Tuesday, February 6, 2018

The Morning Call--So far this is just a correction; don't tell the 'short the VIX' crowd

The Morning Call

2/6/18

The Market
         
    Technical

The indices (DJIA 24345, S&P 2466) had a record (on points) down day.  However, the only support level that was challenged was the lower boundary of the Dow’s very short term uptrend.  Not the S&P’s very short term uptrend, not the 100 or 200 day moving averages for either; certainly not the major trends of all timeframes.  Volume rose.  Breadth weakened, as you would expect; though looking at the flow of funds and on balance volume, you would never know the Dow was down 1,100 points. The technical assumption remains that stocks are going higher. 

The VIX was up 115%, clearly leaving it above the upper boundary of its short term trading range for a second day.  If it closes above that level today, the short term trend will revert to an uptrend.  I would note that there is some inconsistency in the VIX being up that much and stocks not being down more than they were.  So it shouldn’t surprising today if either the VIX or stock prices fall. 

                This is a must read article.  It explains how and why this Market is in free fall: the impact that the machines, programmed trading and the ‘short the VIX’ crowd have had on this decline.  Note that there is absolutely nothing fundamentally driven by this pin action:

                And:

The long Treasury was up 1% on big volume---likely the result of its ‘safety trade’ status.  However, it remains in a very short term downtrend, closed below the lower boundary of its short term trading range for the third day, resetting to a downtrend and well below its 100 and 200 day moving averages. It continues in a technical no man’s land but near its lower level.

The dollar was up fractionally, but did little to improve an otherwise sick chart and certainly didn’t demonstrate any quality of a ‘safety trade’.
           
GLD rose, though not as much as I thought it would.  However, it is stabilizing, so the chart continues to look good.

Bottom line: as unsettling as the last few trading days have been, the worse we can say, at this moment, is that we are in a correction from a substantially overbought Market.  What I am focused on now is the extent of any ensuing rally; that is, will the indices reach their former highs and take them out or not. If they do, the momentum will remain to the upside, the current stomach churning sell off notwithstanding.  If not, then will any subsequent decline take out the prior low?  The results should give us an idea of whether we are in the midst of a hiccup (which was long overdue) or a reversion to a valuation mean.

            More on valuation:

    Fundamental

       Headlines

            Yesterday’s economic news was mixed with the January Markit services PMI declining while the ISM nonmanufacturing index rose.  However, this will be a very slow week for data; so the headlines will be coming from another direction.
           
            Not the least of which is the continuing clusterf**k in DC.  The next couple of weeks will pose a number of challenges to our ruling class, starting with a house vote on continuing resolution currently scheduled for today.  Then there is the budget, the debt ceiling and the immigration legislation---any one of which could generate concerning headlines.

                The latest on the status of immigration legislation (medium):

            Bottom line: the Market pin action was the center of attention yesterday and will likely remain so until the current turmoil subsides.  It is important to point out that nothing has changed in the gathering strength of the economy.  So whatever fear is being manifest, it has little to do with the underlying growth fundamentals. 

However, if the recent decline in bond prices is an indication of a tightening Fed or rising inflation, then a change in valuations could be in process. 

            For the optimists (short):        

            Why you need bonds in your portfolio (medium):

            The latest from John Mauldin (medium):

            Signs of a blip or something else (medium):

            What you control (short):

            Are Markets coming to terms with the punch bowl running dry (medium)?

    News on Stocks in Our Portfolios
 
Cummins (NYSE:CMI): Q4 EPS of $3.03 beats by $0.36.
Revenue of $5.48B (+21.8% Y/Y) beats by $240M.

Emerson Electric (NYSE:EMR): Q1 EPS of $0.58 beats by $0.03.
Revenue of $3.82B (+18.6% Y/Y) beats by $100M.

PepsiCo (NYSE:PEP) declares $0.805/share quarterly dividend, in line with previous.

Becton, Dickinson (NYSE:BDX): Q1 EPS of $2.48 beats by $0.07.
Revenue of $3.08B (+5.5% Y/Y) beats by $30M.

United Technologies (NYSE:UTX) declares $0.70/share quarterly dividend, in line with previous.

Economics

   This Week’s Data

      US

            The January Markit services PMI came in at 53.3, in line.

            The January ISM nonmanufacturing index was reported at 59.9 versus expectations of 56.2.

                The December trade deficit was $53.1 billion versus estimates of $51.9 billion.

     International

            January German factory orders were almost double consensus, while the construction PMI was much better than anticipated.

    Other

            Light vehicle sales per capita (medium):

                        Lumber prices rising (short):

                        Bankruptcy filings decline (short):

                        The good news is that the government is finally starting to audit its spending; the bad news is the Pentagon can’t account for $800 in spending (medium):

What I am reading today

            Six ways to tell if your retirement plan is on track (medium):

            Front running the Fed (medium):\
                       
            As you know, I have had a hard-on for the big banks since they sparked the financial crisis.  Congress and the Fed subsequently tightened up the rules; but bank managements basically escaped their crimes untouched.  Well, Friday, the Fed at least, slapped some hands at Wells Fargo (medium):
           
            The Earth’s magnetic field is shifting (medium):

            Quote of the day (short):

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