Thursday, June 27, 2019

The Morning Call---China ups the ante


The Morning Call

6/27/19

The Market
         
    Technical

The Averages (26536, 2914) drifted ever so slightly lower yesterday, continuing to work off their overbought condition without any kind of major correction---at least, so far.  They remained below their all-time highs, but, as you know, I have suspended a directional call on the short term trend.  They are above both moving averages and in intermediate and long term uptrends. 

At the moment, I am waiting for the indices to fill last Tuesday’s gap up opens and then, see how they trade following that.  My current assumption is that the momentum is to the upside, that those gaps will be filled and the upward trajectory will be resumed. However, I am bothered by the lack of volume (which was flat yesterday) and the failure of other major indices to make new highs. 

 VIX fell ½%, but still ended above its 100 DMA.   Intraday, it again touched the upper boundary of its very short term downtrend and backed off slightly.

TLT declined 5/8 % on volume, closing above both MA’s (now support), in a very short term uptrend and remains near its twenty year high.  As I noted previously, that high represents major resistance; so, I expect more backing and filling before another attempt is made to break above it---if indeed there is such an attempt.

The dollar was up two cents.  It finished below its 100 DMA (now resistance) but in a short term uptrend, above its 200 DMA (now support) and still needs to close Thursday’s gap down open. 

GLD declined 1% but ended above the upper boundary of its intermediate term trading range for a third day (if it remains there through the close today, it will reset to an uptrend), in a short term uptrend and above both MA’s (now support).  However, there is a major gap up open lower down---which needs to be filled.

Bottom line:  the Averages continued to consolidate after the big run since the first of June.  They got very overbought, so that pin action isn’t surprising.  In fact, it is a plus that the recent backing and filling has been so tame.  Still more is needed to close those gap up opens lower down.  Nonetheless, I continue to believe that momentum remains to the upside; though clearly, that call is less certain now.  

It is remains disconcerting that volume is low (versus high volume in bonds, the dollar and gold which are pointing to recession/or the need for a safety trade), breadth is weakening, other indices have failed to confirm Monday’s breakout of the Dow/S&P and the VIX  has been acting unconventionally for the last couple of weeks.

            Wednesday in the charts.

    Fundamental

       Headlines

            Yesterday’s stats were mixed: weekly mortgage applications were up but purchase applications were down, May durable goods orders were disappointing but ex transportation, they were good, May wholesale inventories were up less than expected but sales were up even less.  The only definitive number was the May trade deficit which was larger than anticipated.

            Overseas, June German consumer confidence was slightly below estimates.

            There were multiple news stories on the three major situations impacting the Market yesterday.  None of them particularly significant.

(1)   the most absurd one was the quote from Mnuchin that the US/China trade deal ‘was’ 90% done [we already knew that] which was initially reported as ‘is’ done.

                 China exposed in multiyear hacking of US technology companies.

                 ***overnight, China sets pre-conditions on resuming talks.  Not to play the cynic; but could this the ‘face saving’ move needed to return to the original agreement, i.e. Trump meets their demands because they have already secretly agreed to the move forward with a deal as it had already been negotiated?  That said, on the surface, this looks like an escalation of the trade dispute and fits my thinking that the Chinese have no incentive to do a deal.

(2)   maximum pressure on Iran could backfire.

            (3 )  the Fed: John Hussman addresses the Market/Fed co-dependency.

                   The Fed’s hypocrite-ic oath.

                   Libor rates now inverted---and that is not a harbinger of good things to come.

               Bottom line:  the economic data is not improving.  The question is will it show up in second quarter earnings---which are about to begin being reported (first quarter profits were less bad than forecast.  See below).

               We will know more about the US/Chinese trade dispute by this coming weekend.  Indeed, we may know more about it today as we await Trump’s response to new Chinese terms.  As you know, I see no incentive for the Chinese to comply with US demands for reforms in their industrial/IP theft policies until the pain is excruciating and maybe not even then---which means in the short term, Trump either folds or there is no deal.
                       
               Of course, the stock market/Fed co-dependency is the major factor in equity prices.  Until that paradigm changes, the trend in stock prices will likely remain to the upside.  If you didn’t read the above article by John Hussman, he addresses how that link could be broken.

            Is value investing about to make a comeback?

    News on Stocks in Our Portfolios
 
Paychex (NASDAQ:PAYX): Q4 Non-GAAP EPS of $0.63 misses by $0.01; GAAP EPS of $0.64 misses by $0.01.
Revenue of $980.4M (+15.9% Y/Y) beats by $1.46M.

Accenture (NYSE:ACN): Q3 GAAP EPS of $1.93 beats by $0.04.
Revenue of $11.1B (+3.8% Y/Y) beats by $70M.

Economics

   This Week’s Data

      US

            The final Q1 GDP growth rate was 3.1%, in line;  corporate profits were -3.1% versus -3.5%; PCE prices up 0.5% versus 0.4%; core PCE prices up 1.2% versus 1.0%.

     International

            June Japanese retail sales were up 0.3% versus expectations of -0.6%.

            YoY Chinese industrial profits fell 2.3% versus estimates of -3.8%.

            June EU business confidence was .17 versus forecasts of .23; consumer confidence was -7.2, in line; economic sentiment was 103.3 versus 104.6; industrial sentiment was -5.6 versus -3.1.

    Other

            Chemical activity barometer flat in June.

            Thoughts on a wealth tax.

            The snowflake economy.

            The latest on Brexit.

What I am reading today

            Quote of the day.

            Falling CO2 in the US.

            Another regulatory winner from San Francisco.

            The unsatisfying certitude of uncertainty.
            https://yourbrainonstocks.com/the-unsatisfying-certitude-of-uncertainty/
           

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