The Morning Call
10/5/18
It is Texas/OU weekend. Guests
arrived last night. More today. Parties. The game. No Closing Bell
The
Market
Technical
The Averages
(DJIA 26627, S&P 2901) nosedived yesterday on higher volume and weaker
breadth (though not as weak as I would have expected). Still, they remain technically very
strong. My assumption is that they will challenge the
upper boundaries of their long term uptrends (29807, 3065).
The VIX spiked
22 ½ %, trading in (inverse sync) with stock for a second day. It finished above its 100 DMA (now
resistance; if it remains there through the close on Monday, it will revert to
support). As you know, while it has not
been following the normal script of late, it remained near the lower end of its
short term trading range---a positive for stocks. Yesterday’s pin action was the first time the
aforementioned cognitive dissonance has translated into a meaningful negative
for equities. That said, it was only one
day performance. As always, follow
through is what’s important.
The long bond fell
another ¾ % also on heavy volume and closing below the lower boundary of its
intermediate term trading range for a second day. If it remains there through the close next
Monday, it will reset to a downtrend.
The dollar was up
slightly, continuing its march toward its August high. I continue to believe that UUP will move
higher as long as the dollar funding problem persists.
GLD was up fractionally,
showing no inclination to trading up out of a developing very short term
trading range but completely the opposite of what it generally does when rates
are rising (bond prices falling) and the dollar is strong.
Bottom line: the indices
remain technically strong. I continue to believe that they will challenge the
upper boundaries of their long term uptrends.
The terrible pin action in the long
bond appears to be signaling a huge change in bond investors economic/valuation
model. It has broken its long term
uptrend and is now challenging the next level of major support. If the intermediate term trading range is
reset to a downtrend that would portend even lower bond prices---and all that
may imply for stock prices and the dollar funding problem. The dollar is confirming a liquidity
shortage. GLD continues to act negative
no matter what happens in stocks, bonds, oil, the dollar----I could go on.
Thursday
in the charts.
Fundamental
Headlines
Yesterday’s
economic data continued this week’s positive trend: weekly jobless claims were
lower than anticipated while August factory orders beat expectations.
The leading headline, at least, for
the Markets was the continuing decline in bond prices (rising interest rates),
following through Wednesday’s reaction to Powell’s hawkish comments. Not helping matters, the dollar funding
problem, which is a result of tightening monetary policy, is exacerbating the upward
pressure on interest rates. The higher
rates go, the more competition they present to equities; and yesterday, stocks
finally took notice. However, given the sustained
strength in equity prices, one day’s pin action is hardly reason to think that
change is a foot. Indeed, the optimists
argue that higher rates are a sign of economic strength and, hence, a positive
for the Market. I can’t dispute that,
though as I continually point out, we have never lived through the unwinding of
such an extreme monetary expansion. That said, I believe no one really knows the
ultimate effect of the current monetary tightening including me.
Bottom line: nevertheless,
I am sticking with my thesis that QE did little for the economy (the tax cuts
provided the fuel for the recent pickup in economic activity) but much for
asset prices, so its unwinding will have a marginal impact on the economy but a
significant effect on asset prices.
What I do believe
will impact the economy is the totally irresponsible fiscal policy being pursued
by the GOP. As you know, I think that
the US debt has reached a level at which the cost of servicing that debt will constrain
economic growth. And as you also know,
this problem is only getting worse.
Cash reserves
are good at this point in the Market (valuation) cycle.
It is not different this
time.
News on Stocks in Our Portfolios
Economics
This Week’s Data
US
August
factory orders rose 2.3% versus expectations of up 2.1%.
September
nonfarm payrolls rose 134,000 versus estimates of up 180,000; but also the
august number was revised from up 201,000 to 270,000---in other words a net
gain for the two months; unemployment came in at 3.7% versus consensus of 3.8%.
The
August US trade deficit was $53.2 billion versus forecasts of $53.7 billion.
International
Other
What
I am reading today
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