Wednesday, February 20, 2019

The Morning Call--Stocks getting very overbought

The Morning Call


The Market

The Averages (DJIA 25891, S&P 2779) followed through slightly on Friday’s big up move.  The Dow ended above its 100 DMA (now support), above its 200 DMA (now support) and in a very short term uptrend.  The S&P remained in a very short term uptrend, above its 100 DMA (now support), above its 200 DMA (now resistance) for second day (if it remains there through the close on Thursday, it will revert to support).   Both remain below their previous lower highs (~25977, 2800).

Volume fell and breadth improved, and, in fact, is now in overbought territory--- though the flow of funds indicator is weakening.

The VIX fell three cents, but still ended below the lower boundary of its short term uptrend (if it remains there through the close today, it will reset to a trading range).  And it remains below both MA’s (now resistance).

The long bond was up ¼%, finishing above both MA’s, in very short term uptrend and within short and intermediate-term trading ranges. 

The dollar declined on heavy volume but closed above both MA’s and within a short-term uptrend.  However, it continued to fall away from the upper boundary of its mid-November to present consolidation phase---though still not enough to concern me. 

GLD rose 1½% on huge volume, ending above both MA’s (the 100 DMA is crossing above its 200 DMA---a positive technical signal) and within very short-term and short-term uptrends.  

 Bottom line: the Averages are about to challenge their prior lower highs.  If successful, it would set the stage for a move to their all-time highs.  Though given their very overbought condition, some retreat makes sense in the short term.  However, I don’t think that any consolidation lowers the odds of a test of those prior lower highs.

          The dollar, bonds and gold seem to be attracting ‘safety trade’ investors even though their daily activity is not always consistent.

                Tuesday in the charts.

            Why bear markets are getting shorter.



One minor datapoint released yesterday: the February housing market index was ahead of estimates.

There was also one piece of anecdotal evidence---Walmart reported a strong fourth quarter.  This along with Amazon’s Q4 results is lending credibility to the notion that the lousy December retail sales number reported last week was negatively impacted by seasonal and technical factors and, hence, was not nearly as poor as it appeared.

In other news:

(1)   Trump appears to be backing off the March 1 deadline for imposing additional tariffs on China.

      But issues remain other than Chinese industrial policy and IP theft,

(2)   a second Fed governor advocated easier monetary policy.

And as I reported yesterday, the Bank of Japan is now considering easing its already expansive monetary policy.

Bottom line: if history is any guide, as long as the global central banks are returning to monetary ease, stocks are likely to continue to advance whatever the news flow.  The only potential problems are (1) if inflation returns forcing tighter monetary policy, (2) if a recession starts, leaving central banks with few policy tools to reverse declining economic activity or (3) if valuations get so stretched that even the algos realize that there are no greater fools left.

The Fed’s conundrum.

Yes, if the US/Chinese trade talks end without a positive result, I am sure the Markets will sell off; but in the absence of the aforementioned problems, I think it will be short term in nature.

In the meantime, if any stock that trades into its Sell Half Range, I will act accordingly.

Stocks have best reaction to poor earnings in nine years.

    News on Stocks in Our Portfolios


   This Week’s Data


            The February housing market index was reported at 62 versus estimates of 49.

                        Weekly mortgage applications rose 3.6% while purchase applications were up 1.7%.


            The January Japanese trade deficit was Y1.4 Billion versus forecasts of Y.987 billion largely as a result of plunging exports.


            The problem is political, not economic.

            This article is supportive of modern monetary theory.  The only problem is that while arguing that high levels of debt don’t inhibit economic growth, it doesn’t provide an alternate explanation of why economic growth has been inhibited.  In my opinion, the explanation is that the funds raised by the debt are invested in marginally profitable projects (the misallocation of assets) which result in below average growth in sales and profits.

                Counterpoint from Ed Yardini.

            The global slowdown continues.

What I am reading today

            Tax luxury not income or wealth.

            Investing a lump sum---immediately or over time?

            Be an investment skeptic.

            Barry Ritholtz on Amazon’s decision to bail on its proposed NY headquarters.

            Calculating the total cost of ETF ownership.

            The importance of Copernicus.

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