Wednesday, February 26, 2020

The Morning Call--When does the Fed step in?

The Morning Call


The Market

The Averages’ (27081, 3128) plunge continued on heavy volume yesterday reaching levels at which important support levels are starting to be challenged; (1) both negated their very short term uptrends, (2) the Dow ended below both its 100 DMA for a second day [now support; if it remains there through the close today, it will revert to resistance] and its 200 DMA [now support; if it remains there through the close on Friday, it will revert to resistance] and (3) the S&P finished below its 100 DMA [now support; if it remains there through the close on Thursday, it will revert to resistance] and right on the lower boundary of its short term uptrend.

            Update on margin debt.

However, challenges are significant only if they are successful; and right now, the only real damage is the voiding of the very short term uptrends.  So, at this moment, the Averages are, technically speaking, in OK shape but on the threshold of serious technical impairment.  Making matters all the worse is the pin action over the last two months of the TLT, GLD and UUP markets which have been shouting that the global economy was in significant danger of slipping into a recession or something worse.  And it now looks like equity investors are starting to acknowledge the problems currently being discounted in those markets. 

Of course, that doesn’t mean that

(1)   stocks can’t rally in the short term.  Indeed, [a] they are dramatically oversold right now, [b] gold and the dollar have consolidated over the last two days taking some downward pressure off of stock prices and [c] and there is the magnetic pull of Monday’s high gap down open,

(2)   bonds, gold and the dollar are discounting everything correctly.  Assuming their major worry is economic growth, we still don’t know exactly what they were concerned about before the coronavirus raised its ugly head and, now, how much worse the coronavirus will make it.   I do believe that as long as the long bond, gold and the dollar continue to rise, equities have an uncertain future.

Tuesday in the charts.



            Yesterday’s datapoints were all negative.  The December Case Shiller home price index, February consumer confidence, month to date retail chain store sales and the February Dallas and Richmond Feds’ manufacturing indices were all disappointing.

            Quantifying the panic.
            The probability of recession.

Barry Ritholtz still doesn’t think that we are in a recession.

            Overseas, the news was a little better.  Q4 Japanese leading economic indicators and Q4 German GDP growth were both in line.

            When China sneezes.
            Bottom line: in a month or so, the economic impact of the coronavirus will start showing up in the number.  And at that point, we will, at least, have to stop all the guessing.

In the meantime, the Market is the main story.   In my opinion, it could easily remain that way until we know what the TLT, GLD and UUP markets have been discounting (remember they started their tear long before we ever heard of the coronavirus), whether they are correct and how that gets reflected in equity prices. 

Keep in mind that there is more to the Market’s story than just the recent pin action in TLT, GLD, and UUP.  As you know, it has heretofore been largely determined by (easier) fiscal and monetary policies coming to its rescue.  Does anyone doubt that it won’t happen again?  The question is, will the Market care?

    News on Stocks in Our Portfolios


   This Week’s Data


            February consumer confidence came in at 130.7 versus projections of 132.0.

            The February Richmond Fed manufacturing index was -2 versus estimates of +13.

            Weekly mortgage applications rose 1.5% while purchase applications advanced 5.7%.



What I am reading today

            Why sleep I is so important.

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