The Morning Call
11/9/18
A football weekend in
Norman. See you next Tuesday.
The
Market
Technical
The Averages
(DJIA 26191, S&P 2806) rested (mixed: Dow up, S&P down, both
fractionally) after a big Wednesday, leaving open the probability of a
potential dramatic change in the technical picture. The Dow ended above its 100 DMA for a third
day, reverting to support and above its 200 DMA (now support).
The S&P
finished below its 100 DMA for (now resistance) but above its 200 DMA for a
second day (now resistance; if it remains there through the close next Tuesday,
it will revert to support).
With the Dow now
getting support from both MA’s and the S&P threatening to break back above its
200 DMA (that strong support level for the last two years), it appears increasingly
likely that the decline that began in October is over and that the positive seasonal and calendar effects are starting to
exert themselves. The only negative is
two previously mentioned gap opens to the upside, which in tech wisdom have to
be closed before a longer term uptrend to continue. That doesn’t necessarily mean that the
uptrend won’t continue; but it means that there needs to be some back and
filling before any launch to the upside.
Volume fell; breadth
was mixed.
The VIX was up 2
¼ %, bouncing up off its 200 DMA, remaining above its 100 DMA and within a
short term uptrend.
The long bond was
down one cent finishing within very short term and short term downtrends and
below both moving averages. Still a
negative technical picture, indicating higher interest rates.
The dollar was
up ½ %, closing back above its August high and within short term and very short
term uptrends and above both moving averages.
I continue to believe that UUP will move higher as long as the dollar
funding problem persists.
GLD was down ¼ %,
but still ended above its 100 DMA. While
the pin action remains a bit confusing, it does seem to be trying to establish
a trading range slightly above the former August to October trading range.
Bottom line: the S&P has begun a challenge of its 200 DMA, which if successful
would point to higher prices---the likely next stop being the September/October
highs. That seems a reasonable scenario
given the seasonal and post mid-term calendar effects. However, confusing the technical picture are
two gap opens at lower levels that, technically speaking, have to be
closed. I await for the confirmation of
the break of the 200 DMA.
While I disagree
with this analyst’s take on the fundamentals, he provides the technical bull
case based on the calendar.
TLT’s and UUP’s
performances both continue to point to higher interest rates (a tighter Fed)
which is definitely not a plus for the Markets.
Thursday
in the charts.
Fundamental
Headlines
One
minor US stat reported yesterday: weekly jobless claims were in line. Overseas, the October Chinese trade surplus
was $34 billion ($31.7 billion with the US) down slightly from $34.1 billion in
September. Still it is not likely to
make the Donald happy.
The
main headline of the day was the FOMC November meeting which concluded. It
issued its usual formal statement that hardly varied from the prior release:
rates unchanged, balance sheet unwind continues, the economic assessment was
upbeat, no mention of Market volatility or concern about inflation.
While
stocks sold off a bit, the pin action was calm as was trading in other markets.
However,
in my opinion, the most important Market take away is that the Fed’s balance
sheet will continue to run off, meaning that the end of the mispricing and misallocation
of assets draws close---though, clearly, the Market disagrees with me at this
point.
This a great
article dealing with the Fed unwinding its balance sheet and the impact it is
having (hint: dollar funding shortage).
The author makes an important point that I hadn’t thought of; and that
is that a large portion of the Fed’s balance sheet is being used by banks to
meet more stringent capital requirements dictated by Dodd Frank and
regulators. Hence, those funds are not
loose money chasing asset prices higher but basically passive funds that are
being utilized to increase the financial strength of the US banking system.
While that is
good news for the health of our financial system, it also means that the Fed’s
run off of its balance sheet is having a more leveraged impact on the speculative
money that created the mispricing and misallocation of assets. In other words, even though the decline in total
Fed holdings has been modest to date, it is having a larger effect on the
speculative dollar holders because all those reserves on bank balance sheets
are not available to satisfy the speculators dollar debt servicing obligations.
Bottom
line: with a big news week behind us, we now know that (1) fiscal policy will probably
be less stimulative over the next two years as political gridlocks diminishes
the chances of tax cuts or big spending plans.
That doesn’t mean that the fiscal drag from servicing a ginormous
national debt is going away; hopefully it means that conditions won’t get any
worse and (2) the Fed remains on course to unwind QE. The longer that goes on, then, in my opinion,
the more pressure it puts on speculators and low quality creditors with dollar
denominated debt to reverse those trades.
And that is
likely a Market negative. I would use
any continuing price strength in stock prices to build cash reserves (sell
high).
The
tailwinds to the Market have shifted.
Profit
margins are likely to contract.
Why
investors like gridlock.
The
risk of a ‘buy and hold’ strategy.
I would like to
see more of the math that determines this author’s conclusion about stock
market returns; so I am not sure I agree with it. In any case, it is an interesting read.
News on Stocks in Our Portfolios
Economics
This Week’s Data
US
October
PPI came in at a sizzling +0.6% versus expectations of +0.2%; ex food and
energy, it was much the same +0.5% versus +0.2%.
International
Other
The
state of consumer debt.
The
commercial real estate momentum index declines.
The
oil boom in Africa.
New
lending directive from the Chinese government.
What
I am reading today
This author is wrong on
so many counts it would take an article of equal length just to refute all his
inaccurate assertions. But in the
interest of a balanced approach, I include it.
Ten easy ways to waste your money.
How
memories influence our investment perspective.
Buffett’s
underrated investment attributes.
Things that you
see in every market correction.
Quote of the
day.
Russia deploys
new hypersonic missile.
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for Survival’s website (http://investingforsurvival.com/home)
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