closing in a short term downtrend and below its 100 and 200 day moving averages, in a series of six lower highs and below the lower boundary of its short term trading range for the third day, resetting to a downtrend.
           
 GLD was advanced 1%, ending above the lower boundaries of its short term and very short term uptrends and above its 100 and 200 day moving averages (both support).

Bottom line: long term, the indices remain strong viz a viz their moving averages and uptrends across all timeframes.  Short term, they have moved sideways since early August.  That is not necessarily bad; after all, stocks can’t go up every day.  Still, I am watching the indices’ August highs as resistance and the lower boundaries of their short term uptrends as support.  A break in either one would provide directional information.

The unambiguous performances of TLT, GLD and UUP continue to point at a weakening economy.  I continue to be uncomfortable with the overall technical picture.
           
    Fundamental

       Headlines

            Two economic datapoints yesterday: weekly jobless claims soared while revised second quarter productivity and unit labor costs were better than expected. 

One number from overseas: August German industrial output was disappointing. 

In addition, the ECB took a page from the Fed guide on communications issuing disjointed ‘on the one hand, on the other hand’ statement, the bottom line of which (aside from totally confusing the markets) was that it would leave rates and its bond buying program unchanged.  Of course, confusion is essential because the EU has been the strongest segment of the global economy and if the ECB isn’t going to normalize monetary policy when the economy is going well, then when will it?  Whatever Draghi says, strengthening the euro and avoiding a Market hissy fit are his top priorities even though neither Market valuation nor currency levels are part of central banks’ monetary mandates.  Unfortunately, one of the side effects of currency manipulation is that prompts a similar response from their trading partners.

As an aside, I have long maintained a country’s currency value are like a stock’s value---it is the Market’s judgement as the value of that country.  So a strong currency reflects investors’ perception of the strength of a country.

Bottom line: yesterday was less news packed than Wednesday but that is not to detract from the ECB’s decision to leave monetary policy in QEInfinity mode.  It would seem that there is no central bank with the enough responsibility to wind down QE irrespective of its particular country’s economic performance.  Of course, we know why and it has nothing to do with economic performance.  It is fear of unwinding the asset mispricing and misallocation for which it is solely responsible.  How can this possibly end if no central bank takes the first step?  (1) the Market starts to flatten the yield which is now occurring, (2) the dollar keeps plunging, (3) the composition of one of these central bank undergoes a change in leadership that recognizes the need to correct past mistakes [think Volcker, then think no Fischer and no Yellen].
           
            More on valuations.

            My thought for the day: most investors avoid the stock in companies in industries that are under stress.  Who can blame them?  The industry outlook is horrible; there can’t be anything good here.  I take a different view. I believe that some of the safest plays you can make consist of buying financially strong names in weak sectors. These companies are usually cheap in comparison to their earnings and to their book values.

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Politics

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Quote of the day (short):

  International War Against Radical Islam

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