The Morning Call
6/19/15
The
Market
Technical
The Averages
(DJIA 18115, S&P 2121) had a euphoric day, reveling in Fed dovishness/lack
of willingness to piss off the Markets. Both
closed above their 100 day moving averages and the upper boundaries of their
very short term downtrend. Clearly, we
got the follow through needed to return our attention to the upside. The strong bounce off the 100 day moving averages
is further testimony to the power of this support level. The spike above the upper boundaries of their
very short term downtrends, negates those trends. The focus now is on the indices’ former highs
(18281, 2135) and the upper boundaries of their long term uptrends.
Longer term, the
Averages remained well within their uptrends across all timeframes: short term
(17398-20204, 2047-3026), intermediate term (17585-23727, 1845-2613) and long
term (5369-19175, 797-2138).
Volume was flat
with the prior day; breadth improved. Unsurprisingly,
the VIX was off 9%, finishing below its 100 day moving average and within a
very short term downtrend and a short term trading range. While on
the surface this move is positive for stocks, the VIX is again nearing a level
at which it offers value as portfolio insurance.
The long
Treasury had another down day, ending below its 100 day moving average and the
upper boundaries of very short term and short term downtrends.
GLD was up, but continues
its directionless meandering, though it did finish the day right on its 100 day
moving average. It remained below the
neck line of the head and shoulders pattern.
Oil was up slightly, but still closed below the upper boundary of its
short term trading range. The dollar also slipped, remaining below its 100 day
moving average and within a very short term downtrend and a short term trading
range.
Bottom line: investors
got jiggy yesterday as they (rightfully so) interpreted the Fed’s bewildering
performance on Wednesday as a sure sign that it is paralyzed and therefore will
do nothing to upset the Markets, i.e. it will stay dovish. The question is how much juice the bulls have
left and how much further to the upside they can move stock prices. All the relevant barriers (prior highs and
upper boundaries of their long term uptrends) are nearby; so it won’t take long
to answer that question. I continue to
believe that the indices will be unable to break their long term trends to the
upside.
The correlation between
stock and bond prices that has existed for the last six years appears to have
been broken. That augurs the return of
the bond vigilantes, that is, the Fed may be losing control of the long end of
the bond Market. That doesn’t
necessarily mean something negative is afoot.
Certainly in the past, long interest rates have risen (bond prices
declined) while stocks prices made new highs.
But that generally occurred when the economy is coming out of a
recession. Today, that is not
happening. What seems more likely to me is
that the bond guys are sick and tired of paying high prices for government
paper when the government is doing nothing to improve the economic outlook.
Fundamental
Headlines
We
ended this week’s data dump on a positive note (nothing today): both the headline and ex food and energy May
CPI figures were less than anticipated; weekly jobless claims fell more than
expected; and the first quarter US trade deficit came in a below estimates. Plus the Philly Fed manufacturing index and
May leading economic indicators were well ahead of forecasts. That means a
third week in a row of decent numbers. I
am not suggesting any kind of ‘lift off’ scenario but they do make me feel more
comfortable with our forecast.
The
only stat from overseas was improving UK retail sales. Certainly, that is good; but it is the sole
datapoint this week so it doesn’t contribute a lot to the international economic
picture.
Center
stage continues to be held by:
(1)
global QE, with our own Fed maintaining its
leadership. I am not going to dwell on
the results of Wednesday’s FOMC meeting; I think that I was pretty clear on my opinion
in yesterday’s Morning Call. The
conclusion: the Fed is clueless about the economy, knows that monetary policy
is extremely overextended and is clueless how to extract itself; hence its
policy response is duck its head and pray, i.e. do nothing. Helping the QE bandwagon along were the Swiss
National Bank that left its key rate at a negative .75% and the Norwegian
central bank that lowered its rates---again.
***overnight,
the Japanese central bank left its giant, economy sized QE intact.
Judging by the
Market reaction, this was all welcome news---as it has been for the last six
years. The problems are that the growth
rate of the US economy seems to have slowed which can’t be good for profits, the
bond guys are starting to take long interest rates up which is probably not
good for valuations and stocks are a mille short hair from historical highs.
Another view of
Wednesday’s FOMC meeting (medium):
(2)
the ongoing Greek tragedy. Yesterday’s developments were:
[a] a eurozone meeting that ended
with no progress on a Greek deal---though in fairness, none was expected. However, that didn’t stop the parties from laying
some hot tongue on each other (short):
[b] a continuing
run on the Greek banks (medium):
[c] and rumors
yet to be confirmed that the ECB may believe that the Greek banks may not be
able to open their doors on Monday (short):
What
if there is no deal in Greece (medium):
***overnight
(medium):
Bottom line: the
degree of uncertainty expressed in Wednesday’s Fed statement and the Yellen
news conference has investors convinced that it will do nothing (i.e. stay
accommodative). And that was apparently
all that was need to give the bulls a new lease on life. Whether this enthusiasm is sufficient to
overcome serious overhead technical resistance, the impact that a slowing
economy could have on earnings and a potential monkey wrench in the valuation
equation (higher long term interest rates) remains to be seen.
The Greek bailout
crisis has yet to be resolved. While I am
encouraged by the Troika’s seeming willingness to negotiate pensions and debt
relief, that doesn’t mean that it will happen or if it does that the Greeks
will agree. Whatever is going on over
there, the risk of a Greek default or exit is still sufficiently high that some
caution is warranted.
I am not poo
pooing the notion that stock prices can’t/won’t go higher; I am suggesting that
in the grand scheme of things most of the gain from this bull market has
already been made and therefore it is a bit risky to be chasing stocks up
except for the most seasoned traders.
Sweden’s
largest fund manager bumping stocks (medium):
Economics
This Week’s Data
The
June Philadelphia Fed manufacturing index was reported at 15.2 versus
expectations of 8.0.
The
May leading economic indicators came in up 0.7% versus estimates of up 0.4%.
Other
Politics
Domestic
International
Russia
and NATO/US keep poking each other in the eye (medium):
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