Tuesday, July 16, 2019

The Morning Call--How overvalued is it?


The Morning Call

7/16/19

I am leaving town on family business.  I am not sure when I will return.

The Market
         
    Technical

The Averages (27359, 3014) rose modestly yesterday. Both are above their MA’s and in uptrends across all time frames.  Still volume was down, remaining anemic; breadth was again mixed.  In addition, the recent gap up opens still need to be closed.  My assumption is that they 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 was up 2 3/8 %, despite it being a price up day.  That said, it finished below both MA’s and in a very short term downtrend.   So, impetus is lower.  Nonetheless, it is close to its historic lows---which should provide pretty stiff resistance.

The long bond advanced another ½ %, holding above an obvious minor support level.  Given its big runup since late May, the consolidation so far has been well within the bounds of ‘normal’.  Nonetheless, it is above both MA’s, in a very short term uptrend and has a gap down open which needs to be filled.  The big question remains how TLT will act longer term in response to the Powell’s recent surprisingly dovish tilt---so far, it is not buying the improving economy/higher inflation/rising long bond scenario.

            And.

            The dollar rose 1/8%, ending above both MA’s and in a short term uptrend---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 unchanged, leaving it above both MA’s and in a short term uptrend.  However, it finished below the lower boundary of its very short term uptrend by virtue of the boundary’s steep rate of ascent and GLD’s flat performance.  Still, it has made one gap up and one gap down opens and those need to be dealt with. 

Bottom line:  despite being overbought (and getting more so) on weak volume, deterorating breadth indicators and the need to fill the recent gap up opens, my assumption remains that the Averages are on their way to challenging the upper boundaries of their long term uptrends.

The other indicators appear to have shaken off the initial shock of the Fed’s push to QEIV and seem to be returning to the econoimc slowdown/safety trade investor mindset.  However, I would like to see another week of trading before drawing any conclusion about whether the Fed’s action has altered their investors’ outlook.

            Monday in the charts.

    Fundamental

       Headlines

            Only one stat reported yesterday: the July NY Fed manufacturing index was stronger than anticipated.  Overseas, there was a host of datapoints out of China most of it good: YoY Chinese GDP was in line; industrial production, retail sales and fixed asset investment were better than expected.

            Few other headlines, though there were a number of articles addressing Market valuations:

            How overvalued is the market?

            Investors all in on stocks.

            The post retirement society.

            The latest from Jim Rogers.

Bottom line: we are moving into earnings season with expectations somewhat cautious.  But as overbought as this Market is, it has been resistant to any kind of decline however the fundamentals are unfolding.  My thesis is that this is explained by the Fed/Market codependency which is likely to continue until investors come to realize that higher prices don’t mean a higher discounted value of future cash flows.

    News on Stocks in Our Portfolios
 
Johnson & Johnson (NYSE:JNJ): Q2 Non-GAAP EPS of $2.58 beats by $0.14; GAAP EPS of $2.08 beats by $0.04.
Revenue of $20.56B (-1.3% Y/Y) beats by $170M.


            Johnson & Johnson (NYSE:JNJ) declares $0.95/share quarterly dividend, in line with previous.

Economics

   This Week’s Data

      US

            June retail sales soared +0.4% versus expectations of +0.1%; ex autos, they were up 0.4% versus +0.1%.

            June import prices  fell 0.9% versus estimates of -0.7%; export prices were -0.7% versus -0.2%.

     International

            May UK unemployment was 3.8%, in line.

            The May EU trade surplus was E23 billion versus forecasts of  E16.3 billion; July economic sentiment was -20.3 versus -20.9.

July German economic sentiment was -24.5 versus projections of -22.3.

    Other

The growth of the spending class ends in 2020.

            Global debt hits $246 trillion.

What I am reading today

            How to have a good flight.

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