The Morning Call
6/1/18
The
Market
Technical
The Averages
(DJIA 24415, S&P 2705) staged another major reversal (down this time) on
big volume and poor breadth. The Dow finished
below its 100 day moving average (now resistance). The S&P ended back below its 100 day
moving average after voiding Tuesday’s break on Wednesday (now support; if it
remains there through the close next Monday, 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 by both indices, stocks are at stall speed. Longer term, the assumption is that stocks
are moving higher.
The VIX rose 3 ¼ %,
finishing above its 200 day moving average for the third day (now resistance;
if it remains there through the close today, it will revert to support), above
the upper boundary of its short term downtrend for a third day, resetting to a
trading range. However, it remains below
its 100 day moving average.
The long
Treasury was down ¼ % on high volume, ending over its 100 day moving average
for the third day, reverting to support, but back below its 200 day moving
average. It remained within its long
term uptrend and short term downtrend.
The dollar fell two
cents, but still closed above its 100 and 200 day moving averages (now support)
and in short term and very short term uptrends as well as, though it ended
right on the lower boundary of the latter’s uptrend.
GLD was down
slightly, finishing below its 100 and 200 day moving average (now resistance)
and in a short term downtrend, though is it is nearing the upper boundary of
that trend.
Bottom line: the
‘buy the dips’ crowd may still have some muscle, but bad news is no longer good
news. I continue to think that confusion/uncertainty
best describes the pin action since mid-May as (1) both the Averages see saw
back and forth around resistance/support levels, (2) while the long bond and
the dollar seemed to be pointing at higher inflation/higher rates or perhaps a
safety trade, (3) although the pin action is gold is not suggestive of a safety
trade. At the moment, my focus is on the
resistance being offered by the 100 day moving averages to any price increase
on the short term. Longer term, the
assumption remains that stock prices will continue to rise.
The
latest from BankAmerica’s technical department (medium):
Fundamental
Headlines
Yesterday’s economic
numbers were mixed to positive: the May Chicago PMI, weekly jobless claims and
April personal spending were above expectations while April pending home sales
were below and April personal income was in line. I would note that personal spending out
pacing personal income is generally good news when consumers have accumulated
savings and have started to spend it. It
is not so good when consumers are up to their eyeballs in debt and are going
even deeper in debt.
The
big news, as I reported in yesterday’s Morning Call, was the US imposition of
steel and aluminum tariffs on the EU, Canada, Mexico and China. As you might expect, that was not well
received by any of our trading partners.
The bad news, of course, is that this action could be the opening shot
in a global trade war. But we should
remember (1) this may be just another chapter in Trump’s ‘art of the deal’ and results
could end up being positive, the stomach churning process notwithstanding, (2)
these tariffs are really small in relations to the overall volume of trading
with our partners, (3) trade talks are about to begin with China, the outcome
of which is much more important in the scheme things than the relative small
size of steel/aluminum imports. And if
China sees that the US is ready go after its allies, it will have to take
seriously any demands the US is making, and (4) the raison d’etre given for the
steel/aluminum tariffs is national security, i.e. Trump wants to be sure that these
are strong viable domestic industries.
That is not a bad motive.
Canada wastes no time retaliating
(medium):
Italy’s
political crisis has rapidly receded into the background with the formation of
a new Italian government (medium):
Goldman
on Italy and Spain (medium):
Bottom
line: there is no question that a trade war particularly if it encompasses major
trading partners is a major economic negative; but the US is a long way from a
trade war. While there may be some
disagreement about Trump’s tactics, he is trying to rebalance what has become
an unfair trading regime. And that is a
positive. On the other hand, the risk is
that this becomes an emotional contest over who has the biggest Johnson and
real damage gets done. But for the
moment, I am not going to get beared up until we see how this plays out.
News on Stocks in Our Portfolios
Bank
of Nova Scotia (NYSE:BNS), also called
Scotiabank, will buy MD Financial Management, a provider of financial services
to physicians and their families in Canada, for C$2.59B in cash.
A public offering of 19.7M
common shares at C$76.15 per share on a bought-deal basis will fund part of the
purchase price.
BNS -2.2% in
after-market trading.
Scotiabank says its common
equity tier 1 capital ratio will be impacted by about 30 basis points.
After the deal closes, the
bank and the Canadian Medical Association will enter into a 10-year
collaboration, under which CMA will exclusively promote Scotiabank as the
preferred provider of financial products and services to physicians and their
families in Canada. The bank and CMA will also jointly support some
philanthropic initiatives and other programs.
Scotiabank to spend C$115M
over the next 10 years to support the advancement of the medical profession and
healthcare in C
Economics
This Week’s Data
US
The
May Chicago PMI came in at 62.7 versus expectations of 58.4.
April
pending homes sales fell 1.3% versus estimates of an increase of 0.4%.
May nonfarm payrolls rose
223,000 versus consensus of 190,000; the unemployment rate fell from 3.9% to
3.8%.
International
The
Bank of Japan began tapering its bond buying program:
May
EU manufacturing PMI was 55.5 versus estimates of 56.2; Japanese PMI 52.8
versus 53.8; Chinese PMI 51.1 versus 51.1; UK PMI 54.4 versus 53.6.
Other
Remember
this bank has the largest derivative portfolio on the plant.
Deutschebank
is now on Fed’s ‘troubled’ watch list (medium):
S&P
downgrades Deutschebank to BBB+ (medium):
What
I am reading today
The healthcare cost curve
(short):
Praying for a comeback is not a
strategy (medium):
Consistency is the playground of
dull minds (medium):
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