The Morning Call
11/15/17
The
Market
Technical
The indices
(DJIA 23409, S&P 2578) started the day as it has the last three days---down
big---then spent the rest of the day fighting back. The only difference is that they couldn’t
make back to neutral yesterday. Still it
was a valiant effort and that strong rebound needs to be taken into
account. So I don’t think yesterday’s
pin action diminishes ‘the relentless drive higher’ theme. Meanwhile, volume spiked again; though this
could be related to Friday’s options expiration. The real negative was a decided turn for the
worse in breadth. Still that is one day’s
activity; so it is way too soon to be getting uneasy. The bottom line is that both remain above
their 100 and 200 day moving averages and are in uptrends across all time
frames.
The VIX (11.5) was
up pennies, finishing above the upper boundary of its short term downtrend for
the second day (if it remains there through the close today, it will reset to a
trading range), above its 100 day moving average for a third day, reverting to
support, above its 200 day moving average (now resistance; if it remains there
through the close on today, it will revert to support) and above the lower
boundary of its long term trading range. Even if the VIX is able to reset its short term
downtrend, it will remain in a trading range going back five years. So it is way too soon to be reading too much
in its recent pin action. On the other
hand, its divergence from its normal inverse relationship with stocks keeps the
warning light flashing.
The long
Treasury experienced another day of recovery; though again not enough to suggest
Friday was some one-off random occurrence.
It closed below its 100 day moving average for the third day, reverting
to resistance but above its 200 day moving averages (now support) and above the
lower boundaries of its short term trading range and long term uptrend. Like
the VIX, it seems like something could be going on beneath the surface. That point was underlined by the battering taken
by other segments in the long bond complex, especially the lower quality
issues. We need more follow through; but it looks like
the TLT buying is a safety trade.
The dollar was
hit hard, ending below its 200 day moving average (now resistance), below the
upper boundary of its short term downtrend, below the lower boundary of its
very short term uptrend but above its 100 day moving average (now support). It appears that UUP is confirming its downtrend---which
is not a safety trade.
GLD was up, closing
back above its 100 day moving average (the fourth violation of this moving
average in the last week), above its 200 day moving average (support) and the
lower boundary of a 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. The technical assumption has to be that stocks are going higher.
Trading in UUP,
GLD and TLT remain out of sync with themselves, the VIX and stocks, and seem to
be pointing at a change in trends---but in different directions. I am watching for more follow through in all.
I remain
uncomfortable with the overall technical picture.
Fundamental
Headlines
Yesterday’s
US economic data was negative: the October small business confidence index and
month to date retail chain store sales were disappointing. PPI was much hotter than expected. I consider this a negative because I don’t
like inflation in any form. However, the dreamweavers may view this as a plus
as it suggests a surging economy.
Overseas,
Europe continues to shine---third quarter German GDP was strong and third
quarter UK inflation was below forecasts; and China remains iffy---October
Chinese industrial production and fixed asset investments were below consensus
while retail sales were above.
***overnight,
third quarter Japanese GDP was above estimates; October UK unemployment hit a
42 month low; the Chinese 10 year bond traded at a new high yield (this is
potentially very important):
A
deeper look into the Chinese economy (medium):
The
tax reform sausage making continues a pace, though the provisions of both the
house and senate versions change hourly. So trying to do analysis is a losing
proposition.
This
is a decent argument why the tax bill won’t increase the deficit all that much. Notice (1) it is a relative argument---it
will increase the debt, just not all that much, (2) it fails to address the
issues of whether it is simpler or fairer and (3) saying that the debt is
growing primarily because of entitlements, is not an excuse for growing it by
any other means.
The
good news of the day was that Mohamed El Erian is being considered for the Fed
vice chair. I have linked to many
articles by El Erian which have shown him to be a practical economist. He would be a great addition to Fed and would
likely be a force for moving the monetary normalization process along without a
lot of the wimpy hand wringing that has characterized the current crew. That said, El Erian believes that the economy faces
huge headwinds and is going to grow slowly, tax reform or not---which is
exactly opposite of Trump’s view point.
So the odds of his nomination seem low.
Bottom line: the most
important thing maybe what is occurring on the technical side. I wish I could provide an astute analysis
about the meaning of the aforementioned divergences. But I can’t except to say something seems to
be going on beneath what seems a placid Market surface and I have no idea what
it is.
I wanted to address an
issue that might be causing confusion among readers, to wit, how can I be
buying stocks when I am so negative on the Market? And it is a valid point. First, remember that the Valuation Model for
each stock is different from that of the broad market in that it only looks at
factors relative to the stock and underlying company.
So it is perfectly reasonable to have the stock of a company in its Buy Range when the Market is in a Sell Range.
So it is perfectly reasonable to have the stock of a company in its Buy Range when the Market is in a Sell Range.
Second, back in
early 2016, investors took industrial stocks out behind the wood shed and shot
them. Many traded into their Buy
Ranges. However at the time, I was so
concerned about Market Valuation that I chose to ignore those valuations on the
thesis that once the Market rolled over, the stocks would be even cheaper. Well, I was wrong. Since then that same pattern has occurred
with the stocks of several industries and many individual companies---oil and
retail come immediately to mind. Many
stocks in these industries haven’t just been cut in half but they have traded
to valuation levels similar to those of 2009.
Which raises the
question, is the bear market I have been anticipating going to be a rolling one
where each industry/stock gets its time before the firing squad versus a flush
of everything at once? I clearly don’t
know the answer to that but when stocks the likes of WW Grainger, Gilead
Sciences, Willams-Sonoma endure their own private bear market, I am going to
hedge my bets by stepping in irrespective of the lofty levels of the
indices. I may be wrong. We could have a general wringing out in
prices, but the downside to these purchases is considerably less than those
trading at or near their highs.
My
thought for the day: the Simmelweis Reflex describes our tendency to scrutinize
ideas more critically when we disagree with then than when we agree and to
recall supporting data rather than opposing evidence. This helps explain why it can be so hard to
find, admit and respond to our mistakes---why we hang on to bad trades so and
even refuse to see them as bad.
Investing for Survival
Your
politics are hurting your investments,
News on Stocks in Our Portfolios
Economics
This Week’s Data
Month
to date retail chain store sales grew at a slower pace than in the prior week.
Weekly
mortgage applications rose 3.1% while purchase applications were up 0.4%.
October
CPI was up 0.1%, in line; ex autos, it was up 0.2%, also in line.
October
retail sales advanced 0.2% versus estimates on +0.1%; ex autos, they were up
0.1% versus forecasts of +0.2%.
The
November NY Fed manufacturing index came in at 19.4 versus expectations of
26.0.
Other
In
praise of Trump’s deregulation effort (medium):
Speaking of
which, moving ahead with health care reform (medium):
A
review of third quarter corporate sales and earnings; plus a look at valuations
(medium):
The
latest household debt and credit report from the NY Fed (medium):
A
closer look at auto loans (short):
Politics
Domestic
International War Against Radical
Islam
An
inside look at the Saudi ‘purge’ (this reads like it was government sponsored):
Miscellaneous
Dinosaur era shark found off the
coast of Portugal (short but interesting):
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