The Morning Call
12/6/18
The
Market
Technical
What
a difference a day makes. The Averages
(DJIA 25-27, S&P 2700) plunged Tuesday, undoing all the repair work they
had done over the last two weeks:
(1)
the Dow traded back below its 200 DMA but only one day
after having reverted to support. My
rule of thumb in such circumstances is to weigh the follow through, i.e. if the
DJIA continues to move lower, the break of the MA is negated; if it bounces
back immediately, the reversion to support holds,
(2)
it also ended
back below above its 100 DMA, voiding Monday’s break higher. It remains resistance.
(3)
it continues in a very short term downtrend,
(4)
the S&P traded back below the upper boundary of the
very short term downtrend, one day after voiding it. The rule of thumb described above also holds
true in this instance,
(5)
it also traded back below its 200 DMA, voiding Monday’s
break. It remains resistance.
(6)
both indices have now made a second lower high.
However, all is
not lost. (1) remember that both of the
Averages have also made higher lows. So
they are in a developing pennant formation.
Now the immediate resistance level is the upper boundary of the very
short term downtrends; but there is support at the trend line connecting the
higher lows, (2) we are in a historically strong seasonal period for stock
prices and (3) they both filled Monday’s gap up open, meaning that technically
there is nothing holding them back from advancing on their all-time highs.
Volume rose and
breadth was negative. But neither had
any of the characteristics of a selling climax.
The VIX soared
25%, so its chart remains positive (bad for stocks).
The long bond rose
1½ %, on huge volume, finishing above its 100 DMA (now resistance; if it
remains there through the close next Tuesday, it will revert to support), above
its 200 DMA (now resistance; if it remains there through the close next Wednesday,
it will revert to support) and very near the upper boundary of its short term
downtrend. In sum, its chart is being
turned on its head. Follow through is
still needed to confirm the aforementioned challenges. But clearly, bond investors are embracing the
flattening yield curve scenario (recession) enthusiastically, at least for a
day.
Jeff Gundlach on
the yield curve inversion.
The dollar was down
a nickel, but ended in very short term and short term uptrends as well as above
both MA’s. So the chart remains technically strong. Usually when long bond yields decline, the
dollar follows suit. However, I think
that its role as a safety trade is in play.
GLD traded up ½ %;
not surprising in face of the big drop in yields. But its chart is still a bit ugly, suggesting
that investors’ enthusiasm for gold as a safety trade remains tepid.
Bottom line: Tuesday’s pin action returned
the Averages’ charts to a technical negative.
Of course, given the recent volatility, this whole situation could
reverse back to the upside. However,
today, there is nothing in the charts to suggest a challenge by the indices of
their all-time highs.
Counterpoint.
The
trigger for Tuesday’s liquidation.
Another
opinion.
Tuesday
in the charts.
Fundamental
Headlines
The
stats over the last two days were upbeat: weekly mortgage and purchase applications,
month to date retail chain store sales and November light vehicle sales were
better than anticipated.
The
Fed released its latest Beige Book yesterday; and the narrative was reasonably
upbeat: growth in all regions, a tighter labor market but some softening in
housing and concerns about trade. I didn’t
read this as dovish.
Overseas,
the numbers were more mixed: October EU retail sales were up 0.3% versus
expectations of +0.2% but the September reading was revised from 0.0% to -0.5%;
the November EU composite PMI came in at 52.7 versus estimates of 52.4.
Tuesday,
investors apparently woke up to the fact that all the trade truce news was perhaps
not as great as the Donald said.
Although that night the Chinese finally commented in a somewhat positive
fashion. The official interview
indicated they were moving forward implementing the agreement negotiated over
the weekend. Perhaps it is only a
coincidence, but it seems none of the measures will go into effect until late
March---just outside the ninety day window deadline for a more permanent accord.
Reduced
auto tariffs don’t seem to be in the mix.
I
finally found someone who makes a decent argument that the US/China cease fire
was more than smoke and mirrors.
***overnight,
the CFO of dominant Chinese tech company arrested at US request.
Other
factors are getting investor attention:
(1)
the vote on funding the government is still to be
done. As you know, Trump has threatened
not to sign the legislation unless congress gives him $5 billion for the border
wall; and the dems are saying ‘no way, Melvin’.
Bush 41’s death has delayed that showdown for two weeks. But it is still going to occur. When the vote comes, Trump either loses face
or the government is shut down.
Historically, shutting down the government has not been a winning
strategy.
(2)
the internecine Brexit fight has reached the point
where it could induce heartburn beyond the UK boundaries.
(3)
tensions are again escalating in the Persian Gulf.
***overnight,
oil plunges after Saudi’s propose smaller than expected production cut.
Bottom line: Fed
policy and trade will likely remain the headline movers over the short
term. At the moment, neither seem
especially positive to me. We still don’t
know for sure whether the Fed will continue to wind down its balance sheet at
the pre-Powell comment/FOMC minutes rate.
If it does, liquidity will continue to be removed from the financial
system; and as the above link (Another opinion) suggests, it is diminishing
liquidity that has suddenly began to impact the algo traders.
Regrettably,
I am near giving up trying to discern the difference in what Trump says and
reality. I can’t be the only one;
indeed, I may be among the last since I have believed that the Donald would
make a big change in the global political/trade regime. Even if it does eventually occur, the
credibility factor (valuations) is apt to hang over the Market until it does.
Merrill
Lynch’s 2019 outlook.
Dividends
by the numbers for November.
News on Stocks in Our Portfolios
Brown-Forman (NYSE:BF.B):
Q2 GAAP EPS of $0.52 beats by $0.01.
Revenue of $910M (-0.4%
Y/Y) misses by $30.48M.
Economics
This Week’s Data
US
Month
to date retail chain store sales growth slowed from the prior week.
November
light vehicle sales were ahead of expectations.
Weekly
jobless claims fell 4,000 versus consensus of down 9,000.
The
October trade deficit was $55.5 billion versus forecasts of $55.0 billion.
The
November ADP private payroll report showed job gains of 179,000 versus
projections of 175,000.
Third
quarter productivity increased 2.3%, in line; unit labor costs advanced 0.9%
versus estimates of +1.1%.
International
Other
Less
inflation gives Fed room to pause.
OPEC
works on deal to cut oil production.
But as of last
night, there is no deal.
Framing lumber
prices down year over year.
Home prices up year over
year.
What
I am reading today
When
things stop working.
The
law of big numbers.
Blockchain study shows 0%
success.
Bitcoin miners hold garage sale.
The opioid epidemic.
From
the census bureau; sixty-three percent of noncitizens are on welfare.
The octopus is smart as heck.
Questions about Hanukkah
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