The Morning Call
12/14/18
The
Market
Technical
The Averages
(DJIA 24597, S&P 2650) turned in a mixed day (Dow up, S&P down
fractionally). They both finished below
both moving averages and have set a second lower high and second lower
low. I still believe that some kind of
oversold rally could happen; but the pin action this week is suggesting that it
won’t.
Volume was flat;
breadth mixed. The VIX was down 3 ¾ %; but
the drift lower over the last couple of days has done nothing to alter an
otherwise positive chart.
The long bond was
down another ¼ %, finishing above its 100 DMA (now support), above its 200 DMA
(now support) but below the upper boundary of its short term downtrend. It needs to take out this downtrend to
convince me that investors are truly shifting their outlook for interest rates
(lower).
The dollar was unchanged,
ending slightly below the rising lower boundary of its very short term up trend. I am not going to count this as a challenge
unless UUP actually trades down. It
remains above both MA’s and in a short term uptrend. So the chart continues to
be technically strong.
GLD fell ¼ %, but
still closed above its 100 DMA and continued to build strength.
Bottom line: the Averages continue to
act poorly despite their oversold condition.
Any attempt to rally and relieve that situation simply brings out the
sellers. As historically powerful as the
seasonal forces are to the upside, stocks are not following the script even
when good news (jobless claims) hits the tape.
It doesn’t mean that a Santa Claus rally can’t happen; but it is clearly
running out of runway. Levels on the
downside to watch are the October lows (25062/2601) and the February lows
(23352/2536).
The
long bond has run into some resistance at the upper boundary of its short term
downtrend. That is not particularly
surprising; but it does need to successfully challenge this level before the
current move up is more than just a rally in a bear market.
The
dollar continues to trade like there are dollar funding (liquidity) problems. And if you think about gold as a safety
trade, then its pin action would support the notion of credit/liquidity
problems are looming.
Wheels
coming off leveraged loan market (must read).
Thursday
in the charts.
Fundamental
Headlines
Not
much data: weekly jobless claims declined significantly (indicating a strong
economy) while November import and export prices were well below estimates
(indicating a weakening economy).
Overseas,
November Chinese auto sales fell dramatically.
Otherwise
the day was quiet.
Bottom
line: the data suggest that the US economic growth rate is slowing---which is
not a problem except for valuations.
However, there are number of factors playing on that growth rate: (1)
the near term potential positive of the proposed trade concessions by China,
(2) a global economy slowing more rapidly than the US, (3) the rising burden of
servicing the massive US deficit/debt and (4) the increasing potential credit/liquidity
problems stemming for the unwind of QE. These
too may not in sum be a problem for growth but could negatively impact
valuations---given equities current elevated price levels.
It is the latter
point that I keep coming back to: the
economic outlook does not deserve current valuations and hasn’t for some
time. In my opinion, if valuations on
the current consensus economic forecast mean revert to historical norms, there
is considerable downside price risk. Again,
in my opinion, this is one of those times that cash is a great investment.
PIMCO’s
recession signals flashing orange.
***overnight,
some clarity on the Chinese lower auto tariffs.
News on Stocks in Our Portfolios
Economics
This Week’s Data
US
November
retail sales rose 0.2% versus estimates of +0.1%; ex autos they were up 0.2%,
in line.
International
November
Chinese retail sales were up 8.1% versus expectations of up 8.8%; factory
output rose 5.4% versus consensus of +5.9%.
The
December Japanese flash manufacturing PMI was 52.4 versus the November reading
of 52.2.
The
EU flash composite PMI was 51.3 versus forecasts of 52.5; both the
manufacturing and services PMI’s were also below estimates.
Other
Philly Fed ADS
business conditions index update.
LA port traffic
decreases year over year.
Hotel occupancy
rates decrease year over year.
The counterproductive
nature of yearly forecasts.
Brexit endgame.
***overnight,
May returns empty handed.
What
I am reading today
Rational versus reasonable.
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