The Morning Call
8/8/19
The
Market
Technical
The Averages (26007,
2883) made a huge intraday rebound from a 500+ Dow point selloff in early
trading to close mixed for the day (Dow down, S&P up). Volume was down again and while the equities
are oversold, breadth was not good.
The Dow closed
back above its 100 DMA, voiding Monday’s break (remaining support); however,
the S&P ended below its MA for a third day, reverting to resistance Both
indices remained above their 200 DMA’s and their Monday gap down opens still need
to be filled.
The VIX was down 3
¼%. It remained above both MA’s (now
support). Let’s see if these challenges
are a harbinger of similar behavior of stocks.
The long bond advanced
fractionally on huge volume, finishing 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 down
slightly, 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 third
day---which is a bit worrisome as it raises the odds that Friday’s breakout
could prove false. Follow through.
Gold jumped another
1 ½ % on monster volume, ending within very short term and short term uptrends
and above both MA’s. However, it still
has last Friday’s gap up open which needs to be closed.
Bottom line: the Averages are in
uptrends across all timeframes and have those gap up opens that need to be
closed. I mentioned yesterday what is selling
climax looks like, i.e. early big selloff and then a strong bounce. Tuesday didn’t fit that pattern so I thought
that there could be more downside.
However, yesterday’s pin action did fit.
So, a short term recovery wouldn’t surprise me. The question is how the indices handle those
gap down opens. Patience.
The major argument against any kind of rally is that
the long bond, the dollar and gold are all pointing at the need for a safety
trade.
Wednesday in the
charts.
Fundamental
Headlines
Two minor
indicators were reported yesterday: weekly mortgage applications rose but the
more important purchase applications fell; consumer credit jumped in June but
not as much as anticipated.
JP
Morgan raises odds of a recession, but it is still below 50%.
Overseas,
there was one datapoint released: June German industrial production fell
much more than expected.
Aside
from the narrative on yesterday’s volatility, investors remained focused on the
trade/currency war with interest rate cuts by the central banks of New Zealand,
India and Thailand inflaming the issue of a potential global race toward competitive
rate cuts/currency devaluations---which is becoming a front line issue for the
Markets.
The risks of a
currency war.
What could Trump
do to weaken the dollar?
To be sure,
those central banks had plenty of justification for this action, i.e. the impact that slowing of global economic growth
could have on their respective economies.
As you know, the overseas data in the last six months has not been great. And a deteriorating global trade environment
will likely only make matters worse.
But
the issue that investors are starting to consider is, are central banks lowering
rates because they are worried about global growth or are they just responding
to Markets’ concern about global growth?
The distinction is important because the answer defines who is controlling
interest rates.
And that is much
more important consideration for the longer term than just whether the central
bank of New Zealand lowered its official lending rate yesterday. Because (1) if the central banks are the
determining factor, then an interest rate cut will help the global economy but
(2) if the Markets have taken over, then central bank monetary policy becomes
much less relevant. In other words, if
the Markets have already begun discounting a global recession [i.e. lowering interest
rates], then there is much less reason to watch or respond to foreign central
bank rate cuts.
***overnight,
China weakened the yuan, but not as much as traders expected.
Bottom line: the
potential problem for our equity Market is that if a general loss of faith in central
banks’ ability to manage their respective economies finds its way to the Fed,
then the whole Fed/Market codependency is in danger of unravelling. To be clear,
I am not saying that (1) the loss of faith has occurred [though it may be
occurring], or (2) the US economy is slowing to the extent of many other
countries. But the risk is increasing that
investors’ glorified perception of the Fed is becoming more tenuous.
Easy money won’t
work anymore.
Dividends by the
numbers in July.
Is volatility a
fee or a fine?
News on Stocks in Our Portfolios
Automatic Data Processing (NASDAQ:ADP) declares $0.79/share quarterly dividend, in line with
previous.
Economics
This Week’s Data
US
June
consumer credit rose $14.6 billion versus projections of $16 billion.
Weekly jobless
claims fell 8,000 versus estimates of down 2,000.
International
The
July China trade balance came in at $45 billion versus forecasts of $40
billion.
Other
Why
are interest rates negative?
What
I am reading today
Mental illness and mass
murder.
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