Wednesday, November 6, 2019

The Morning Call--Deal or No Deal?


The Morning Call

11/6/19

The Market
         
    Technical

The Averages (27492, 3074) turned in a mixed performance (Dow up, S&P down) yesterday. Volume rose while breadth was mixed. The VIX was up 2 1/8%, further relieving a somewhat oversold condition and giving equities more upside before getting overbought. 

My assumption remains that momentum is to the upside; but there are still some negatives:  (1) October 11th gap up opens need to be closed, (2) both had gap up opens on Monday, and (3) breadth is nearer to overbought.

BofA joins the ‘melt up’ chorus.

            And Ed Yardini is worried about it.

            Is buying stocks at an all-time high a good idea?

TLT fell 1 1/8 % on heavy volume, closing below its 100 DMA (now support; if it remains there through the close on Thursday, it will revert to resistance) and very near its 9/13 low.  The dollar was up 3/8 % also on heavy volume, maintaining its upward momentum.  Gold declined 1 5/8%, also on volume, finishing below the tip of that pennant formation.   

TLT, UUP and GLD remain at potentially critical junctures.  We know the Averages are telling us to tip toe through the tulips; and yesterday’s pin action in other indicators (in particular the dollar) suggest that their investors may be following suit.  However, TLT and GLD  have not successfully challenged levels that would indicate a change in sentiment.  But their performance yesterday on heavy volume could be a precursor to such an event.

            Tuesday in the charts.

    Fundamental

       Headlines

            Yesterday’s data was mixed.  Month to date retail chain store sales and the October ISM nonmanufacturing index were better than expected; the September job openings (JOLTS) report was in line;  the October services and composite PMI’s were below estimates.
                    
Overseas, the numbers were slightly upbeat.  The October Chinese Caixin composite PMI and the October UK services PMI were ahead of forecasts; the September EU PPI was in line; the October Chinese Caixin services PMI was below consensus.

            Trade continues to command the nonpolitical headlines.  But the changing narrative makes my hair hurt.  Yesterday, they grew more optimistic as the storyline shifted to the possible shape and likelihood of a Phase One agreement: the Chinese buy more agricultural products (which they are dire need of anyway) and Trump backs off tariffs (how far is unclear).  But overnight, the Chinese poured cold water on it.  As I said before, this is likely all part of the negotiating dance; but it leaves the level of uncertainty somewhat elevated.
        
                    I can’t let a day go by without focusing on what I believe is driving stock prices.

(1)   The simplistic Fed narrative.


            (2) Shades of 2007/2008.

(3)   China cuts interest rates.

Bottom line: OK, maybe we are getting closer to some kind of trade deal.  Although, it apparently will not address the issues the prompted the trade war in the first place.  Meaning that it would undoubtedly improve the global economic sentiment and likely our own near term global economic outlook.  However, longer term, the principal unfair Chinese industrial and IP theft policies aren’t being addressed; and I continue to believe that they never will be. 

But couple a trade deal with a third quarter earnings season that continues to come in ahead of expectations, the Market now in the most favorable trading period of the year and a scramble by the global central banks to see who can out ease who and there are the ingredients for a year-end rally.
         
That said, I still believe that huge segments of the stock market are grossly overvalued and that any further advance will only make them more so.  Caveat emptor.

            More on valuations.

            October dividends by the numbers.

            The permaeverything approach.

            Realistic investment results.

            Investing is hard, even for the most successful.

    News on Stocks in Our Portfolios
 
           

Economics

   This Week’s Data

      US

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

            The September job openings (JOLTS) reported 7.02 million openings, in line.

            The October services PMI came in at 50.6 versus estimates of 51.0; the composite PMI was 50.9 versus 51.2.

            The October ISM nonmanufacturing index was 54.7 versus consensus of 53.5.

Weekly mortgage applications fell 0.1% while purchase applications were down 2.5%.

Preliminary Q3 nonfarm productivity fell 0.3% (ooops) versus an anticipated rise of 0.9%; unit labor costs advanced 3.6% versus +2.2%.

     International

The October Japanese services PMI came in at 49.7 versus forecasts of 50.3; the composite PMI was 49.1 versus 49.8.

The October German services PMI was reported at 51.6 versus expectations of 51.2; the composite PMI was 48.9 versus 48.6.

The October EU services PMI was 52.2 versus projections of 51.8; the composite PMI was 50.6 versus 50.2.

September EU retail sales were up 0.1%, in line.

    Other

            A slowdown in the auto industry is hurting global growth.

What I am reading today

            The Gunpowder Plot of 1605.

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