The Morning Call
4/22/16
The
Market
Technical
Yesterday, the
indices (DJIA 17982, S&P 2091) showed that they really and truly could go
down, at least for a day. Volume was
flat and breadth weaker. The VIX was up
5%, leaving it below its 100 day moving average but above the lower boundary of
its short term trading range. I continue
to monitor this situation for the correct timing for our Aggressive Growth
Portfolio to Add to its VXX holding.
On breadth:
On the VIX
On large cap
leadership:
The Dow closed
[a] above its 100 day moving average, now support, [b] above its 200 day moving
average, now support, [c] in a short term uptrend {17480-18435}, [c] in an
intermediate term trading range {15842-18295} and [d] in a long term uptrend
{5471-19343}.
The S&P
finished [a] above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] within
a short term uptrend {2075-2177}, [d] in an intermediate term trading range
{1867-2134} and [e] in a long term uptrend {830-2218}.
More on why the
stock market is so strong (medium):
The long
Treasury experienced further weakness, remaining below a key Fibonacci level. That is a bit concerning on a near term
basis; although it remained within a short term uptrend and above its 100 day
moving average.
GLD rallied a
tad, ending within a short term uptrend and above its 100 day moving average
and a key Fibonacci support level.
Bottom line: the
Averages finally had a bad day, but not enough to suggest the current up move
is over. My technical outlook: (1)
stocks are at a level of heavy congestion and so going is likely to get a bit
tougher, (2) but the technical strength is sufficient to maintain the assumption
that the Averages will challenge their all-time highs.
I
am paying closer attention to the long Treasury which broke some minor support
levels. However, it is much too soon to
cause worry.
Fundamental
Headlines
Another
poor numbers day: weekly jobless claims were down, the March Philly Fed
manufacturing index was abysmal, the March Chicago Fed National Activity index
was worse than expected and the March leading economic indicators rose less
than estimates. Of course, the goldilocks
are trumpeting that employment is the ultimate measure of economic performance,
so a good week of jobs numbers offset two months’ worth of lousy data from
various economic sectors. Yeah, that
sounds right.
An optimist’s
view
Overseas,
the German government reduced its 2017 GDP growth estimate and March UK retail
sales fell more than anticipated.
In central bank
related news, the Bank of Sweden stepped up its bond buying program; and the ECB
started off a three major central bank trifecta by leaving rates unchanged but
increasing its asset purchase program.
Just what the doctor ordered---double up on a remedy that to date has
done nothing to cure the disease.
The
ECB meet, leaving rates unchanged but continuing its asset purchase program.
Visualizing
negative interest rates (short):
***overnight:
speaking of negative interest rates, the Bank of Japan is apparently
considering an even deeper dive into this cesspool.
Bottom line: does
it get boring to read me say that ‘nothing has changed’? In truth, I am bored saying the same
thing. It would be much more interesting
for me if there was something different to comment on. But the consistency of both poor US and
global economic numbers as well as central banks’ response is palpable. And for better or worse, the only thing that
counts to the Market is the latter. So
the gap between reality and fantasy continues.
My only point has been and remains that sooner or later the economic
outlook has to improve or valuations will become too stretched for even the
lemmings.
My thought for the day remains
on the previous discussions of a Buy/Sell Discipline. One of the primary drivers of upward prices
today is the push by, at least, some investors to chase yield largely in the absence
of any other investment consideration. With
Fed policy crushing the yield on the normal savings instruments, it is
understandable that an investor would want to stretch risk in order to achieve
the return he/she needs to pay the bills.
My word of caution in pursuing this strategy is that even if you know
what you want to buy/own (higher income) and why you need to own it (to get the
return that you need to live on), focusing too much on obtaining a high yield can
fall victim to the cold hard math facts of life.
And the primary fact is that no
one, especially the Market, gives a s**t if you need to a high return in order
to pay day to day expenses, no matter how much you need it. If you buy a stock or ETF today just because
it yields 3% in this low rate environment, what happens tomorrow when economic
conditions normalize and it yields 4%, the price of that asset will be down 25%.
(And don’t fool yourself, this time it
is not different.)
How much better off would you have
been to take 1% (or less) on a cash equivalent investment today and wait to buy
that stock or ETF at a 4% yield? It
takes a long time for difference between a 1% and 3% yield today to pay for a
price decline of 25% tomorrow. Those
numbers are even worse if you are looking at high risk yield investments like
junk bonds whose price volatility are more akin to stocks than bonds.
The message here is that it is
dangerous to chase yield (Buy stocks that you know) for its own sake if you are
paying too much for it (Buy Discipline).
And if you just can’t help yourself, then have realistic Stop Loss
Prices so you don’t take that 25% loss (Sell Discipline).
News on Stocks in Our Portfolios
Forward yield 2.49%
Revenue of $22.1B (+1.7% Y/Y) in-line.
Revenue of $4.48B
(-4.5% Y/Y) misses by $60M.
Revenue of $9.46B
(-25.5% Y/Y) beats by $70M.
Revenue of $5.9B
(-1.0% Y/Y) beats by $80M.
Economics
This Week’s Data
March
leading economic indicators were reported up 0.2% versus expectations of up
0.5%; the February number was revised from up 0.1% to down 0.1%.
Other
With
gold and other commodities rallying, my first response was to assume that
inflation expectations were on the rise.
Little do I know. (short):
Concerns
about government debt (short):
Politics
Domestic
Obama once again
pontificates to the detriment of all (medium):
International
A look at the meaning of a Brexit
(medium):
EU immigration dilemma just got
worse (short):
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