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The Morning Call--How Strong An Oversold Bounce?

|Includes: Illinois Tool Works Inc. (ITW), MSFT, SHW, TROW

The Morning Call

10/25/18

The Market

Technical

The Averages (DJIA 24583, S&P 2656) were yesterday’s story, selling off dramatically. The Dow ended below its 100 DMA (reverting to resistance) as well as its 200 DMA (now support; if it remains there through the close next Monday, it will revert to resistance). The S&P finished below its 200 DMA for a third day (now support; if it remains there through the close today, it will revert to resistance) and the lower boundary of its short term uptrend (if it remains there through the close on Friday, it will reset to a trading range). This is the first challenge of that uptrend since February 2018. Volume was up and breadth negative, back in oversold territory.

The #MAGA Stock Market Trendline Is Broken

Buy the dip?

Morgan Stanley: "Buy The Dip" Is Dead

The VIX spiked 22%, clearly retaining its positive chart; and still a negative for stocks.

VIX Curve Moving Back Towards Contango A Positive For Stocks

The long bond rose ¾ %, ending above the upper boundary of its very short term downtrend. If it remains there through the close today, the trend will be voided. However, it continues to trade within a short term downtrend and below both moving averages. Still a negative technical picture.

Bizarre Direct Bid Collapse Continues In Today's Tailing 5Y Auction

And.

Your bond investments may be more risky than you realize

The dollar was up ½ %, touching its August high. I continue to believe that UUP will move higher as long as the dollar funding problem persists.

GLD was up ¼ %, finishing above its 100 DMA for a second day (now resistance; if it remains there through the close on today, it will revert to support). Until the 100 DMA is reset, I remain unimpressed with its pin action.

Three Stages Of Gold

Bottom line: clearly, yesterday was painful and, for the first time, I am beginning to believe it could get more so. If the S&P’s 200 DMA reverts to resistance, that would be bad enough. As I have noted, this MA has been a major level of support for the last two years. Its collapse would be a major technical negative. However, if the short term uptrend also resets to a trading range, then we are looking as some serious downside objectives, i.e. the next visible major support level of any consequence is around 1806.

All that said, the S&P has today and Friday to recover losses; and given the oversold state of the Market, we will almost surely get some kind of rally. So it is still too soon to get beared up. But the force of the rally will be important, directionally speaking. Just to confuse matters a bit more, don’t forget that we are getting ever closer to the powerful positive seasonal pattern in November and December---meaning the lower the odds of much lower prices.

The Nightmare Scenario: JPMorgan Warns Of $7.4 Trillion In ETF Selling During Next Downturn

The long bond, dollar and gold all acted as safety trades yesterday.

Wednesday in the charts.

Markets In Turmoil: S&P, Dow Erase 2018 Gains As Nasdaq Crashes Most Since 2011

Fundamental

Headlines

Yesterday’s economic data was mixed: weekly mortgage and purchase applications were up and the October Markit flash composite, manufacturing and services PMI’s were better than anticipated; however, September new home sales (a primary indicator) were awful.

In addition, the latest Fed Beige Book was released. It read pretty much as expected: moderate economic growth, tighter labor markets and rising input costs. Not a dataset that would lead the Fed to take its foot off the brakes. On the other hand, there was much handwringing over trade and that could be a catalyst for ease. That said, there was no indication of a potential policy change in the narrative.

Beige Book: Tariff Panic, Widespread Labor Shortages And "Robots"

***overnight, the ECB met and (1) left rates unchanged and (2) did not change the language regarding the end of QE starting in December (earlier I mistakenly said that it ended this month). Nothing new.

ECB To End QE In December, Will Keep Rates Unchanged "As Long As Necessary"

Bottom line: as I noted above, the investor psychology is now the story. The bad news out there; but there has been bad news out there for a long time. The difference this time is investor perception. If that is turning negative on a longer term basis, then there could be a lot more downside because stocks are so richly valued. I still want to see the confirmations of the Averages’ challenges of their 200 DMA and the S&P’s challenge of its short term uptrend before getting really Market negative. However, I am happy with my cash.

The Average Stock Is Overvalued Somewhere Between Tremendously And Enormously

News on Stocks in Our Portfolios

Illinois Tool Works (NYSE:ITW): GAAP EPS of $1.90 beats by $0.02.

Revenue of $3.61B (-0.3% Y/Y) misses by $110M.

T. Rowe Price (NASDAQ:TROW): Q3 Non-GAAP EPS of $1.99 beats by $0.05; GAAP EPS of $2.30 beats by $0.36.

Revenue of $1.39B (+12.1% Y/Y) in-line.

T. Rowe Price (NASDAQ:TROW) declares $0.70/share quarterly dividend, in line with previous.

Microsoft (NASDAQ:MSFT): Q1 GAAP EPS of $1.14 beats by $0.20.

Revenue of $29.1B (+18.6% Y/Y) beats by $1.22B.

Sherwin Williams (NYSE:SHW): Q3 Non-GAAP EPS of $5.68 misses by $0.07; GAAP EPS of $3.72 misses by $1.04.

Revenue of $4.73B (+4.9% Y/Y) misses by $80M.

Economics

This Week’s Data

US

September new home sales fell 5.4% versus estimates of a fractional decline.

New Home Sales Crash In September As Supply Soars

The October Markit flash composite index came in at 54.8 versus forecasts of 54.1; the manufacturing index at 55.9 versus 55.5; and the services index 54.7 versus 54.0

September durable goods orders jumped 0.8% versus consensus of -1.5%; but ex transportation, they rose 0.1% versus projections of +0.4%.

The September trade deficit was $76.0 billion versus estimates of $74.7 billion.

Weekly jobless claims rose 5,000 versus forecasts of up 2,000.

International

The October Markit EU flash composite PMI was reported at 52.7 versus expectations of 53.9; the manufacturing PMI was 52.1 versus 53.0; the services 53.3 versus 53.4.

Other

What I am reading today

The latest on student loans.

A Hidden Plan to Stick Taxpayers with Billions in Student-Loan 'Forgiveness' | National Review

A thought experiment on expanding the house of representatives.

Political Calculations: Should We Expand the U.S. House of Representatives?

It is not getting better in Italy/EU faceoff.

Standoff Between Italy and European Commission Escalates as Commission Rejects Italian Budget | naked capitalism

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Disclosure: I am/we are long itw, msft, trow, SHW.