The Morning Call
4/13/18
The
Market
Technical
The indices
(DJIA 24483, S&P 2663) had a good day. Volume was up (again breaking the
pattern of high volume on down days, lighter volume on up days); breadth was
positive. Both of the Averages still
closed within very short term downtrends (having made a fourth lower high on Tuesday)
and below their 100 day moving averages (now resistance). They both remain above its 200 day moving
average. The DJIA finished in a short
term trading range but in intermediate and long term uptrends. The S&P is in uptrends across all
timeframes. The short term technical picture remains cloudy; but longer term,
the assumption is that equity prices will continue to rise.
The VIX was down 8 ½ %,
but still ended in a very short term uptrend, above its 100 and 200 day moving
averages and the lower boundary of its short term trading range---reflecting
the obvious fact that volatility hasn’t gone away.
The long
Treasury fell ¾ %, reversing Wednesday spike.
It remained within its strong month long bounce (very short term
uptrend) off the lower boundary of its long term uptrend. On the other hand, it continues to trade
below its 100 and 200 day moving averages and in a short term downtrend. So its pin action is roughly the reverse of
stocks---it is in a short term uptrend but longer term it is in a downtrend.
What
worries this bond manager (medium and a must read):
The dollar was
up ¼ % on heavy volume, finishing below its 100 and 200 day moving averages and
in an intermediate term downtrend. UUP
continues to trade in a very tight range, which is not usual when bonds are
moving big directionally.
GLD was down 1
%, like bonds, reversing much of Wednesday’s move up. It closed above the lower boundary of its
short term uptrend and its 100 and 200 day moving averages.
Bottom line:
near term the direction of equity prices is in question. As I noted yesterday, the indices are
starting to get squeezed between their very short term downtrends and their 200
day moving averages---which they have already unsuccessfully challenged four
times.
History suggests
that a break out of this narrowing pennant like formation will set the course
of the Market in the direction of the break.
If it is to the upside then it would support the assumption that the
stock prices remain in a long term uptrend.
If to the downside then it would weaken the bull case and set up a
decline to the lower boundaries of the DJIA’s short term trading range and the
S&P’s short term uptrend. That said,
the Averages have plenty of support at lower levels.
The price
movements yesterday in TLT, UUP and GLD suggested a stronger economy and higher
interest rates.
An
historical perspective of Market corrections (medium):
Fundamental
Headlines
Yesterday’s
economic data was mixed: weekly jobless claims fell less than expected; March
import prices were flat while export prices were in line; and March retail
chain store sales were slightly better than anticipated.
The
trade news was mixed. The day started
with a statement from the Chinese saying that premier Xi’s recent supposedly
conciliatory speech was nothing of the sort (bad news). Then later in the day, the White House (1)
said that Chinese trade talks were going well and (2) announced that it was
reviewing its decision to have withdrawn from the Trans Pacific
Partnership. So Trump’s continues his unpredictable
behavior in what I assume is an effort to shake up trade deals all around the
world in order to improve the US competitive position---which seems to be a
worthy objective. True his tactics are
certainly not what most of us consider mainstream, but the initial results have
been positive. I am not suggesting that we
are all going to live happily ever after.
But as you know, I have never believed that the trade concerns were as
big as did the Market and that Trump’s ‘art of the deal’ negotiating style would
ultimately prove positive.
The
news out of Syria seemed to lose some steam as Trump back off of his ‘missile
attack soon’ statement. I have no idea
what that means. Hopefully, it is a sign
that our leaders realize that Syria has little value to the US. Of course, as long as Russia and the US are
trying to prove who has the bigger cojones, an existential risk remains.
Another
view of the situation in Syria (medium):
Finally,
yesterday started first quarter earnings season. To say that it is one of the most anticipated
and publicized earnings season for a long time is an understatement. For the last three months, pundit after
pundit has opined that this will be one of the best ever---primarily the result
of the tax cut. So the Market narrative
is that stocks will almost assuredly perform well over the reporting
period. However,
(1)
remember this is a one-time increase in operating
earnings resulting from a one-time non-operating cause. So all that has occurred is profits have
shifted to a new level; but it says nothing of the future growth rate of
earnings. To be sure, analysts are
assuring investors that the new capital will be put to uses that will
accelerate earnings. Sort of like they
did with the repatriated billions from overseas. So far that isn’t showing up in the
numbers. Maybe it will; but maybe we
should wait and see,
(2)
if the aforementioned one-time increase in earnings
hasn’t already been discounted by now, then I am in the wrong business,
(3)
what will likely be important about this earnings
season is the forward guidance of EPS.
That could have an impact on stock prices because there is more
uncertainty related to this factor than the happy talk about the numbers that
will be reported.
Bottom line: the
trade news seems to be improving (which it should and longer term could be a
plus for the economy) and the Syrian situation has calmed at least a
little. Barring some bad news from the
latter, earnings seems to be foremost in investors’ minds. But as I suggest above, I am not sure their
impact will be that significant on stock prices.
The important
factors to me remain the performance of the economy (which is currently not
that great), the direction of inflation (which has shown few signs of getting
out of control, yet) and Fed policy (which is tightening). That combo, historically, has not been great
for stocks.
I continue to
like how my portfolios are structured---half equities, half cash.
The
growth rate of dividends since 2000 (short):
News on Stocks in Our Portfolios
Economics
This Week’s Data
US
March
retail chain store sales were slightly higher than anticipated.
International
China
posts first trade deficit in over a year.
Other
US
budget deficit hits $600 billion in first six months of FY2018 (medium and a
must read):
More
on consumer inflation (short):
And
on business inflation (short):
JP
Morgan credit card charge off surge in first quarter (medium and a must read):
Three
more things to worry about (medium):
What
I am reading today
(Disappointing) fact of
the day (short):
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