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The Morning Call--Dead Cat Bounce?

The Morning Call

10/26/18

I am off to my annual pledge class reunion. No Closing Bell. Back on Monday.

The Market

Technical

The pin action of the Averages (DJIA 24984, S&P 2705) continues to be the main headline. Yesterday, they bounced hard off of an oversold condition; though they did not recover all of Wednesday’s losses. The Dow ended below its 100 DMA (now resistance) as well as its 200 DMA for a second day (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 fourth day---sufficient to make the reversion to resistance an easy call. At the risk of being repetitious, this MA has been major support for the S&P for the last two years. So I consider this development more negative than would ordinarily be the case. On a more positive note, the S&P did recover above the lower boundary of its short term uptrend, negating Wednesday’s break.

SSDD

Volume declined; and, as you might expect, breadth improved

The VIX fell only 4% which is very little on a 400+point up day for the Dow. Its chart remains positive---a negative for stocks.

The long bond was down ½ % on heavy volume, but remained above the upper boundary of a very short term downtrend---voiding that trend. Nevertheless, it closed within a short term downtrend and below both moving averages. Still a negative technical picture.

China vows to defend the yuan---meaning sales of its foreign reserves, i.e. US Treasuries, to buy the yuan. Not a plus for interest rates.

"The Central Bank Will Intervene": PBOC Said To Sell Reserves If Yuan Drops Below 7.00

The dollar was up ¼ % on big volume, finishing above its August high---a clear plus. I continue to believe that UUP will move higher as long as the dollar funding problem persists.

GLD fell ¼ %, but still ended above its 100 DMA for a third day, reverting to support. So the technical picture is improving a bit after a long negative run.

Bottom line: the good news is that the S&P voided the break of its short term uptrend; and the Dow still has the potential of negating the current challenge of its 200 DMA.

The bad news is that the S&P’s 200 DMA, which has been a source of considerable technical support for the last two years, has reverted to resistance in a meaningful way. In addition, the VIX hardly budged on major up day, meaning there continues to be a lot of negative sentiment. If today’s follow through to the upside is weak and/or the S&P re-challenges its short term uptrend, which suggests more downside to come. On the other hand, we are getting ever closer to the powerful positive seasonal pattern in November and December---meaning the lower the odds of much lower prices.

***overnight, we may gotten the answer on direction. Amazon and Google had disappointing quarterly reports, issued disappointing guidance and the stocks are off. If the tech stocks, which have led this Market for years, start to break down, the odds of the indices regaining their early October highs will slip considerably to say nothing of the odds of their challenging the upper boundaries of their long term uptrends.

Did The Nasdaq Bubble Just Burst?

The long bond and dollar were back trading like interest rates are going higher; but GLD seemed to maintain its status as a safety trade.

Is the Market predicting a recession?

Is The Market Predicting A Recession? - Real Investment Advice - Commentaries - Advisor Perspectives

The recent decline in historical perspective.

Putting The Recent Market Decline Into Historical Perspective

Fundamental

Headlines

Yesterday’s economic numbers were negative: the September trade deficit, weekly jobless claims and the October Kansas City manufacturing index all disappointed; September pending homes sales were better than forecast; while the headline September durable goods order (primary indicator) has better than expected, ex transportation, it was quite weak. These are not great stats at a time when suddenly investors are waking up to the fact the economy is not nearly as awesome as the ruling and chattering classes would have us believe.

Bottom line: 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.

When stocks fall 10%.

When Stocks Fell 10%...

News on Stocks in Our Portfolios

Economics

This Week’s Data

US

September pending home sales rose 0.5% versus estimates of unchanged.

The October Kansas City Fed manufacturing index was reported at 8 versus September’s reading of 13.

Kansas City Fed: Regional Manufacturing Activity "Expanded at a Slower Pace" in October

The initial estimate of third quarter GDP came in at 3.5% versus expectations of 3.3%; the price deflator was 1.7% versus forecasts of 2.0%.

BEA: Real GDP increased at 3.5% Annualized Rate in Q3

International

Other

Stalling new home sales.

Political Calculations: More Signs Point to Stalling U.S. New Home Market

Brexit back on hold.

Brexit Talks On Hold As "May's Team Can't Agree", Cable Slides

Is Chinese luck running out?

"Their Luck Is Running Out": Why Albert Edwards Expects A Chinese Hard-Landing

What I am reading today

Have the rich really gotten all the gains from economic growth?

Do the Rich Capture All the Gains from Economic Growth?

Humble exits.

Humble Exits

14 investment principles.

A Matter of Principles

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