The Morning Call
1/11/19
The
Market
Technical
The Averages
(DJIA 24001, S&P 2596) experienced another roller coaster day but ending higher
on the day. However, both indices
finished below both moving averages (the 100 DMA’s are close to crossing below
its 200 DMA’s---an historically negative technical signal). The Dow finished in a very short-term
downtrend and a short-term trading range. The S&P is in a short-term
downtrend. So longer term, there remains a lot of work to be done to
re-establish an uptrend. For instance,
the S&P would have to successfully challenge the upper boundary of its
short-term downtrend (~2626) before it makes any sense to start thinking that
the worst is over.
Volume was up
slightly; breadth positive.
The VIX fell another
2½ %, but still ended above both moving averages and in a short-term uptrend. However, it closed right on the lower boundary
of its very short-term uptrend; a break would be the first sign that the upward
momentum in stocks is gaining strength.
For the moment, this chart remains a negative for stocks.
The long bond
was down ½% but closed above its 100 DMA (now support), above its 200 DMA (now
support) and in short and intermediate-term trading ranges and in a very
short-term uptrend. However, it is approaching
its prior higher low---a break of which would be the first sign that rates may
have seen the lows near term. If that
occurs, it would suggest that investors are becoming convinced that either the
economy is stronger than is currently apparent or that the Fed won’t be as ‘flexible’
or ‘patient’ as the headlines portray. As
you know, I think that the latter is more likely. However, no break has happened yet; so, no
real technical damage has been done.
The dollar rose ½%. While it remained below the lower end of its
mid-November to present consolidation range, it finished back above its 100 DMA
voiding Wednesday’s break. In addition,
it is above its 200 DMA and in a short-term uptrend.
GLD fell ½%, but
still ended above both MA’s, within a very short-term uptrend and within a
short-term trading range. It remains a
healthy chart.
Bottom line: yesterday’s pin action
was the mirror image of Wednesday (which gave a muted response to positive news
on both the US/China trade talks and Fed policy), gaining on a day in which
Powell said that the Fed would continue to unwind its balance sheet. Color me confused. So, I retreat to ignoring the news flow and just
watch the technicals. Now, on the upside
that is the upper boundary of the S&P short term downtrend (~2626) and on
the downside, the December 26th low (2349) or, at least, the last
higher low (2446).
TLT, UUP and GLD all acted like the Fed is
going to tighten into a strong economy--- with which I take issue.
Thursday in the
charts.
Fundamental
Headlines
Another
slow day for economic data: weekly jobless claims fell more than expected.
The
big headline of the day was another Powell speaking engagement at which he (1) reiterated
the new ‘patient’, ‘flexible’ attributes of the revised Fed policy, (2) opined
that he saw no weakness in the economy, (3) but he also said that the Fed’s
balance sheet needs to continue to shrink. If that sounds somewhat out of touch
and contradictory to you, join the crowd.
Forget what real
Fed policy, probably the major takeaway for me is that Powell is still learning
how to communicate and, so far, is making a mess of it. That said, the Market appeared to interpret Powell’s
comments as dovish, apparently focusing on ‘flexible’ versus ‘the balance sheet
will continue to shrink’. You know my
thoughts---whether the Fed raises rates or not is almost irrelevant; shrinking
the balance sheet is critical. If the
Fed is proceeding with this process, liquidity problems will continue and that
spells trouble with a capital ‘T’ right here in River City. Here is a summary of his comments.
To
make the confusion all the worse, Powell’s statement was followed by these
stunning remarks from Chicago Fed head Evans.
Speaking of liquidity
problems.
Are we now at
Quantitative Failure?
Bottom line: under the Bernanke/Yellen regimes I constantly
railed about their statements and policies being totally out of touch with reality. Instead of a robust economy, they gave us an
anemic one and extraordinary distortions in the pricing of risk and assets (e.g.
negative interest rates). Markets got used to free money and the deference
shown to them by the Fed.
Now
comes Powell and he says that he sees no signs of weakness in the economy. He apparently missed the Apple, Macy’s and American
Airlines lower forward guidance as well as the layoffs being announced by GM,
Ford, Blackrock and others; and that lack of perception is being echoed by
other FOMC members. In addition, Powell
seems unable or unwilling to provide consistency in his monetary policy statements. Cutting him some slack: he is new in the job,
it is a very difficult one and mistakes are inevitable. But switching from ‘the Fed balance sheet
unwind is on autopilot’ to ‘the Fed is flexible and listening the Markets’ to ‘the
balance sheet is going to continue the shrink’ in less than sixty days is a bit
much.
I
continue to believe that QE II, III and Operation Twist did little to help the
economy and that slowing their unwind will do little to hurt it. The negative impact of shrinking the balance
sheet falls primary on the Markets---to which the Fed has absolutely no responsibility,
except to insure that they are properly pricing the cost of capital which they
almost certainly are not.
In
all this confusion, I only hope that the Fed ‘call’ is the real policy. If so, then at best, there is a lid on
valuations. If not, then Powell will
blow his own bubble at a time of monstrous government and corporate debt. I don’t
believe that will end well.
Government
shutdown impacts some home buyers.
How
it is likely to end.
The
total return roller coaster.
News on Stocks in Our Portfolios
Economics
This Week’s Data
US
December CPI
fell 0.1%, in line; ex food and energy, it was +0.2%, also in line.
International
Other
Average
hourly pay and benefits in the US.
Mortgage
serious delinquency rate dropped in November.
A
slowdown in the Chinese economy is the biggest threat to global growth.
Update
on Brexit.
***overnight,
French
yellow vests urge people to withdraw money from banks to spark a bank run.
What
I am reading today
When Markets are tough,
stop looking.
The demographic path of
human self extinction.
Investment
thoughts from Morgan Housel.
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for Survival’s website (http://investingforsurvival.com/home)
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