Tuesday, October 24, 2017

The Morning Call--Strong earnings from the industrials

The Morning Call

10/24/17

The Market
         
    Technical

The indices (DJIA 23273, S&P 2564) turned down yesterday, on high volume and weaker breadth.  Both remain above their 100 and 200 day moving averages and are in uptrends across all time frames. 

            And:

And:

The VIX (11.1) was up 11%.  It remained below the upper boundary of its short term downtrend and its 200 day moving averages.  However, it is above the lower boundary of its long term trading range, above its 100 day moving average (if it remains there through the close on Wednesday, it will revert to support) and continues to develop a very short term uptrend.  At the moment, it appears that the July low was the bottom.

The long Treasury was up fractionally, but still finished below its 100 day moving average (if it remains there through the close today, it will revert to resistance).  However, it continued to trade above its 200 day moving averages (support) and the lower boundaries of its short term trading range and its long term uptrend. 

The dollar rose, but ended in its short term downtrend and below its 100 and 200 day moving averages. However, it negated a very short term downtrend. 


GLD was up, finishing above its 100 and 200 day moving averages (support) and the lower boundary of a short term uptrend.  However, it voided a very short term uptrend.

 Bottom line: long term, the indices remain strong viz a viz their moving averages and uptrends across all timeframes. Short term, they are above the resistance level marked by their August highs, meaning that there is no resistance between current price levels and the upper boundaries of the Averages long term uptrends.  Yesterday’s weakness is hardly surprising.  Given their recent price strength, some consolidation is to be expected.

Trading in UUP, GLD and TLT remains inconsistent, providing little directional information.

I remain uncomfortable with the overall technical picture.

    Fundamental

       Headlines

            One economic datapoint was released yesterday: the Chicago Fed national activity index was much stronger than anticipated. Another sign that either the post hurricane economic reality has not caught up with economic reporting or that the economy is a lot stronger than is reflected in our forecast.  Notice below the earnings reports from yesterday and this morning.  They are all industrial companies (except MCD) and they all had upbeat earnings, suggesting that perhaps the economy is (getting) better than I expect.

            This will be a major week for corporate earnings releases.  To date, 70% of S&P companies have beat profit expectations while 72% have reported better than estimated sales growth.  On the other hand, the net overall earnings increase is not that impressive---up 3.8%.

            We will also get some big economic numbers: durable goods, new home sales and GDP.  In addition, the ECB meets on Thursday and is expected to keep its bond buying program intact, though it could raise lending rates slightly.

            Also favoring a continuation of QEInfinity, Japanese PM Abe scored a major election victory, likely assuring more of his version of QE.

            ***overnight, the Bank of Japan said that it was considering lowering its inflation forecast for 2018, likely making more QE a lock.

On the other hand, China released its new economic plan to wide (internal) acclaim, removing the need for the recent excessive monetary ease and the tendency to shade economic data to the upside. 

            Bottom line: yesterday’s pin action notwithstanding, the bulls still rule.  As long as that is the case, lay back and enjoy it.  But I wouldn’t be fully invested; indeed, I want a decent cash position.  Our Portfolios are now ~50% in cash.

            When the music stops (medium):

            Collateralized loan obligations are booming again (medium):

            My thought for the day: avoid errors. Sadly, errors cost us more than good decisions help. When nearly everyone is smart together, nobody wins. When nearly everyone screws up together, nearly everyone loses and loses much more than they otherwise would have. The more universal the error, the greater the loss will be. Because this tragedy of errors is such a major problem, dealing with risk first is absolutely essential for good investing. Thus learning what not to do is more important than learning what to do. As Charley Ellis famously established, investing is a loser's game much of the time—with outcomes dominated by luck rather than skill and high transaction costs. If we avoid mistakes we will generally win.
       Investing for Survival
   
            Market myths that could hurt investors.
           
    News on Stocks in Our Portfolios
 
Illinois Tool Works (NYSE:ITW): Q3 EPS of $1.71 beats by $0.06.
Revenue of $3.62B (+3.4% Y/Y) beats by $50M.

McDonald's (NYSE:MCD): Q3 EPS of $1.76 misses by $0.01.
Revenue of $5.75B (-10.4% Y/Y) beats by $10M

Caterpillar (NYSE:CAT): Q3 EPS of $1.95 beats by $0.68.
Revenue of $11.4B (+24.5% Y/Y) beats by $770M.

3M (NYSE:MMM): Q3 EPS of $2.33 beats by $0.12.
Revenue of $8.17B (+6.0% Y/Y) beats by $240M.

Sherwin Williams (NYSE:SHW): Q3 EPS of $4.75 beats by $0.08.
Revenue of $4.51B (+37.5% Y/Y) beats by $70M.

United Technologies (NYSE:UTX): Q3 EPS of $1.73 beats by $0.05.
Revenue of $15.45B (+6.3% Y/Y) beats by $470M

Economics

   This Week’s Data

   Other

            The economic indicator Goldman is watching the closest (medium):

            Quote of the day (short):
           
Politics

  Domestic

The two US economies (medium):

  International War Against Radical Islam


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