The Morning Call
10/24/18
The
Market
Technical
The Averages
(DJIA 25191, S&P 2740) ended lower yesterday; but their close was not
indicative of the intraday trading. At
one point, the Dow was down in excess of 500 points, but closed down just 125
points. Volume increased significantly; and
while breadth was weaker, it was only marginally so.
The Dow ended below
its 100 DMA for a second day (now support; if it remains there through the
close today, it will revert to resistance).
Intraday, it traded below its 200 DMA but finished back above it.
The S&P
finished below 200 DMA for a second day (now support; if it remains there
through the close on Thursday, it will revert to resistance). As you know, this boundary has been a
critical support level for the last two years; so any successful challenge is
meaningful.
Perhaps the most
important technical aspect of yesterday’s pin action is that both indices
gapped down (that is, the opening price was lower than the prior day’s closing price)
at the opening. Technicians generally
agree that those gaps get closed (in this case, prices rise to match the prior
day’s closing price). Sometimes, this
may take a bit. But the point is, gaps
have historically had a magnetic pull to them that, in essence, constrains the
magnitude of a price move in the direction of the gap open. So if the Averages are really headed down,
they would have to retrace and close the gap before doing so. Yesterday, they did just that, closing the
gap intraday before then trading lower. That
leaves open the potential for a further decline without the nagging possibility
of a gap closing retracement. That is
the bad news.
The good news is
that the Dow remained above its 200 DMA, the S&P remains only 26 points
below its 200 DMA (not that big an obstacle to recovery), breadth was not that
negative and the VIX was much more tame than I would have expected on such a
volatile day.
The VIX was up only
6 %, retaining its positive chart; though as I noted above, not really a lot
for a huge intraday swing in prices.
Still, it is, at the moment, a negative for stocks.
The long bond popped
dramatically in early trading, rising above the upper boundary of its very
short term downtrend, but ended back below it.
TLT remains in short term and very short term downtrends and below both
moving averages. Still a negative
technical picture.
And:
The dollar declined
fractionally. It continues to have a
positive technical standing but is also struggling to challenge its August high. I still believe that UUP will move higher as
long as the dollar funding problem persists.
GLD was up ½ %, finishing
above its 100 DMA (now resistance; if it remains there through the close on
Thursday, it will revert to support). Until
the 100 DMA is reset, I remain unimpressed with its pin action.
Bottom line: while yesterday’s pin
action was a bit unsettling, there was still good as well as bad aspects. Longer term, very little technical damage has
been done to the Averages, so price direction is still up. On a short term basis, I have little
conviction about Market direction. But
as I have pointed out before, we are getting ever closer to the powerful
positive seasonal pattern in November and December---meaning the lower the odds
of much lower prices.
The long bond
and the dollar both continued to act like rates are going higher. Gold remains in never, never land.
Tuesday in the
charts.
Oil
prices getting hit.
Fundamental
Headlines
Yesterday’s
economic releases were negative: month to date retail chain store sales and the
October Richmond Fed manufacturing index were disappointing.
Trump
continued to hammer Powell to lower interest rates. Those who know Powell say that it will only
make him dig in his heels. Frankly, if I
were Trump, I would want to get the tightening over with as soon as possible,
i.e. as far ahead of the 2020 elections.
The
other economic headline was the continuing deterioration of corporate profit
reports and forward guidance. To be
clear, I am not saying that the numbers are negative; I am saying that they are
not as positive as they were in the first two weeks of this earnings season. Perhaps more important, investors are
punishing even those companies that are delivering upbeat comparisons.
Bottom
line: investors are not only hammering
the stocks of companies that report disappointing earnings but also selling the
stocks of companies that have upbeat profit reports. Also concerning is the performance of the
bank stocks which seem to be telling us that the banks are once again facing
problems.
Typically, when
good news produces selling that presages negative Market pin action. However, this is the first time in a while
that investors have actually lightened up on good news. Clearly, the longer this persists, the more likely
mean reversion. But we are not there
yet. So too soon to get beared up. Not too soon to own some cash.
From
an ex bull.
News on Stocks in Our Portfolios
Revenue
of $9.09B (+19.9% Y/Y) misses by $310M.
Revenue
of $25.15B (+3.8% Y/Y) beats by $1.26B.
United Parcel Service (NYSE:UPS):
Q3 Non-GAAP EPS of $1.82 in-line; GAAP EPS of $1.73 misses by $0.08.
Revenue
of $17.44B (+7.9% Y/Y) misses by $50M.
Revenue
of $45.7B (+15.2% Y/Y) beats by $320M.
Canadian National Railway (NYSE:CNI):
Q3 Non-GAAP EPS of C$1.50 beats by C$0.03; GAAP EPS of C$1.54 beats
by C$0.07.
Revenue
of C$3.69B (+14.6% Y/Y) beats by C$110M.
Economics
This Week’s Data
US
Month
to date retail chain store sales growth slowed from the prior week.
The
October Richmond Fed manufacturing index came in at 15 versus estimates of
24---though Hurricane Florence may have had an impact on that number.
Weekly mortgage
applications rose 4.9% while purchase applications were up 2.0%.
International
The October
Markit EU manufacturing PMI came in at 52.1 versus expectations of 53.0.
October German
PPI was +0.5% versus forecasts of +0.3%.
October UK new
factory orders index was -6 versus consensus of +2.
Other
Stephen
Roach on Fed policy (must read):
As
you are only too aware, one of my economic theses (based on the Rogoff and
Reinhart study) has been that when the national debt reaches a certain level
adding more debt reduces economic growth because servicing that debt
constraints investment and consumption.
The below study calls that conclusion into question in cases when the
debt is financed by foreign rather than domestic investors.
An easy money
economy is not sustainable.
The
chairman of the house tax writing committee said that if the GOP holds both the
senate and house, the GOP would advance a proposal for 10% middle income tax
cut. No politics there.
What
I am reading today
When violence broke out
in congress.
How to keep winning the
lottery from ruining your life.
Oldest intact shipwreck
found in Black Sea.
Like
we don’t need another Middle East hot spot.
Volcker trashes
our ruling class.
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for Survival’s website (http://investingforsurvival.com/home)
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