The Averages (27171, 2985) were up yesterday but continue in a consolidation phase after pushing through their all-time highs. Both are above their MA’s and in uptrends across all time frames. So, the trend is quite strong; though on a very short term basis, a recent gap up open still needs to be closed. Volume was down, remaining anemic; breadth was again mixed. My assumption is that the indices will challenge the upper boundary of their long term uptrends (29947, 3191), though the aforementioned conditions remain a potential early warning of a reversal.
The VIX fell 6 3/8 %, dropping back below the upper boundary of its very short term downtrend, voiding Friday’s break. That puts it closer to its historic lows---which should provide pretty stiff resistance. That said, it finished below both MA’s and in a very short term downtrend. So, impetus is lower.
The long bond was up 1/8%, ending above both MA’s and a minor support level, in a very short term uptrend (that earlier gap down open has been filled) and six cents below a twenty year high. With the Fed trying to out-dove itself and economic growth slipping, the pin action makes sense.
The dollar rose 1/8%, closing above both MA’s, in a short term uptrend and roughly fifteen cents from a twenty year high---not what I would expect with Trump crying for a lower dollar and the Fed seemingly accommodating him with a more aggressive expansion of monetary policy.
GLD was down two cents; but the trend remains strong. It is above both MA’s, in short and very short term uptrends, three dollars above a five year high but fifty dollars below its all-time high. Still, it has that one gap up open that needs to be filled.
Bottom line: the Averages continue to quietly work off an overbought condition but on weak volume, deterorating breadth and the need to fill gap up opens from three weeks ago. Given the strength of their pin action, my assumption remains that the Averages are on their way to challenging the upper boundaries of their long term uptrends.
The long bond and gold are pointing to lower rates/weaker economy; the dollar just the opposite in spite of Trump’s rhetoric and the Fed’s increasingly dovish narrative. One way to resolve this inconsistency is to view them all as safety trades.
Monday in the charts.
One datapoint was released yesterday: the Chicago Fed national activity index was negative but not as much as forecast. Nothing overseas.
Speculation on the outcome of the FOMC meeting next week is taking a lot of airtime and print space---the debate being whether there will be a 25 or 50 basis point rate cut and what either would say about the Fed’s opinion on the economy. As you know, I think this debate akin to arguing about the number of angels that can dance on the head of pin. In my opinion, the Fed was way too late raising rates which makes it way too late to lower them. In short, whatever the magnitude of the cut, it will have little impact on the economy. But, as long as the Fed/Market co-dependency exists, the Markets will continue to levitate.
The Fed’s asymmetric bubble blowing policy.
The Fed, the Phillips Curve and asset price inflation.
The debt ceiling and QE/QT.
Issue number two, which appears to have been put to rest, is an agreement on the debt ceiling. Of course, it provides for additional spending (and, hence, a bigger deficit)---which, as I repeatedly point out, is exactly the opposite of what sound fiscal policy would entail, i.e. running surpluses or at least balancing the budget when the economy is at or near full capacity.
Three, tensions in the Middle East continue to escalate as the UK works to build a coalition to provide safe conduct for tankers going through the Straits of Hormuz
And Trump imposes sanctions on a Chinese firm for importing Iranian crude.
Finally, progress seems to be occurring on the US/China trade front. It was reported that talks will soon resume. In addition, the Pres met with tech leaders to hammer out a reasonable approach to the Huawei dilemma.
Bottom line: whatever one might think of the longer term implications of the terms of the (fiscally irresponsible) debt ceiling agreement, it removes a potential near term negative (a government shutdown).
The resumption of face to face US/China trade talks is a positive; though the question is, will Trump remain steadfast in his insistence that China cease pirating US technology or will he fold?
Whatever the magnitude of the Fed rate cut, it will likely be a plus for the Market---at least until investors come to realize that higher prices don’t mean a higher discounted value of future cash flows.
The potential for an escalation of violence in the Middle East remains a wild card.
The latter notwithstanding, the above seems a prescription for higher stock prices.
News on Stocks in Our Portfolios
Becton, Dickinson (NYSE:BDX) declares $0.77/share quarterly dividend, in line with previous.
Kimberly-Clark (NYSE:KMB): Q2 Non-GAAP EPS of $1.67 beats by $0.05; GAAP EPS of $1.40 misses by $0.02.
Sherwin Williams (NYSE:SHW): Q2 Non-GAAP EPS of $6.57 beats by $0.21; GAAP EPS of $5.03 misses by $0.30.
Coca-Cola (NYSE:KO): Q2 Non-GAAP EPS of $0.63 beats by $0.02; GAAP EPS of $0.61 misses by $0.01.
This Week’s Data
July UK industrial orders index was -34 versus estimates of -15; the business optimism index was -32 versus -14.
Elizabeth Warren’s plan for the financial industry. It has some merits.
What I am reading today
Who is afraid of cryptocurrencies?
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