The Morning Call
12/7/18
The
Market
Technical
The Averages
(DJIA 24947, S&P 2695) had a roller coaster day, vacillating almost 800 Dow
points intraday before closing down modestly.
They finished below both moving averages; and having set a second lower
high last Friday, they made a new lower low.
In addition, they closed last Tuesday’s gap up open---the significance
being the upward pull of last Tuesday’s and Friday gaps has been eliminated,
leaving the indices free to decline further.
In short, despite the strong intraday rebound, the indices’ charts
continued to deteriorate.
Volume rose and
breadth was negative. But neither had
any of the characteristics of a selling climax.
The VIX was up 2%,
so its chart remains positive (bad for stocks) and actually got more upbeat as
its 100 DMA is crossing above its 200 DMA.
The long bond rose
another 3/8 %, on volume, finishing above its 100 DMA for a second day (now resistance;
if it remains there through the close today, it will revert to support) and
above its 200 DMA for a second day (now resistance; if it remains there through
the close next Monday, it will revert to support). Intraday, it challenged the upper boundary of
its short term downtrend but failed to close above it. 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…...
Does the yield
curve forecast recession?
Average
lead times between inversion and recession.
The dollar was down
a penny, but ended in very short term and short term uptrends (right on its
lower boundary) as well as above both MA’s. So the chart remains technically
strong. I continue to think that its
role as a safety trade is in play.
GLD traded up two
cents: 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: the intraday bounce
notwithstanding, the Averages’ charts grew more negative, technically
speaking. Although given the oversold
condition of the Market, some follow through to the upside would not be surprising. Indeed, we may have seen a bottom near term
if seasonal and calendar forces kick in.
On the other hand, it may take even more work to undo the technical
negatives, having already failed once. In other words, I have no idea what
happens next.
The
pin action in the long bond continues to point to lower rates. While that may be good news with respect to
Fed policy, it also suggests bad news for the economy (i.e. weaker). Both the dollar and gold look to be
supporting that view.
Thursday
in the charts.
Fundamental
Headlines
Yesterday’s
economic stats were tilted to the plus side: positives---the November ADP
private payroll report, Q3 unit labor costs, November Markit services PMI and
the November ISM nonmanufacturing index; neutral---Q3 productivity;
negatives---the October trade deficit, October factory orders (primary
indicator).
Overseas,
October German factory orders were much better than anticipated but industrial
production was worse.
The
big news of the day was the arrest of the CFO of a major Chinese tech company
for violating sanctions against Iran. I
can’t imagine that the Chinese will not respond, though at this point, they
haven’t. So we have that to look forward
to.
Other
factors facing the economy/Market are the budget showdown (now two weeks away),
the upcoming Fed meeting at which another rate increase is expected, the
results of the OPEC meeting and the Brexit showdown next week.
***overnight
at OPEC.
That is a lot
for investors to contend with, especially with the demise of the ‘buy the dip’
mentality that has been a major support for equity prices for the last ten
years.
Bottom
line: there are number of upcoming events that will influence the economy and likely
the Market. In each of them, there is a
reasonable chance of bad news. The Fed,
for instance, is in a no win situation.
If it raises rates, it will likely be perceived as a weight on valuations;
if it lowers rates, it suggests that the economy (corporate profits) is
weakening.
Ditto, Trump
versus the Chinese---if you assume, which I do---that there is no way the
Chinese will fold on IP theft without a major fight, if ever. So he is faced with doing what he did with
NAFTA (perhaps getting a few scraps) and continuing to lose face; or he holds
firm and the trade news gets worse. To
be sure, the arrest of that Chinese executive will play into this scenario: will
the Chinese make a major concession to buy her way out of jail or will they up
the ante?
Ditto, the
coming budget slowdown---if you assume, which I do---that there nothing for the
dems in a compromise. Trump either backs
down or shuts down the government---historically not a winning strategy.
Clearly, I could
be wrong about any or all the above. But even if I am right, I want to be clear.
While there is the potential for negative economic outcomes, I don’t think it
likely that my economic forecast will be effected in a major way.
However, one or
more of them could exacerbate the growing illiquidity in the Market as the Fed
continues to unwind its balance sheet. (As
you might expect, I have been talking everyone I can to get a handle on whether
the Fed’s more dovish stance on interest rates also means a slowdown in the
runoff of its balance sheet. Most agree
that the unwinding will continue at its current pace).
Income
and valuations.
News on Stocks in Our Portfolios
Economics
This Week’s Data
US
October
factory orders fell 2.1% versus estimates of -2.0%; the September reading was
revised from +0.7% to +0.2%.
The
November Markit services PMI was reported at 54.7 versus forecasts of 54.4.
The
November ISM nonmanufacturing index came in at 60.7 versus consensus of 59.2.
November
nonfarm payrolls grew by 155,000 jobs versus expectations of 190,000; the October
number was revised from up 250,000 to plus 237,000.
International
October
German factory orders rose 0.3% versus expectations of -0.5%; but industrial production
was down 0.5% versus projections of up 0.4%.
Q3
EU GDP advanced 0.2%, in line.
Other
Household
net worth increased in the third quarter.
NAFTA
and NAFTA 2.0. Is there really a
difference?
Light
vehicle sales per capita.
More
on Powell’s dovish tilt.
Did
the Markets ignore his real message?
The
latest on Brexit.
The
latest from OPEC.
What
I am reading today
Defining risk.
Common errors of
the left.
The
demise of blockchain is greatly exaggerated.
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