The Morning Call
12/20/18
The
Market
Technical
The Averages
(DJIA 23323, S&P 2506) traded in a Dow 800+ point range, closing down
substantially on the day. They both finished below both moving averages and are
now in a pronounced very short term downtrend. The Dow finished below its February low,
while the S&P ended below the lower boundary of its short term trading range
(also its February low); if it remains there through the close on Friday, it
will reset to a downtrend.
Volume was up; breadth
was terrible.
The VIX was down
¼%, once again trading contrary to its normal pattern, suggesting that there is
still a lot of investor nervousness. That
said, it nearing expiration; so it may have more to do with the technical
issues surrounding that event than investor sentiment.
The long bond was
soared 1 ¼ % on huge volume, closing above its 100 DMA (now support), above its
200 DMA (now support) and above the upper boundary of its short term downtrend for
the third day, resetting to a trading range. It appears that the rise in long term interest
rates (decline in bond prices) is over.
The dollar was up
slightly, ending back above the lower boundary of its very short term up trend. It remains above both MA’s and in a short
term uptrend. So the chart continues to be technically strong.
GLD fell ½ % on
big volume, but still finished above its 100 DMA. Intraday, it challenged its 200 DMA but
backed off.
Bottom line: the Averages continue to
get more oversold while also continuing to challenge ever lower support
levels. I have said several times that I
thought the key to price direction was how the S&P trades around the lower
boundary of its short term trading range.
In its third challenge of the support level, it pushed through and
closed markedly lower. Under my time and
distance discipline, it must remain there through the close on Friday to confirm
the challenge; but given yesterday’s dramatic intraday reversal, it seems likely
to happen. If that occurs, this decline
becomes more than just a correction in long term bull market. Further, as I noted previously, the next
major support level for the S&P is ~1800.
The
long bond has reset its short term trend from down to a trading range,
suggesting the end of the 2016-2018 rise in rates.
The
dollar’s chart remains quite strong and will likely continue to do so as long
as dollar funding (liquidity) problems grow.
GLD’s pin action seemed to reflect a stronger dollar and rising short
term interest rates.
Wednesday
in the charts.
Fundamental
Headlines
Yesterday’s
stats were mixed: weekly mortgage and purchase applications fell, the Q3 trade
deficit was in line and November existing home sales were well above estimates.
Of
course, the big news of the day was the FOMC’s action and forward guidance
following its meeting. The main points
are (1) it raised the Fed Funds’ rate another .25%, (2) it will continue its
schedule of balance sheet run off, (3) it lowered the number of likely rate
increases in 2019 from three to two and (4) it said that the economy remained
strong though it lowered its 2019 GDP growth forecast and acknowledged the
difficulties occurring in the global economy.
***overnight, Bank of
England leaves rates unchanged, largely due to the economic uncertainties surrounding
Brexit.
***overnight, Bank of
Japan leaves rates and QE unchanged.
My
bottom line is that (1) the forward guidance was not as dovish as many hoped
[that is obvious in the Market’s reaction], (2) as long as QT is operative, the
securities markets are likely to remain under pressure, (3) but the economy
will still continue to grow at a below average pace and (4) a reminder that there
is nothing in the Fed mandate about stabilizing securities markets. Granted the Bernanke/Yellen Fed did just that;
but that doesn’t mean that it is wise policy or that Powell will continue it.
Low
probability of recession.
Counterpoints:
Why
the Fed should be cautious about raising rates (and QE).
No
need for an unforced error.
I
like the work this author does. Indeed, I
read all of his articles. In this one,
he poo poos the notion that QE caused stock prices to advance. For some reason, he leaves out any mention of
QE resulting in zero interest rates, the chase for yield, the lowering of
credit standards and the ability of large hedge funds and corporations to
borrow cheaply to buy stocks.
Bottom
line: the Fed has spoken and it said the QT will remain on schedule. My thesis remains that the unwind of the Fed’s
balance sheet will not be good for securities’ prices.
I
am working on Buy candidates.
The
latest from David Tepper.
News on Stocks in Our Portfolios
Revenue of $858.9M (+7.0%
Y/Y) in-line.
Revenue of $10.61B (+7.4%
Y/Y) beats by $130M
Economics
This Week’s Data
US
November
existing home sales were up 1.9% versus expectations of down 0.5%.
Weekly jobless claims
rose 8,000 versus estimates of +14,000.
The
December Philadelphia Fed manufacturing index came in at 9.4 versus consensus
of 16.5.
International
Other
It
appears that the US is exiting Syria---to which I say, thank God. The US has been wasting money and lives
trying to reform a culture that doesn’t want to be reformed. Now let’s get out of Afghanistan and Iraq.
What
I am reading today
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