Thursday, May 23, 2019

The Morning Call---Will investors ever stop discounting a quick end to the trade war?


The Morning Call

5/23/19

The Market
         
    Technical

Lately, the Averages (25776, 2856) have been hopping around like Bugs Bunny on crack.  Yesterday, they were down on weak volume and mixed breadth.  However, their charts are strong as (1) both remain above their DMA’s, (2) both negated their very short term downtrends, (3) the S&P again ended above the April 1st gap up open and (4) the S&P’s 100 DMA is crossing above its 200 DMA---a technical plus.

Yesterday’s retreat set Tuesday’s high as a lower high.  It calls into question (but doesn’t negate) the assumption that the indices will challenge their all-time highs.  If the indices follow through to the downside and make a lower low, then it would negate that assumption and raise the odds that a double top has been made---a technical minus.

The VIX was down 1 ¼ %, unusual on a down Market day which is a positive for coming equity pin action.  It is below both MA’s but in a solid very short term uptrend.  However, yesterday’s pin action and well as the resistance posed by both MA are a stronger plus for the Market than the support offer by the very short term uptrend.

The long bond was up ½ %, finishing above both MA’s, in a very short term uptrend and at a new two year high. 

             The dollar was up, again ending above a three year high and is now 12 cents from a ten year high.  So, the chart remains quite positive though (1) that ten year high should offer strong resistance and (2) UUP has two unfilled gap up opens below current price levels.
           
            GLD dropped slightly.  Its chart remains broken---its 100 DMA is resistance; plus, it still hasn’t fulfilled the downside objective set by that recent head and shoulders formation.
                       
Bottom line: yesterday’s decline sets the Average up to reestablish a very short term downtrend and to raise the prospect of a double top.  Further downside that would create a lower low would increase the likelihood of that being case.  That said, yesterday’s VIX performance indicates a lack of concern among investors, meaning potentially higher equity prices.  So, I think the technical picture very much in flux.

UUP and GLD were back pointing to a stronger economy/higher rates while TLT suggested otherwise.

Wednesday in the charts.


    Fundamental

       Headlines

            Only single datapoint yesterday: while weekly mortgage applications rose, the more important purchase applications declined.

            Overseas, April UK PPI, CPI and public sector borrowing were below expectations.  The April Japanese trade balance declined significantly; on the other hand, March machinery orders were very strong.
              
            For a change, trade didn’t dominate the headlines.  Yesterday, it was the release of
the minutes of the last FOMC meeting.  As always parsing the language requires a Rosetta stone; but here are my interpretation of the high points: (1) while inflation is below target at present, the Fed expects it to rise in the next two to three quarters,  (2) in that period, it will remain ‘patient’ even if inflation rises above target---in other words, no rate hikes for the next six to nine months, (3) however, if inflation doesn’t rise in that time period, the Fed will review the need for a possible rate cut.

            Counterpoint from BofA.

                Nonetheless, there was more threats from China:
                        
            China preparing for ‘a people’s war’.
           
            Offers five year tax break for tech companies.

                        ***overnight, Toshiba joins Huawei blockade.

                Along with others.
                                                                        

                        And this bit of good news.  In a meeting with Pelosi and Schumer, Trump said either stop the investigations or no infrastructure spending.  Guess which one the dems will choose?  I have been clear about my thoughts on infrastructure spending---they can be a plus when the fiscal budget is not stretched.  Not so much when the US is running a record deficit at a time of a record national debt level.  I will take fiscal responsibility anyway I can get it.

                        Bottom line: the questions are (1)  if or when will investors start to discount no trade deal for an extended period of time,  (2) if they do, how long will it take Trump and/or the Fed to react?
                
the most apparent factor in equity pricing is the Market’s belief that both Trump and the Fed will allow it to dictate their policies. 

                 I will continue to take advantage of current lofty valuations to Sell Half of any stock in our Portfolios that trades into its Sell Half Range.

    News on Stocks in Our Portfolios
 
           

Economics

   This Week’s Data

      US

            Weekly jobless claims rose 1,000 versus expectations of up 4,000.

     International

            The Japanese flash manufacturing PMI was 49.6 (below 50 means contraction) versus estimates of 50.5.

            Q1 German GDP grew 0.4%, in line.

            The May EU flash manufacturing PMI came in at 47.7 versus forecasts of 48.1; the services PMI was 52.5 versus 53.0; the composite PMI was 51.6 versus 51.7.

    Other

            Government spending and economic growth.

            Slight uptick in architectural billings in April.

            We won’t know how much risk the shadow banks pose until after the next financial crisis.

            Latest on Brexit.

What I am reading today

            America’s soft power.

            Financial pornography.

            Survivorship bias in the art world.

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