Tuesday, March 27, 2018

The Morning Call--Follow through


The Morning Call

3/27/18

The Market
         
    Technical

The indices (DJIA 24202, S&P 2658) executed a Titan III formation yesterday, though volume fell (not a good sign).  Breadth improved, but there are still some negative readings (not a good sign).  Both of the Averages (1) bounced hard off their 200 day moving averages [a plus], but (2) closed below their 100 day moving averages for the third day, reverting to resistance, (3) the Dow finished below the lower boundary of its short term uptrend for the third day, resetting to a trading range and (4) both are in very short term downtrends. 

Clearly, equities avoided an important trend change.  On the other hand, all support levels that were being challenged turned negative.  As is often the case, the key at the moment is follow through.

The VIX fell 15 ½ %, not surprising on a 600 point up day on the Dow.  However, it still ended above its 100 and 200 day moving averages and the lower boundary of its short term trading range.  In addition, it continues to develop a very short term uptrend.

The long Treasury was down, probably the result of a big Treasury offering, a condition that will become more and more common.  It is remains below its 100 and 200 day moving averages and in an intermediate term downtrend---indicating higher rates in the offing. 

The dollar was down ½ %, moving toward the lower end of a recent support range.  Its chart remains ugly, with UUP trading below its 100 and 200 day moving averages and in an intermediate term downtrend.

GLD popped another ½ %.  I thought that a bit unusual given the declining fears of a trade war and a falling TLT (higher rates). It remains above its 100 and 200 day moving averages and within a short term uptrend.

Bottom line: while the technicals of the equity market point higher for the long term, some cracks are starting to appear in that thesis.  Despite yesterday’s moonshot, both indices’ 100 day moving averages reverted to resistance and the Dow’s short term uptrend reset to a trading range.   So the potential remains for further loses.  The issue today is, will investors ‘sell the rip’?

I remain confused by aggregate pin action in TLT, UUP and GLD.

            Confused trader (medium):

    Fundamental

       Headlines

Yesterday’s economic releases were mixed: the February Chicago Fed’s national activity index was much better than expected while the March Dallas Fed manufacturing index was well below estimates.

Trade was the primary focus yesterday, as comments from Mnuchin on Chinese trade talks were hopeful (medium):
     
            However, trade is only one of the problems facing the economy right now.  Last week’s spending bill remains an irresponsible piece of fiscal policy---one that will not lead to growth but to stagnation as servicing  the enormous national debt will ‘crowd out’ growth capital.  In addition, the Fed is proceeding with its quantitative tightening which (1) makes the aforementioned financing of the national debt all the more difficult and (2) moves the moment of truth forward when asset mispricing and misallocation start to unwind.
           
            Bottom line: the rattling effect of Trump’s trade language notwithstanding, it seems to be working.  Progress is being made with NAFTA, the EU and South Korea.  Clearly, further developments could reverse some or all of that of that headway.  Ditto with China.  However, if the Donald is successful (and further along we go, the more likely it seems to be), then that should prove a plus for the long term secular growth rate of the economy, just as his dismantling of government regulations have.  To be sure, ‘if’ is the operative word; but there is reason to be hopeful.

            On the other hand, at least two major economic problems still exist, i.e. the growing deficit/debt and the Fed.  The former is an offset force for long term secular growth; and the latter is a shorter term cyclical issue.  Finally, there is the matter of valuation; that is, how does one price the impact of the above items.  My Valuation Model places current prices well above historic valuation levels.  Hence, my bias toward owning a decent size cash position in my Portfolios.

            More on valuations (medium):

            Plus, the simple math of forward returns (medium):

    News on Stocks in Our Portfolios
 
           

Economics

   This Week’s Data

      US

            The March Dallas Fed manufacturing index came in at 21.8 versus expectations of 30.9.

     International

            March EU business confidence fell for the third month in a row.

    Other

            NY Fed introduces a new gauge for inflation (medium and a must read):

            The Fed’s ‘dot plot’ is bad news for consumers (medium):

            The EU’s deepening political divide (medium):

            ECB finds E10 billion in loan miscalculations (medium and a must read):

            CBO data on income growth (short):

            More on rising credit spreads (medium):

What I am reading today
 
            Saving the shrinking middle class (medium):
           
            The person who is best at lying to you is you (medium):

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