Wednesday, August 7, 2019

The Morning Call--The Fed is still the key

The Morning Call


The Market

The Averages (26029, 2881) bounced yesterday on weaker volume but better breadth.  The S&P finished below the lower boundary of its very short term uptrend  (though just barely), voiding that trend; however, the Dow ended back above its comparable boundary, negating Monday’s break.  Both remained below their 100 DMA’s for a second day; if they remain there through the close today, they will revert to resistance.   In short, the aforementioned support levels are still in the process of being challenged.  Today should provide clarity.  Both (1) ended above their 200 DMA and (2)  had gap down opens on Monday which need to be filled. 

The VIX was down 18 %.  It remained above its 100 DMA (now support) and above its 200 DMA for a fourth day, reverting to support.  Let’s see if these challenges are a harbinger of similar behavior of stocks.

The long bond advanced another ¾%.  It is above both MA’s and in uptrends across all timeframes.  However, it experienced a gap up open on Monday which needs to be closed.

The dollar was up 1/8% but remains in short and long term uptrends and above both MA’s.  Like stocks, it had a gap down open which needs to be filled.  However, it did close below the upper boundary of its former long term trading range for a second day.  The odds are rising that Friday’s breakout could prove false.  Follow through.

Gold jumped 7/8%, ending within very short term and short term uptrends and above both MA’s.  It also experienced a gap up open which needs to be closed.

Bottom line: even though the Averages are in uptrends across all timeframes and have those gap up opens that need to be closed, I am not sure that the worst is over.  Typically, the end of a down leg in stock prices would be marked by hard selloff at the opening followed by a rally.  Just the opposite occurred.  Plus, the long bond, dollar and gold are still acting as safety trades.  That said, stocks could experience another leg down and still remain above their 200 DMA and well out of range of the lower boundaries of their short term uptrends. So, it will take a lot more downside before the Averages longer term upward momentum will be in question.

            Tuesday in the charts.



            Yesterday’s stats were upbeat: month to date retail chain store sales as well as June job openings were mildly positive.

            Overseas, it was a bit of a mixed picture: June Japanese household spending and leading economic indicators were below expectations while cash earnings were up above; and the June German construction PMI was lower than anticipated while factory orders were higher.

            The US/China trade skirmish remained center stage. The only additional development being the overnight fix of the yuan was back within its historically normal range which is a mild plus.  Still, I don’t think that there will be a resolution to this situation before November 2020 unless the Donald folds.  As you know, I don’t believe that the Chinese are going to even think about negotiating until after that date and may not ever. 

            Who suffers the most in the US/China standoff?
            US/China direct investments plunge.

            ***overnight, the Bank of China moved the yuan exchange down slightly.  Plus, the central banks of New Zealand, India and Thailand lowered their official interest rates on fears of global recession.

Bottom line: I continue to believe that the US economy will grow.  But there is an increasing risk that the trade war will lessen that rate of growth.  And history tells me that Fed policy, however dovish, will do little to prevent or correct that problem.

However, I also believe that the Fed policy is the single most important factor in Market valuation and will remain so until investors lose faith in that institution.  My assumption remains that the Fed will ease monetary policy if the Market declines in any meaningful way and that will be a positive for equity prices.  The only question is Powell’s definition of ‘any meaningful way’.

            The latest from Ed Yardeni.

    News on Stocks in Our Portfolios
Emerson Electric (NYSE:EMR) declares $0.49/share quarterly dividend in line with previous.     

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


   This Week’s Data


            Month to date retail chain store sales grew faster than in the prior week.

            The June job opens (JOLTS) report showed 7.34 million openings versus estimates of 7.31 million.

Weekly mortgage applications rose 5.3% but purchase application fell 2.0%.


            June German industrial production fell1.5% versus expectations of -0.4%.


            Railroad freight traffic is declining.

            Bernie Sanders demonstrates the impact of a minimum wage.

            Eight reasons Brexit will hurt the EU more than the UK.

What I am reading today

            The decision to bomb Hiroshima.
            What a criminology professor learned in a study of mass shootings.

What is driving the migrant surge?

            How to overcome the fear of failure.

            Stocks and inflation.

            Three factors driving the price of bitcoin.

            Rethinking your retirement saving math.

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