The Morning Call
4/25/18
The
Market
Technical
After a one day
rest, the indices (DJIA 24024, S&P 2634) continued their decline, continuing
to retreat from their challenge last week of their 100 day moving averages.
Volume increased; breadth was very poor.
The S&P ended within a very
short term downtrend. While the Dow had
negated its downtrend, it is now back below the former upper boundary, raising
the question as to whether that break was a false flag. Both finished below their 100 day moving
averages but above their 200 day moving averages (yesterday, I mistakenly said
that they were below that MA). The DJIA closed
in a short term trading range but in intermediate and long term uptrends. The S&P is in uptrends across all
timeframes. The short term technical picture remains cloudy. Longer term, the assumption is that equity
prices will continue to rise.
Not surprisingly, the VIX
was up 11%, remaining above its 100 and 200 day moving averages and the lower
boundary of its short term trading range.
The long
Treasury continued its decline, ending below its 100 and 200 day moving
averages and in a short term downtrend. It
closed right on the lower boundary of its long term uptrend, a breach of which
would have major technical significance as it would mark the end of a thirty
year decline.
The dollar paused
its three day run to the upside, closing down fractionally. It still ended above the upper boundary of
its intermediate term downtrend for the third day (if it remains there through
the close today, it will reset to a trading range) and above its 100 day moving
average (if it remains there through the close today, it will revert to support). UUP remains below its 200 day moving average
but it is very close to challenging it.
GLD was up ½ %, but
still finished below the lower boundary of its short term uptrend (if it
remains there through the close today, it will reset to a trading range). It remained above its 100 and 200 day moving
averages.
https://www.zerohedge.com/news/2018-04-24/gundlach-gold-something-big-happening-its-getting-exciting
Bottom line: Monday
morning, I posed the question, was the dramatic change in direction last
Thursday/Friday for most of the indicators a sign of a major shift in the economic/Market
narrative or just noise. The pin action that
day did little to address that question as the indices closed mix and near the
flat line.
In pre-Market
trading yesterday, equity prices were spiking, suggesting the answer was noise. Then the bottom fell out, suggesting the
opposite. At this point, both of the
Averages are near to challenging their 200 day moving averages.
Backing up a
bit, I have previously observed that the indices were stuck in a range capped
by their 100 day moving averages and the upper boundary of their very short
term downtrend and bordered on the downside by their 200 day moving
averages. And I opined that a break out
of this range would have directional implications.
Early last week,
the Averages challenged the upper boundary of that range and failed. Now it appears that they are about to
challenge its lower boundary. And that
range is narrowing.
Putting this
altogether, the direction that the indices break out of the aforementioned narrowing
range could provide, at least, an indication of the answer to ‘major shift in
the Market narrative’ versus the ‘noise’ question.
Oil
tumbles on Macron proposal (short):
Fundamental
Headlines
Yesterday’s
economic stats were slightly upbeat: March new home sales were strong, April
consumer confidence was higher than anticipated, the February Case Shiller home
price index rose more than expected (you can decide if this is good or bad
news); meanwhile, month to day retail chain store sales growth declined and the
April Richmond Fed manufacturing index was extremely disappointing.
Bonds
(interest rates) continued to hold investor focus as the ten year Treasury
pierced the 3% psychological level even though it didn’t hold. Still, the concerns that I outlined in yesterday’s
Morning Call (flat/inverted yield curve, recession, tightening Fed) were exacerbated. As you know, the slowing economy, rising
commodity prices, increasing debt offering and a tightening Fed are my major worries. Not because I believe that the US economy is necessarily
going into a recession but as a result of the impact that the above factors
will have on mispriced and misallocated assets---not the least of which is
stocks.
The
other attention grabbing event was the Caterpillar earnings conference call in which
the CEO said that the first quarter (2018) was likely ‘the high water mark’ for
earnings. Suddenly, ‘peak earnings’
became a theme of the day.
You may remember
a couple of weeks ago, I opined that while a very positive first quarter
earnings season was the most anticipated (well discounted) earnings season in a
long time, it would likely still serve as a prop to the Market. Au contraire, monsieur. To date, a third of the S&P companies
have reported, 80% have beaten upwardly revised earnings and prices are down. That suggests that a lot of good news had
been priced into stocks; and the Market may have reached the ‘what have you
done for me lately’ point. In other
words, what is going to prompt investors to pay increased valuations for
equities which are already at record highs? I am sure that there may be an answer out
there, I just don’t see it. So the big
question is, will ‘peak earnings’ be a short lived theme or is it an ‘emperor’s
new clothes’ moment?
Bottom line: my fundamental unease is with the
performance of the economy (which has not been awe inspiring of late), the
direction of inflation (which commodity prices as well as the long bond are starting
to point to the upside) and Fed policy (which is tightening). That combo, historically, has not been great
for stocks. I am very comfortable with
my cash position.
The
anatomy of a ‘bubble’ (long):
Goldman
warns of declining Market liquidity (medium):
News on Stocks in Our Portfolios
Revenue of $7.6B (-16.8% Y/Y) beats by $290M.
Revenue of $12.9B (+31.4% Y/Y) beats by $970M.
Revenue of $8.28B (+7.8% Y/Y) beats by $30M.
Revenue of $3.97B (+43.8% Y/Y) beats by $20M.
Revenue of $15.2B (+10.1% Y/Y) beats by $580M
Revenue of $7.54B (+1.3% Y/Y) misses by $20M.
Revenue of $1.33B (+17.7% Y/Y) beats by $50M.
Revenue of $23.4B (+6.6% Y/Y) beats by $1.18B.
Economics
This Week’s Data
US
Month
to date retail chain store sales grew slower than in the prior week.
March
new home sales rose 4.0% versus expectations of up 1.9%.
April
consumer confidence came in at 128.7 versus estimates of 126.1.
The
April Richmond Fed manufacturing index was reported at -3 versus forecasts of
+16.
Weekly mortgage
applications fell 0.2%, while purchase applications were flat with the prior
week.
International
Other
Congress
trying to do its part in deregulation (short):
QE
failed in Japan (medium):
China
concerned that its economic growth rate could slow (medium):
What
I am reading today
One of the best ways to
maximize your retirement income (medium):
How Nick Saban wins (medium):
How valuable is your ‘digital self’?
(medium):
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