The Morning Call
5/30/18
The
Market
Technical
In case you didn’t
hear, the Averages (DJIA 24361, S&P 2687) got hammered yesterday,
expectedly on higher volume and poor breadth.
The Dow finished below its 100 day moving average for the second day
(now support; if it closes there through the close today, it will revert to
resistance). The S&P ended below its
100 day moving average for the first day (now support; if it remains there
through the close on Thursday, it will revert to resistance). Both remained above their 200 day moving
averages (now support). The Dow is in a
short term trading range, the S&P in a short term uptrend.
The resistance
from the 100 day moving average is having, at least, a short term impact on
upside momentum. Until that barrier can
be overcome, stocks are at stall speed.
Longer term, the assumption is that stocks are moving higher.
The VIX exploded up 29%,
finishing above its 200 day moving average (now resistance; if it remains there
through the close on Friday, it will revert to support), above the upper boundary
of its short term downtrend (if it remains there through the close on Thursday,
it will reset to a trading range) and right on its 100 day moving average.
The long
Treasury was up 2% on high volume, ending over its 100 day moving average (now
resistance; if it remains there through the close on Thursday, it will revert
to support), above its 200 day moving average (now resistance; it if remains
there through the close on Friday, it will revert to support) but remained
within its long term uptrend and short term downtrend.
The dollar was
up ½ %, closing in both short term and very short term uptrends as well as its
100 and 200 day moving averages (now support).
GLD was down two
cents, ending below its 100 and 200 day moving average (now resistance) and in
a short term downtrend.
Bottom line: earlier
this month, stocks were breaking resistance levels on the upside while bonds
and the dollar were challenging support level on the downside. Now the reverse is occurring. To be sure, the fundamental headlines have
been somewhat volatile. But we have just
been through an eight year period in which good news was good news and bad news
was good news and the underlying investment thesis was ‘buy the dips’. That narrative seems to be changing.
Whether this is
a sign that further advances are going to be more labored or that a top is
being formed is unclear. Clearly, the degree
to which support levels that are successfully challenged will provide the
answer. At this moment, the key is
follow through on the current challenges.
Remember yesterday was just one day.
More
on the leverage in the Market (medium):
Fundamental
Headlines
Yesterday’s
economic data was positive: the March Case Shiller home price index rose less
than anticipated and the May Dallas Fed manufacturing index was better than
expected. May consumer confidence came
in below forecasts.
Everything
took a backseat in the headlines to the Italian political crisis and the
turmoil it is causing in its bond market (lower prices). The concern being that Italian government
bonds represent not only a substantial portion of the country’s own banking
system’s capital (i.e. solvency) but also a big enough portion of other EU countries’
banking capital to cause problem---that being a price decline in those Italian
government bonds which in turn decrease capital. It is too soon to know whether this situation
is just ‘Italians being Italians’ or if a real crisis is coming.
However, two
observations: (1) as long as this remains a problem and is disruptive to EU
securities market, the ECB will almost surely remain accommodative and spurn
any talk of quantitative tightening and (2) while I remain a critic of the US
banking system’s policies and the potential reversing of the Volcker rule, our
banks’ capital structure is stronger than it has been in a decade; plus they
have very little balance sheet exposure to Italian bonds. The point being that even if Italy exits the
EU and its bond market crashes, (1) that is not likely to have a big impact on
our banks and (2) indeed, there will likely be capital exiting EU securities
and the US market would be a recipient.
Great
summary of the Italian political situation (medium):
Bottom
line: remember that I have never been a bear on the US economy. And I don’t think any fallout from an Italian
crisis would alter that forecast. On the
other hand, I have been insistent that ultimately the mispricing and
misallocation of assets (securities’ prices) would be corrected. The question has always been ‘what is the
trigger event’? Could it be an Italian
crisis? Sure. Will it be? I have no clue.
News on Stocks in Our Portfolios
Revenue of C$7.06B (+7.3% Y/Y) beats by C$120M
Economics
This Week’s Data
US
The March Case
Shiller home price index rose 0.5% versus estimates of up 0.7%.
May
consumer confidence came in at 128.0 versus expectations of 128.6.
The
May Dallas Fed manufacturing index was 26.3 versus forecasts of 23.7.
Weekly
mortgage applications fell 2.9% while purchase applications were off 2.0%.
April
ADP private payrolls rose 178,000 versus expectations of 187,000 plus the March
number was revised down.
The
second estimate of first quarter GDP came in at +2.2%, in line; the price deflator
was up 1.9% versus estimates of up 2.0%; corporate profits were down 6%, in
line.
The
April trade deficit was $68.2 billion versus consensus of $71.0 billion.
International
April
German unemployment fell slightly.
April
Japanese retail sales rose 1.4% versus projections of up 0.5%.
Other
Recession 2020?
(medium):
Oil
prices (medium):
https://www.advisorperspectives.com/commentaries/2018/05/29/the-selloff-in-oil-oil-stocks-is-buyable
The
next edition of John Mauldin’s analysis of the current debt problem (medium):
Soros
on the EU (medium):
Latest
on China trade talks (medium):
What
I am reading today
How
to respond to a notice from the IRS (medium):
How the sanctions against Iran may
work (medium):
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