The Morning Call
1/17/18
The
Market
Technical
The indices
(DJIA 25792, S&P 2776) soared in early trading, reversing intraday and
finishing down on the day. The Dow even traded
through the upper boundary of its short term up trend and fell back below
it. Volume was huge. As expected, breadth weakened but not as much
as I would have thought. Still it was a
single day’s pin action. And as I am
fond of saying, one day does not a trend make.
The key is follow through.
Long term, the Averages remain robust viz a
viz their moving averages and uptrends across all timeframes. Short term, they
are above the resistance level marked by their August highs, meaning that there
is no resistance between current price levels and the upper boundaries of their
long term uptrends. The technical assumption has to be that stocks are going
higher.
The VIX soared 15%. But it opened higher as the indices sprinted
upward and then rose through the rest of the day. I noted yesterday, it has almost entirely
divorced itself from any (inverse) correlation with stocks in the past week. I think that means one of two things and
perhaps both: (1) somebody in stock land is doing serious hedging [of their equity
positions] and (2) volatility will likely be much higher going forward than it
was in 2017.
The long
Treasury slipped fractionally, remaining in the zone between its 100 day moving
average and the upper boundary of its very short term downtrend (on the upside)
and the 200 day moving average and the lower boundaries of its short term
trading range and its long term uptrend---leaving us with little clear
directional information.
The other indicators
that I follow continue to point to lower interest rates---GLD up, the dollar down
(big).
Bottom line: while
big intraday reversals can portend a change in trend, it was still but one day
of trading. Follow through. The current weight of technical evidence is that
stocks appear likely to go higher. Nevertheless,
I remain uncomfortable with the overall technical picture.
Fundamental
Headlines
As
has been the case for the last week, the Market was the news yesterday. The initial spike in the indices was just a
continuation of the recent melt up. What
led to the reversal is what was on investors’ minds. There seems to be four possible reasons:
(1) rumors regarding Steve Bannon’s testimony
before congress. The worry being that he
knows whatever skeletons exist in Trump’s closet---‘whatever’ being the
operative word---and that could lead to real turmoil in DC,
(2) the crypto
currency got hammered. Having said that,
I have no idea if there is any real price correlation between them and
equities. Their pin action may just be
coincidental,
(3) Friday is
the deadline for a budget or continuing resolution vote as well as DACA/Wall
debate that seems to have attached itself to the budget outcome like a bad case
of herpes. Who knows what the ruling
class will do,
(4) stocks were
overbought and any excuse would do to start a correction.
Bottom
line: stocks were over bought and that is all the reason needed for a selloff. However in addition to being overbought, they
are also overvalued (in my opinion). I
have no idea whether this condition gets corrected by investors recognizing the
math or gets triggered by some random exogenous event, like Steve Bannon
congressional testimony. But I believe
that it will occur. To the extent that
you are invested, that is good news. But
if volatility increases (which it has clearly been doing) that may be a less
comforting position than it has been for the last year. I think it wise to own some cash for your own
protection. As you know, I am 50%
invested and sleeping well.
Morgan
Stanly on the impact of the tax cut and its effect on valuations (medium):
The
forgotten bull market. What the author
neglected to mention is that this bull market started at P/E levels in the mid-single
digits (short).
As a counterpoint, this
article, while a bit long, addresses the issue of likely future returns and
thus, why this time is not different (long):
News
on Stocks in Our Portfolios
Automatic Data Processing (NASDAQ:ADP) declares $0.63/share quarterly dividend, in line with
previous
Economics
This Week’s Data
US
Weekly
mortgage applications rose 4.1% while purchase applications were up 3.0%.
International
The December EU CPI rose 0.4%, in line.
Other
Here
an upbeat assessment of the tax bill (medium):
NY
Fed introduces a new inflation measure (short):
Goldman
on the impact of the tax cut on wages (medium):
Risks of a trade war with
China (medium and a must read):
What
I am reading today
Something
doesn’t make sense.
Make
yourself useful (short):
Common scams to take your money and
how to avoid them (medium):
Four social security statistics that
will scare you (medium):
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