Friday, December 14, 2018

The Morning Call--Santa Claus is running out of time


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
 
            AT&T (NYSE:T) declares $0.51/share quarterly dividend, 2% increase from prior dividend of $0.50.

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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