The Morning Call
12/21/18
The
Market
Technical
The Averages
(DJIA 22859, S&P 2467) got hammered again yesterday. 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) for a second day; if it remains there
through the close today, it will reset to a downtrend.
Volume was up;
breadth was terrible but is now extremely oversold.
The VIX was up
11%, returning to its normal (inverse) relationship to stocks.
The long bond
was down ¼ % on huge volume, closing above its 100 DMA (now support), above its
200 DMA (now support) and in a short-term trading range. It appears that the rise in long term interest
rates (decline in bond prices) is over.
The dollar was down
¾ %, ending below the lower boundary of its very short term up trend; if it
remains there through the close today, that trend will be voided. It still finished above both MA’s and in a short-term
uptrend. So, the chart continues to be technically strong.
GLD was up 1 ½ %
on big volume, closing above its 100 DMA as well as its 200 DMA (now resistance,
if it remains there through the close next Tuesday, it will revert to support).
Bottom line: the Averages continued their
plunge but have become so oversold that some kind of rally seems inevitable. That said, barring a monster rally today, the
S&P short term trend is going to turn down.
That doesn’t mean a bear market is inescapable, but clearly the odds are
rising. Further, as I noted previously,
the next major support level for the S&P is ~1800. P.S. don’t forget that
today is quad witching.
The
long bond is in trading ranges across all timeframes, suggesting the end of the
2016-2018 rise in rates.
The
dollar took a hit likely the result of the sudden reappearance of a government
shutdown. Even if that occurs, I don’t
think that it will alter the upward trajectory of the dollar as long as there
are increasing dollar funding (liquidity) problems.
GLD’s pin action
likely reflected its role as a safety trade.
Algos are starting to short
the Market.
Thursday in the charts.
Fundamental
Headlines
Yesterday’s
stats were weighed to the negative side: while weekly jobless claims fell less
than anticipated, the December Philly Fed manufacturing index was abysmal, and
the revised October/November leading economic indicators were weak.
However,
other issues dominated the headlines.
Of
course, the disappointing results of the FOMC meeting were front and
center. As you know I have opined for years that QE didn’t
help the economy all that much, so ending it wouldn’t damage the economy all
that much. On the other hand, I believe
that QE was in a large way responsible for the gross mispricing and
misallocation of assets and when it ends, the return to real price discovery will
be painful for the Markets.
Here
are a couple of articles addressing the former issue:
(1)
While I have always thought this analyst a bit too
cheery, he nonetheless conveys my point that the economy is doing fine [not
great] in the face of rising rates and QT.
(2)
The risk of recession.
And
here is a look at the latest money supply numbers.
Meanwhile,
back at the White House. Apparently, house
republicans have given the Donald some backbone on the funding of the wall. Last
night, they voted to fund it. Now it
looks like he will unblink. It goes to
the senate today, where Schumer insists that it won’t pass. If not, then Trump says that he will shut
down the government.
https://www.zerohedge.com/news/2018-12-21/trump-demands-mcconnell-fight-wall-hard-he-fought-anything
Finally,
the US has indicted two Chinese hackers and it appears several our allies will support
this move. I think that the latter is a
big plus because it alerts China that it is just not the US that is tired of their
cheating. Knowing that others could be
joining the US is attacking their unfair trade practices (assuming they follow
through with actions that penalize the Chinese) will almost surely add pressure
for the Chinese to clean up their act.
Bottom line: I
am not surprised that the securities markets are reacting negatively to shrinking
liquidity; and I will not be surprised if the securities continue to react negatively
if liquidity continues to shrink.
The
prospects of a government shutdown appear to be giving some investors
heartburn. As you know, I wish that they
would shut down Washington permanently; so, I guess a temporary one is better
than nothing. Wishful thinking aside,
any shutdown is not apt to do much if any damage to the economy. However, Markets tend to not like them
especially when the prevailing mood is negative.
I believe that
if our allies really get on board with penalizing the Chinese for unfair trade
practices, it will have a much greater impact on their behavior than if the US
was acting alone. Indeed, the Donald and
his minions probably should have had them in on the whole sanctions/tariffs
program before the US started it. Better
late than never; but it still a plus if the allies mean it. It will be interesting
to see how the Chinese respond.
Dealing
with hyperbole.
Subscriber Alert
At
the Market open:
The
Dividend Growth Portfolio will Add to its position in Tiffany (TIF). TIF is 46% off its high.
The High Yield
Portfolio will establish a new position EQT Midstream Partners (EQM). EQM is 50% off its high, yields 10%+ and
carries the high credit rating (B++) among the MLP’s.
The ETF
Portfolio will establish a new partial position in the ishares Russell 2000
value ETF (IWN). IWN contains a large
number of small cap stocks many of which have been hammered. It is down 22%.
My strategy at this point is
to just focus on the stocks that have been trashed and are down much more than
the indices. That is not to say that
they won’t go lower; but as you know my Model is always gets me out early and
in early. Also remember that in a bear
market, my Stop Loss discipline gets a little squishy because the downside can
get so overdone.
News on Stocks in Our Portfolios
Revenue of $9.37B (+9.6% Y/Y) beats by $200M.
Economics
This Week’s Data
US
The
November economic indicators rose 0.2% versus expectations of unchanged;
however, the October number was revised from +0.1% to -0.3%.
November
durable goods orders rose 0.8% versus estimates of +1.4%; ex transportation,
they were down 0.3% versus forecasts of up 0.3%.
The
final Q3 GDP report showed growth of 3.4% versus consensus of 3.5%; the price
index was up 1.8% versus projection of up 1.7%; corporate profits were +6.1%
versus the prior estimate of 5.9%.
International
November
UK retail sales rose 1.4% versus consensus of +0.3%.
Other
***overnight,
China announce plans for more fiscal and monetary stimulus.
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