The Morning Call
11/29/18
The
Market
Technical
The Averages
(DJIA 25366, S&P 2743) did a moonshot yesterday following Fed Chair Powell’s
comments (see below). Despite this
performance, their charts are still broken on a short term basis. Both are below their respective 100 DMA; both
are now in a short term trading range; both continue to develop very short term
downtrends; and both have now closed last Tuesday’s gap down open. The S&P remains below its 200 DMA.
On the other
hand, (1) the Dow traded above its 200 DMA [now resistance; if it remains there
through the close next Monday, it will revert to support], (2) both indices
remain solidly in intermediate and long term uptrends, (3) we are in a historically
strong seasonal period for stock prices and (4) both made a higher low off the
late October low.
I think the technical
key here is the 200 DMA’s: (1) they are the first major resistance point in this
rally and (2) before being broken, they were a major source of support for both
indices in the last year. Typically, a
support level which sustains multiple challenges, then breaks, will offer
significant resistance on the way back up.
So before raising the odds of the Averages challenging their all-time
highs or the upper boundaries of their long term uptrend, I need to see both
successfully challenge their 200 DMA.
Volume rose and
breadth improved---but neither reflected the power of the price move in the
indices.
The VIX was down
2 ¾ %, an astonishing small move on such a big up price move. The chart remains positive (bad for stocks):
above both MA’s and within a short term uptrend.
The long bond fell
½ % on volume---not what I would have expected on a day marked by a dovish Fed
statement. While it continues to build a
base very short term, it still finished below both moving averages and in a
short term downtrend; meaning that until some of these resistance levels are
successfully challenged, the assumption is that bond prices are going lower.
The dollar was down
½ %. To be expected on dovish comments
from the Fed. However, it was not enough
to challenge even its very short term uptrend.
In short, the chart remains technically strong. I continue to believe that UUP will move
higher as long as the dollar funding problem persists.
GLD was rose,
remaining above its 100 DMA. While it
seems to be attempting to build a base, the longer term chart is negative.
Bottom line: the price action in the
Averages was clearly big but volume, breadth, the VIX and the performance of
the dollar, bonds and gold all belied the euphoria in equities. They can, of course, respond today. But until I see that confirmation, I am going
to curb expectations for a sustained rally.
Even with the Averages, the first major resistance level is their 200
DMA’s are still there yet to be successfully challenged. That certainly could occur; but until it does,
my short term technical outlook remains unchanged: I don’t think a rally back
to former highs is likely near term.
As I noted
above, if you only looked at yesterday’s performance of the dollar, bonds and
gold, you would never know the Fed made dovish comments or the Dow was up 600
points.
Wednesday
in the charts.
Fundamental
Headlines
There
was a lot of data to digest yesterday: weekly mortgage and purchase
applications were strong; the second estimate of third quarter GDP was
unchanged from the prior reading, though corporate profits were lower; the
October trade deficit, the November Richmond Fed manufacturing index and
October new home sales were disappointing (new home sales is a primary
indicator). So the stats continue to
point to an economy falling back to a below average long term secular growth
rate.
Unless
you were stuck in an elevator, you know the big news of the day. Powell echoed Clarida’s comments on Tuesday,
basically saying the current Fed Funds rate is nearing the ‘neutral rate’, i.e.
the level at which the Fed stops raising rates. Meaning the odds of multiple rate hikes in
2019 are declining. In short, a dovish
presentation; certainly not in line with his prior statement (i.e. rates are a
distance from neutral and the Fed is no longer concerned about the Market’s
reaction to policy). Since the Market is
totally focused on this one comment, I am not going to go over his entire
presentation. For those who are
interested:
Counterpoint.
https://www.zerohedge.com/news/2018-11-28/socgen-powell-corrected-rookie-mistake-nothing-has-changed
Several comments:
(1)
was Powell responding to Market performance [like he
said he wasn’t going to do], Trump’s criticism [which he shouldn’t do] or did
he finally recognize that the Fed’s outlook for the economy was way too
positive and, therefore, it was time for a little discretion? I am going to defy history, give him the
benefit of the doubt and say it was the latter.
