Thursday, October 31, 2019

The Morning Call--It is not the rate cut; it is NotQE

The Morning Call


The Market

The Averages (27186, 3046) had a good day; the most notable point being that the Dow reset to a very short term uptrend.  However, it remains below its all-time high.  Volume and breadth improved.  The VIX fell 6 ½ %, nearing its 7/25 low (= S&P 7/25 high).

Update on margin debt.

The indices ended solidly above both MA’s and in uptrends across all timeframes.    My assumption remains that momentum is to the upside and yesterday’s pin action supports that view.  But there remain some negatives:  (1) the Dow is now out of sync with the S&P, (2) October 11th gap up opens need to be closed and (3) the S&P created a second gap that needs to be filled.

TLT popped 1 ½ %, ending back above its 100 DMA negating Monday’s break.  It also finished above its 200 DMA and  in uptrends across all time frames.  At  least for the moment, the threat to the loss of momentum has been stopped.  Clearly, follow through is important.  The dollar was down ¼%, finishing right on the lower boundary of its short term uptrend.  Gold rose ½ %, ending back above the upper boundary of that pennant formation. Given the back and forth at the tip of the pennant formation suggests that usual performance following the violation of the tip of the formation is not working in this case.

            Bottom line: yesterday’s pin action across indicators points to an easy Fed---like that has ever been in question.

            Wednesday in the charts.



            Yesterday’s data was almost entirely upbeat: weekly mortgage and purchase applications were up and the October ADP private payroll report, the advance Q3 GDP growth, the  price indicator and the PCE price index were above expectations while the core PCE was slightly disappointing.

Overseas, September Japanese retail sales were well above consensus (though at least part of that was due to consumer buying in advance of a sales tax hike) while September German unemployment was in line.  On the other hand, October EU consumer confidence, economic sentiment, industrial sentiment and services sentiment were below estimates while business confidence was slightly better.
The main headline(s) of the day was the Fed rate cut, the accompanying FOMC statement and Powell press conference.  Once again our monetary gurus managed to give their best imitation of a Bugs Bunny cartoon, hopping in one direction and then the other.  First of all, the Fed cut the Fed Funds rate 25 basis points; hardly a surprise.  But the statement had a hawkish tone to it (the full redlined statement is below along with some analysis) because, you know, the economy is so good (do these guys read some newspaper that I don’t know about?). 

Then, in Powell’s press conference, he provided a more dovish narrative, implying that there would be no rate increases in the foreseeable future.

Not so ‘super Mario’ Draghi.

            ***overnight, Chinese trade officials doubt that Phase One will get done.

            Bottom line: once again the Fed delivered just what the Market wanted.  Although the key to Market buoyancy is not a quarter point cut.  At current low levels, it is irrelevant.  Further a raise in rates would be just as irrelevant.  The important policy is Not QE.  That has been the overriding force for Market direction for the last decade; and it appears to remain the case.  Helped by better than expected earnings season, the calendar lift provided by the Holiday Season, Brexit now off stage and an improving technical picture, it looks a year-end rally is in the cards.  Sit back and enjoy it. 

    News on Stocks in Our Portfolios


   This Week’s Data


            Weekly jobless claims rose 5,000 versus projections of up 2,000.

            September personal income rose 0.3%, in line; personal spending was up 0.2%, also in line; the core PCE was 0.0% versus an anticipated reading of +0.1%.


            October German inflation rate rose 0.1% versus consensus of 0.0%; retail sales were up 0.1% versus up 0.2%.

            September Japanese industrial production came in at +1.4% versus estimates of +0.4%; October consumer confidence was 36.2 versus 35.5; housing starts were -4.9% versus -6.7%

            October UK consumer confidence was -14 versus forecasts of -13.

            The September Chinese manufacturing PMI was 49.3 versus expectations of 49.8; the nonmanufacturing PMI was 52.8 versus 53.9; its trade balance was -$2.06 billion versus 1$1.2 billion.

            The Q3 EU flash GDP growth was 0.2% versus projections of 0.1%; inflation was 0.7% versus 0.7%; core inflation was 1.1% versus 1.0%; unemployment was 7.5% versus 7.4%.


            Johnson wins approval from Parliament for December elections.

What I am reading today

            How our monetary system evolved.

            Everybody makes investment mistakes.

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