The Morning Call
2/5/18
The
Market
Technical
As
unsettling as the Thursday/Friday pin action may have been, there is nothing in
the S&P chart to suggest anything other than a normal pullback after a
spectacular run. While the VIX and TLT
seem to be indicating that investors are more unsettled than is apparent in the
S&P, until its pin action points to something more serious than a correction
within a long term uptrend, the assumption remains that stocks are going
higher.
The
long Treasury continues to be hammered.
It is now below the upper boundary of its short term trading range for
the second day; if it closes below that level today, it will reset to a
downtrend. As you can also see, (a) this
decline is on heavy volume and (2) it is nearing the lower boundary of its long
term uptrend. If that boundary is
successfully challenged, it would mark the end of a multi decade bond bull
market.
And:
In
the face of TLT getting crushed, the dollar actually appeared to be trying to stabilize. That would indicate that dollar investors are
finally responding in a historically traditional way to higher interest rates.
GLD
held a critical support level on Friday as TLT continued to track lower. Frankly, I am not sure what that means since
normally higher interest rates drive GLD prices lower.
The
complacency that has been part of the Market fabric for the last year and a
half appears to be giving way to a more normal VIX/SPX relationship. If the VIX takes out the upper boundary of
its short term trading range, we need to start thinking about more than a ‘backing
and filling’ kind of correction.
Fundamental
Headlines
Last week, the
US economic data was upbeat overall as were the primary indicators. Score: in
the last 121 weeks, forty-one were positive, fifty-seven negative and twenty-three
neutral.
Overseas
the stats were also positive and that included numbers from all the major
economies.
On
fiscal policy, the Donald’s SOTU address was tame by his standards and vague
enough that it was impossible to assume any surprises. Not that we won’t get any.
The
FOMC met and left rates and other aspects of policy unchanged---which was to be
expected given that it was Yellen’s last meeting. That said, the narrative was more hawkish
than expected.
Which
brings us to the real news of the week--- rising interest rates (falling bond
prices) and a lower dollar. It is easy
enough to understand the former; after all, the US economy seems to be humming,
aided by the results of the tax cut and the improving global economy. So one would expect rising interest rates and
concerns about inflation in what seems to be an economy at full capacity. The mystery is why both the dollar and gold
seemed to stabilize in this circumstance.
Normally, the dollar would be rising and gold falling in response to higher
rates. I don’t have an explanation; but it
provides reason for caution.
The
bottom line: the markets are struggling with what central bank policy will
become if the global economy continues to advance. At this point, no one knows the answer. The variables to that answer, in my opinion
are (1) how aggressive will the central banks be in their QT efforts, (2) will
it matter, if the bond vigilantes are back and keep whacking the long bond and
force the Fed to act, (3) given the recent levels of investor euphoria, how
long will it take for QT (quantitative tightening) to become bad news.
Things
are starting to get interesting (medium):
News on Stocks in Our Portfolios
Broadcom
ups bid for Qualcomm (short):
Economics
This Week’s Data
US
International
Other
What
I am reading today
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