The Morning Call
4/27/18
The
Market
Technical
The indices
(DJIA 24322, S&P 2666) had a good day. Volume was down; breadth improved
but not by much. The S&P ended within a very short term downtrend;
though the Dow again closed above the upper boundary of its former very short
term downtrend. That leaves the Averages
out of sync with respect to this one indicator, meaning that there is little
informational value on direction/momentum.
Both finished below their 100 day moving averages (now resistance). They continued their bounce off of their 200
day moving averages. The DJIA closed 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. Longer term, the assumption is that equity
prices will continue to rise.
The VIX fell 9%, closing right
on its 100 day moving average but above its 200 day moving average and the
lower boundary of its short term trading range.
The long
Treasury rallied ¾ %, pushing back above the lower boundary of its long term
uptrend, negating Wednesday’s break.
However, it ended below its 100 and 200 day moving averages and in a
short term downtrend.
The dollar continued
its climb, ending above the lower boundary of its newly reset intermediate term
trading range and above its 100 day moving average (now support) and above its
200 day moving average (now resistance; if it remains there through the close
next Tuesday, it will revert to support).
GLD was down again,
finishing above its 200 day moving average (now support), in a newly reset
short term trading range and right on its 100 day moving average (now support).
Bottom line: I
have noted over the last couple of weeks that the Averages were caught in a narrowing
range, bounded on the upside by their 100 day moving averages (plus the S&P’s
upper boundary of its very short term downtrend) and on the downside by their
200 day moving averages. Last Thursday,
the Averages challenged that upper boundary and failed. Wednesday, they challenged the lower boundary
and failed. Now they appear on their way
for another challenge of the upper boundary.
Sooner or later that range will be broken; history suggests a strong
follow up move in the direction of the break.
TLT failed its
second challenge of its long term uptrend (both only lasted a day). That is not particularly surprising---long
term trends usually take a lot of energy to overcome. So multiple challenges are the norm. I don’t mean to suggest that the long term
uptrend will be broken; I am just saying that there is usually at battle at
trend lines involving multiple attempts to break.
Yesterday’s pin
action notwithstanding, the dollar is now catching up with move in bonds (lower
bond prices/higher yields generally means a stronger dollar) breaking multiple resistance
levels. Similarly, GLD has successfully challenged its short term uptrend and may
take out its 100 day moving average shortly.
(As I have noted, gold tends to trade inversely with interest rates,
especially when rates are rising because of a stronger economy; so the
implication here is that investors are betting that the economy is improving
more than moi).
Price
instability/uncertainty remains for the moment.
The question is duration. Patience.
I love my cash.
Hedge
funds are near peak leverage.
Fundamental
Headlines
Yesterday’s
economic data was again generally upbeat: the March trade deficit, the April
Kansas City Fed manufacturing index and weekly jobless claims were better than
anticipated; March durable goods had a good headline number but ex
transportation, it was disappointing.
Late
in the afternoon, the trade representatives from Mexico and Canada cancelled
plans to return to their countries and stated that they would remain in
Washington in order to continue to work on a NAFTA fix. That suggests that the parties are getting close
enough to an agreement. That doesn’t
mean that they will; but if they do and depending on the terms, it could be a
big plus for the US long term secular growth rate.
Overseas,
the ECB was the big news, leaving rates and its QE policy unchanged. In press conference following the ECB meeting
and release of its official statement, Draghi continued to sound very upbeat
about the EU economy despite the deterioration in the dataflow---taking a page
from the Fed’s book.
https://www.zerohedge.com/news/2018-04-26/euro-rebounds-reclaims-122-draghi-downplays-soft-econ-data
***overnight, the Bank of
Japan met, leaving its monetary policies unchanged. In addition, it removed any reference as to
when it might reach its 2% inflation goal (i.e. tightening might occur).
The above
notwithstanding, the primary Market focus during the day was the continuing
earnings reports from the high tech sector in particular. Like the reports we have already gotten from
the financials and industrials, earnings were outstanding. However, investor reaction was much more
upbeat. Several companies reported after
the Market close, so it will be interesting to see if this trend continues
Bottom line: the
important thing in yesterday’s pin action was the change in investor attitude
toward reported earnings. The enthusiastic
response to tech earnings has brought the Market back to roughly its level when
earnings season started. So at this
point, first quarter earnings in aggregate have been a wash in terms of Market
impact.
However, to me
the implications of the aforementioned announcement from the NAFTA participants
as well as what is occurring in the underlying rate of inflation have much more
import. The difference is the earnings
numbers are known and the NAFTA negotiations and inflation aren’t.
News on Stocks in Our Portfolios
Johnson & Johnson (NYSE:JNJ) declares $0.90/share quarterly dividend, 7.1% increase from
prior dividend of $0.84.
Revenue of $68.2B (+16.2% Y/Y) beats by $4.6B.
Revenue of $26.82B (+15.6% Y/Y) beats by $1.05B.
Economics
This Week’s Data
US
The
April Kansas City Fed manufacturing index came in at 26 versus the March
reading of 17.
The first estimate of first
quarter GDP was up 2.3% versus consensus of 2.0%; the GDP price deflator was up
2.0% versus estimates of up 2.4%.
The
first quarter employment cost index rose 0.8% versus expectations of up 0.7%.
International
The
UK reported first quarter GDP up 0.1%, the weakest reading since 2012.
April
EU economic sentiment came in at 112.7, in line.
March
Chinese industrial profits rose 11.6% year over year versus February’s reading
of +16.1%.
Other
Here
is some good research suggesting that the economy/Market is a long way from
rolling over (medium):
Another
look at the pension crisis (medium):
What
I am reading today
Act
like a billionaire (medium):
Precision
in investing (short):
Finland’s
universal basic income program (medium):
Another global warming model (medium):
North/South Korea agree to end war
and pursue denuclearization (medium):
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