The Morning Call
10/11/18
The
Market
Technical
The Averages
(DJIA 25598, S&P 2785) were in a waterfall formation yesterday. The S&P fell below the lower boundary of
its very short term uptrend (if it remains there through the close today, it will
negate that trend) and the 100 DMA (now support, if it remains there through
the close on Friday, it will revert to resistance). The Dow never had a very short term uptrend
and remains above its 100 DMA. Volume was up; breadth negative. Clearly, the technical strength of the
indices is being challenged. My
assumption is that they will challenge the upper boundaries of their long term
uptrends (29807, 3065), though that is under test right now.
Counterpoint.
The VIX rose 43
% (yes, 43%), ending above its 100 DMA (now support) and its 200 DMA for a fourth
day, reverting to support and the upper boundary of its short term trading
range (if it remains there through the close on Friday, it will reset to an
uptrend). A negative for stocks.
The long bond fell
¼ % on big volume, now in an intermediate term downtrend and a long term
trading range and below both MA’s. This does not bode well for the technical
strength of TLT. And clearly it is
starting to impact equity prices.
I
have previously discussed the high level of leverage on corporate balance
sheets and the risk it represents to the financial (not banking) system. It may be starting to manifest itself in the
bond ETF’s.
The dollar was
down three cents. But I continue to
believe that UUP will move higher as long as the dollar funding problem
persists.
GLD rose
slightly on continuing high volume, continuing to snooze its way through the
volatility occurring in most other Markets.
Bottom line: the technical strength of
the indices is being challenged for the first time since April. I remind you that (1) yesterday was one day’s
pin action. Through this ten year bull
market, we have seen these dramatic sell offs before and they quickly
recovered. As always follow through is
critical. Given the severe oversold condition of the Market, I would expect
some kind of rally today. The strength
of that rally should give us an indication of that follow through, (2) the
S&P is nearing its 200 DMA [21 points lower] ---which it has bounced off of
four times in the last two years. So it
represents solid support.
You know that I have
thought that stocks were overvalued for over the last two years and that a selloff
was due. However, one day’s pin action
doesn’t make me right. Still, at the
least, the assumption that the Averages are on their way to the upper
boundaries of their long term uptrends may be close to wishful thinking.
For the last couple of weeks, I have
thought that the terrible pin action in the long bond appeared to be signaling
a huge change in bond investors’ economic/valuation model; and that has now washed
onto the shores of stock land. A further decline in bond prices is not apt to
be a plus for equities.
The dollar is confirming a liquidity
shortage.
The dollar funding problem is
getting worse and moving to major economies, i.e. Japan and Europe. When, as and if this problem worsens, it will
reveal the risks of eliminating price discovery (the mispricing and
misallocation of assets).
GLD
continues to act negative no matter what happens in stocks, bonds, oil, the
dollar----I could go on.
Wednesday in the charts.
Fundamental
Headlines
Though
it didn’t matter, yesterday’s economic data was mixed: weekly mortgage and
purchase applications were down, September PPI was in line and August wholesale
inventories/sales were quite positive.
Of
course, the Market was the story yesterday.
As I noted above, one day’s pin action is hardly an indication of a
change in trend; though given the magnitude and breadth of the decline, it
could be.
Certainly,
the technicals may be breaking. The big
question is how the retail (ETF) investor reacts. In the past month, I have linked to several articles
that have theorized that if investors shuck the ‘buy and hold’ strategy that
has been so prevalent in this Market and start bailing on the ETF’s that will
add fire power to any decline. I am not
suggesting that this is correct; but I do think that it bears watching.
The
risk of forced liquidation.
This decline was
also a function of deteriorating fundamentals---a condition that has not been
present in the current bull Market’s previous sell offs. (1) interest rates are up, (2) the Fed
continues to shrink money supply and that is causing dollar funding indigestion
not only in the emerging market but also seems to spreading to the developed
markets; as important, Powell has made clear that he expects to continue to
tighten whatever happens to the Markets---a massive change in attitude from the
Bernanke/Yellen regimes, (3) corporations have record levels of debt,
especially in the lower rated credit segment and (4) are starting to lower
profit expectations, (5) finally, as detailed in the above link, the bugaboo
from the last financial crisis, i.e. derivatives, has reappeared with all its
associated counterparty risks.
Three things
that could end the selloff.
Bottom
line: I want to repeat my thesis for the
last four or five years: QE did little
to help the economy growth, so it absence will do little to hurt the economy---I
believe that the economy will continue to grow, just not as much as has been
consensus; but it pumped up asset prices and that is what will pay the price
from an unwinding.
I am not saying
that this forecast is becoming manifest, though QE is unwinding and its impact on
the financing of assets is trending negatively.
At the moment, I don’t know if I am going to be right. Yesterday’s pin action may be an indication
that we are closer to finding out.
If the Market
rallies off yesterday’s low but can’t hold it, it would probably be a good time
to raise some cash---if you haven’t done it already.
Is the Fed
accommodative or not?
Tipping
point?
Where
the value is in the global markets.
News on Stocks in Our Portfolios
United Technologies (NYSE:UTX) declares $0.735/share quarterly dividend, 5% increase from
prior dividend of $0.70.
Economics
This Week’s Data
US
August wholesale
inventories rose 1.0% versus estimates of +0.8%; sales rose 9.2%.
September CPI
rose 0.1% versus expectations of up 0.2%; ex food and energy, it was up 0.1%
versus forecasts of up 0.2%.
Weekly jobless claims
were up 7,000 versus consensus of being flat.
International
Other
Trump
threatens more tariffs on Chinese goods.
A
different take on Chinese theft of intellectual property.
US
crude oil exports to China plunged in August.
Signs
of when the Fed has gone too far raising rates.
What
I am reading today
Quote of the day.
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