Wednesday, May 15, 2019

The Morning Call--The power of the tweet seems to be diminishing


The Morning Call

5/15/19

The Market
         
    Technical

The Averages (25532, 2834) recovered some of Monday’s losses but on lower volume and mixed breadth (neither of which is a plus).  In addition, both rose to (1) touch the upper boundaries of their very short term downtrends and (2) trade above the levels created by their April 1st gap up opens and then fell back below both.  On a positive note, the Dow ended above both DMA’s, negating Monday’s break.

The VIX fell 11 ½ %, but remained above both its 100 DMA (I am reinstating it as  support and its 200 DMA for a second day (if it remains there through the close on Thursday, it will revert to support).  It is still in a solid very short term uptrend.

The long bond was off ¼ %, but still finished above both MA’s, in a very short term uptrend and has made a higher high bouncing off the lower boundary of that uptrend. 

             The dollar rose ¼ %, showing a little life after a week of near comatose pin action.  Its chart remains quite positive.  Unfortunately, it made a new gap up open to go with the April 15th gap up open below that still needs to be filled.
           
            GLD was down slightly, remaining above the upper boundary of its very short term downtrend for a second day, negating that trend and its 100 DMA for a second day (if it remains there through the close today, it will revert to support).  If it holds that level, then the chart would flip from broken to positive.  Unfortunately, GLD had a gap up open which needs to be filled.  If that occurs anytime soon, then yesterday’s upbeat pin action will be for naught.
                       
Bottom line: the indices were up yesterday but on lower volume and weak breadth.  In addition, they failed a challenge of the upper boundaries of their very short term downtrends for a second time and couldn’t close above the April 1st gap up opens. So, they have unsuccessfully tested resistance a second time.  Now will they challenge support (100 and 200 DMA’s)?

The pin action in the dollar continues to point at a stronger economy/higher rates; and yesterday the long bond and gold followed suit.  However, their recent pin action indicate that they may be acting as safety trades.

            Tuesday in the charts.

    Fundamental

       Headlines

            Yesterday’s stats were weighed to the positive: month to date retail chain store sales were unchanged from the prior week, the April small business optimism index was better than expected while both import and export prices in April were below estimates (good news for consumers and Trump, more confusion for the Fed).

            Overseas, one datapoint: March EU industrial production declined but in line with forecasts.

            Trade remains front and center in the headlines.  The day began with Trump characterizing the US/China dispute as a ‘squabble’ and that negotiations will be successful.

            But you wouldn’t believe it judging by the latest out of China.

            ***overnight.

            Unfortunately, not only can’t we believe anything the politicians say but also there is little consensus on why there is a trade war in the first place and what impact it will have on each country’s and the global economies:

            Here is article from a guy that I really respect (but who I disagree with on this issue) bemoaning the adverse consequences of a trade war without addressing why there is one (Chinese industrial and IP theft policies) or offering a better solution than tariffs.

            China has more to lose in a trade was than the US.
      
            But US farmers are definitely being impacted negatively.

            This is a must read article on the Fed’s misplaced inflation objective.

Bottom line:  certainly, the outcome of the US/China trade negotiations will impact both economies with ancillary effect on global growth and US corporate profits.  The problem, as I have pointed out, is that there is no agreement about the worthiness of Trump’s stated objectives; there is not even agreement about how serious he is about attaining those objectives; there is no agreement about the economic impact of no agreement; and yet, investors hang on every headline. 

That suggests caution to me. In support of that I repeat three questions and four statements:

(1) what is Trump going to do if the power of the tweet is gone-- [in my opinion, yesterday’s pin action seemed a marginal response to Trump’s family ‘squabble’ and ‘negotiations will be successful’ comments], (2) how far down Trump will let the Market fall before he caves?  (3) how far down the Fed will let the Market fall before it lowers rates?

(1) we can’t believe a thing that gets said by either party for public consumption, (2) no deal is better for long term US secular economic growth than a crumby deal, but (3) short term, a crumby deal will  be better for the economy than no deal, (4) in any case, now that tariffs are going up, economic and corporate profit expectations will likely start to be reduced with the concomitant impact on equity valuations and (5) hoping for a deal, won’t make so.

            The latest from Jeff Gundlach.

    News on Stocks in Our Portfolios
 
3M (NYSE:MMM) declares $1.44/share quarterly dividend, in line with previous.

Cummins (NYSE:CMI) declares $1.14/share quarterly dividend, in line with previous.

Economics

   This Week’s Data

      US

            Weekly mortgage and purchase applications fell 0.6%.

            April retail sales declined 0.2% versus expectations of +0.2%; ex autos, they were up 0.1% versus estimates of up 0.7%.

            The May NY Fed manufacturing report came in at 17.8 versus forecasts of 8.5.

     International

            April Chinese fixed asset investments grew 6.1% versus consensus of 6.4%; industrial production was up 5.4% versus 6.5% and retail sales were +7.2% versus 8.6%.

            Q1 German GDP advanced 0.4%, in line.

            April Japanese machine tool orders fell 33.4%, after a 28.5% decline in March.

            Q1 EU (second estimate) GDP was up 0.4%, in line; employment rose 0.3%, also in line.

    Other

            US GDP expected to slow in second quarter---of course, that was what was anticipated in the first quarter.

                Total household debt now $1 trillion above prior peak.

                Latest on Brexit.

What I am reading today

            Deal with it.

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