The Morning Call
11/1/18
The
Market
Technical
The Averages
(DJIA 25115, S&P 2711) followed through from Tuesday’s rally. The Dow
ended below its 100 DMA (now resistance) but right on its 200 DMA (now
resistance) and above the upper boundary of its very short term downtrend (if
it remains there through the close today, it will negate that trend).
The S&P
finished below both moving averages and right on the upper boundary of its very
short term downtrend, but above the lower boundary of a its short term uptrend,
negating the current challenge.
Importantly,
both indices gapped up on the Market open.
You may remember that three weeks ago, they gapped down on the
open. I noted then that the technical
wisdom was that gap had to be closed before assuming any longer term move
down. That gap was closed within a
couple of days and the Market continued to the downside. Now the reverse is the case. Before assuming much higher prices that gap
has to be closed---meaning that the S&P must trade back to ~2681 and the
Dow ~24892.
Volume advanced,
remaining elevated; breadth improved.
The VIX fell 9 %,
bouncing off the upper boundary of its short term uptrend but ending below the
lower boundary of its very short term uptrend (if it remains there through the
close today, it will negate that trend).
It is still above both MA’s and in that short term uptrend.
The long bond
was down another ½ %, closing within a short term downtrend, below both moving
averages and below the lower boundary of its very short term uptrend (if it
remains there through the close today, it will negate that trend). Still a negative technical picture.
Treasury announces record
debt sales.
The dollar was down
one cent, finishing above its August high and starting to build a very short
term uptrend. I continue to believe that
UUP will move higher as long as the dollar funding problem persists.
China and the
dollar funding problem.
GLD fell an
additional ½ %, closing below its 100 DMA (now support; if it remains there
through the close on Friday, it will revert to resistance) and continuing to
fade its recent positive price performance.
Bottom line: as you can see, there are
a number of very short term trends being challenged. However, (1) those challenges have to be
successful, (2) the short term trends as well as most MA’s are trending in the
opposite direction, meaning a larger directional move is needed before considering
a change in trend, and (3) the technical axiom is that the aforementioned gap
needs to be closed.
On the other
hand, (1) most of the damage done by the current correction is very short term
in nature; so it won’t take much of a change in sentiment to get prices moving
higher and (2) we are now in the seasonally positive Holiday Season.
In short, a
little more clarity is needed before assuming the worst is over.
The long bond
and dollar continue to trade like interest rates are going higher while GLD returns
to its former abysmal performance.
How
much more?
Ralph
Acampora’s view.
Fundamental
Headlines
Yesterday’s
economic stats weren’t exactly easy reading: weekly mortgage and purchase
applications were down, the Q3 employment cost index was higher than expected
and the October Chicago PMI was a disappointment. The bright spot was a good October ADP
private payroll number.
There
was also poor data from overseas: the October Chinese manufacturing and
nonmanufacturing PMI’s were below estimates as was the Q3 EU (preliminary) GDP
report.
Bottom
line: data flow this week has been mixed which basically reflects my
outlook---an economy heading back to a below average long term secular economic
growth rate after a tax cut induced super charged second quarter. And there remain three big problems for the
economy---none of which are growth positive: (1) a federal deficit/debt running
wild, at a time in the economic cycle when they should be shrinking, (2) a
tightening Fed which is struggling to undo a massively irresponsible QE policy
and (3) the Donald’s determination to recast the US/Chinese relationship.
I
know, I know. Third quarter earnings
were great. But to be fair, (1) they
were influenced by [a] lower tax rates---the increase of which is not a
recurring item and [b] anticipatory buying ahead of the imposition of tariffs
and (2) they were largely non-GAAP numbers which allow corporations a lot of
leeway in how profits are reported.
True, the GAAP earnings are included in company reports; but the Street
is mostly basing its valuations on the more favorable non-GAAP EPS.
Finally,
and perhaps most importantly, investors have been living in a liquidity induced
‘everything is awesome' environment in which the only operative investment strategy
that worked was to ‘buy the dips’. That
psychology may still have life in it; though the recent selling on good news
suggests otherwise.
The
bottom line is that the Market has a growing math problem---slowing profit
growth and a higher discount factor (i.e. interest rates) at a time when
valuations are already at near record highs.
The only way to solve that problem is to boost earnings growth further or
lower interest rates.
I
am happy with my cash.
The
latest from John Mauldin.
The latest from Doug
Kass.
News on Stocks in Our Portfolios
Economics
This Week’s Data
US
The
October Chicago PMI came in at 58.4 versus expectations of 60.0.
Weekly jobless claims
fell 2,000 versus estimates of down 3.000.
Third
quarter (preliminary) productivity rose 2.2% versus forecasts of up 2.3%; unit
labor costs rose 1.2% versus consensus of up 1.1%.
International
The
October Chinese Caixin (small business) manufacturing PMI came in at 50.1
versus the September reading of 50.0.
September
German retail sales advanced 0.1% versus projections of +0.5%.
Other
To
hike or not to hike.
Fed considering
lowering liquidity requirements for regional banks.
Chinese yuan
testing its low.
What
I am reading today
Financial worries….or
not.
Your only competition is yourself.
How effective are US financial
sanctions?
How
important is accurate timing?
How
to finish rich.
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