Tuesday, November 6, 2018

The Morning Call--Slow data but big event week


The Morning Call

11/6/18

The Market
         
    Technical
                    
The Averages (DJIA 25461, S&P 2738) rallied yesterday.  However, the technical picture for both index didn’t change.  The Dow ended below its 100 DMA (now resistance) but above its 200 DMA for a third day (now resistance; if it remains there through the close today, it will revert to support).

The S&P finished below both moving averages and above the lower boundary of its short term uptrend.

Volume fell; breadth was mixed.

The VIX rose 2 ½ %, again trading somewhat at odds with the Averages.  It finished above both MA’s and in a short term uptrend. 

The long bond was up slightly, but remains 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 down fractionally, but still closed above its August high, within a short term and a very short term uptrend 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 remained 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: I am continuing to focus on the S&P which is trading between its 200 DMA (which has been a significant level for the past two years) on the upside and the lower boundary of its short term uptrend (which it challenged unsuccessfully last week) on the downside.  Whichever of those boundaries gets successfully challenged should tell us a lot about future price direction.  Keep in mind that (1) we are now in a seasonal period of strong Market performance but (2) last Wednesday’s gap open to the upside needs to be filled.

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. 


            Monday in the charts.

    Fundamental

       Headlines

            Monday’s US stats were upbeat: both the October Markit services PMI and the October ISM nonmanufacturing index were ahead of estimates.  Overseas, there was more of a mixed picture: the October Chinese services PMI and the Caixin composite PMI were below expectations, while the October Japanese services and composite PMI’s were above forecasts.

            This week will be a very slow one for economic data.  However, there will be no shortage of potential Market moving events.  The numero uno will be election results.  Given the lack of accuracy of the 2016 election predictions, any attempt to anticipate the outcome is likely a lost cause.  However, I did find some analysis of the historical Market performance under various scenarios.              

                Understanding the Market and Trump (bear in mind that the author is anti-Trump)

                Number two is the FOMC meeting.  No one expects any change in policy; but everyone is anticipating the policy statement, i.e. will it be more dovish or hawkish than prior statements?  Expectations are for nothing new/different here either; but its analysis of recent economic data could potentially be Market moving.  Making this particular meeting/statement somewhat different from prior occasions is that equity investors appear hopeful that the Fed will err on the side of ease while bond and dollar investors are making pretty clear that they believe that rates are going up.  In short, we need to be aware of how all Markets react to the news, not just stocks.

            More.

            Bottom line: in the background is the China trade/tariffs issue which I think its weighing heavily of investor psychology.  The problem, at the moment, is that it is impossible to know how much truth there is in the news flow.  To be sure, if the US/China trade talks actually produce benefits, which would be great.  Just having economic conditions return to pre-tariff levels would be a short term plus.  However, any agreement would have to include curbs on Chinese theft of intellectual property to make it a big long term secular positive.  If we get another NAFTA 2.0 re-do then all the pain that the Market has endured will be for naught and would have little impact on my long term secular growth outlook or Market valuation.

    News on Stocks in Our Portfolios
 
Emerson Electric (NYSE:EMR): Q4 GAAP EPS of $0.97 beats by $0.08.
Revenue of $4.9B (+10.4% Y/Y) in-line.

Becton, Dickinson (NYSE:BDX): Q4 Non-GAAP EPS of $2.93 in-line; GAAP EPS of -$0.64 misses by $2.74.
Revenue of $4.4B (+38.8% Y/Y) beats by $40M.

Economics

   This Week’s Data

      US
                
                 The October Markit services PMI came in at 54.8 versus estimates of 54.7.

                 The October ISM nonmanufacturing index was reported at 60.3 versus expectations of 59.1.

     International

            September German factory orders rose 0.3% versus forecasts of down 0.5%.

    Other

            Lumber prices falling.

The latest earnings and sales forward guidance data.

            John Mauldin on the growing debt problem (must read):

            Update on the Italy/EU standoff.

            Update on the Japanese QE.

What I am reading today

            Four factors in deciding your stock/bond mix in retirement.

                The marvels of compounding.

            Money alone doesn’t buy happiness.

            The status quo bias in investing.

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