Thursday, October 11, 2018

The Morning Call--One day does not make a trend

The Morning Call


The Market

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.


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.



            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.         

Caterpillar (NYSE:CAT) declares $0.86/share quarterly dividend, in line with previous.

Paychex (NASDAQ:PAYX) declares $0.56/share quarterly dividend, in line with previous.


   This Week’s Data


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.



            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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