If that is correct, then the Fed is probably not going to aggravate the
decelerating forces in the economy---and that is good.
(2)
does ceasing to raise interest rates mean that the run
off in the balance sheet will also slow?
This factor is what is critical in my Market outlook. The Fed can stop raising its Fed Funds
rate. I don’t really care. Indeed, as I said above, it would likely
decrease the probability of a recession---which, as you know, isn’t in my
forecast anyway. My thesis has always been
that the effect of unwinding of the Fed’s balance sheet would be the end the
mispricing and misallocation of assets [price/risk discovery]---and that will
cause the Market pain. If the unwind
continues, my Market expectations are unchanged.
Supporting the notion that rate hikes may be near an
end but run off of the Fed’s balance is not, Mnuchin reportedly has been
lobbying for slowing the rate of interest rate hikes but continuing to unwind
the Fed’s balance sheet. That has the
advantage of getting Trump off the Fed’s back while still pursuing its most
important objective.
(3)
just because the Fed holds short term rates at a
certain level doesn’t mean long rates will stop rising. Indeed, the more money the Fed takes out of
the financial system [unwinding its balance sheet], the more expensive credit
becomes. Long rates can continue to go
up no matter what short rates do if the supply of lendable funds is falling.
(4)
will the Powell led rally give Trump more negotiating
room with the Chinese this weekend? The
world knows that one measure that Trump judges his success as president is the
Market pin action. If the world knows,
then the Chinese know. If the Donald goes
into this weekend’s discussion with his scorecard showing nothing but birdies, he
may think that he has more room to play hard ball.
Or by taking Fed off the table as a potential Market
negative [i.e. someone for Trump to blame], does it increase pressure on Trump
to do a deal? If no deal is done and the
Market declines, the Donald has no one to blame but himself.
Or am I reading too much into what has just occurred? We will know by Monday.
Hiding
in the weeds is the issue of funding for a border wall. Trump wants $5 billion now so that it can’t
be taken away in January when dems take control of the house. Dems’ position is ‘no way, Melvin’. The problem is that a deadline for the
partial funding of government operations arrives on December 7th and
the Donald has threatened to shut down the government. He has said that he thinks that it is a great
idea---though history suggests that he is wrong.
Bottom
line: if the stock Market’s interpretation of Powell’s comments are correct,
then a depressing factor (higher interest rates) to economic growth may have
been lessened. As you know, I never
thought that unwinding QE would be a negative for the economy; but not pushing
short term rates higher will likely be helpful.
We still don’t
know if slowing the rise in the Fed Funds rate also means a decline in the rate
of run off of the Fed’s balance sheet.
That, in my opinion, is what will be critical for the Markets---if the
liquidity continues to be drained from the global financial system, price
discovery is on its way back. That may
be what the dollar, bonds and gold investors were telling us yesterday. But, at this moment we don’t know. Until we do, I wouldn’t be getting
jiggy. More to follow.
Now we await the
outcome of this weekend’s Trump/Xi talks which may or may not be influenced by
the Fed’s (Market’s) action.
News on Stocks in Our Portfolios
Economics
This Week’s Data
US
October
new home sales fell 8.8% versus expectations of an increase of 3.9%.
The
November Richmond Fed manufacturing index came in at 14 versus consensus of 15.
Weekly jobless claims
rose 10,000 versus estimates of a 4,000 decline.
October
personal income was up 0.5% versus forecasts of up 0.4%; personal spending was
up 0.6% versus projections of up 0.4%; the core PCE was up 0.1% versus an
anticipated increase of 0.2%.
International
Other
The
tangled web of the GM/Trump dispute.
Update
on household debt.
Russia
reportedly accepts the need to reduce oil production.
What
I am reading today
Wisdom from Paul Volcker
(must read).
The stock market doesn’t
care about you.
Romaine and blockchain.
Russia and NATO playing a
dangerous game in Ukraine.
Time use and happiness
among millionaires. This is a 50 page
study so you only need to read the one page abstract.
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for Survival’s website (http://investingforsurvival.com/home)
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