The Morning Call
The S&P hit an air pocket last week. On Thursday, it finished below the lower boundary of its short term uptrend and remained there through the close on Friday. If it ends there today, the short term uptrend will reset to a trading range. Let’s see what happens before speculating on the meaning. At the moment, nothing has changed: ‘while valuations continue to reach historical extremes, I can’t see an end to this uptrend as long as the money keeps flowing with abundance and in the absence of any major negative exogenous event.’
The long bond rallied hard on Friday, finishing back above the lower boundary of its very short term trading range, voiding Thursday’s break. The question is, was this a dead cat bounce or is that lower boundary providing good support, marking an end to the current seven month downtrend? This is, of course, more than a technical question; it involves investors conviction regarding higher interest rates/inflation. Again, let’s see what happens.
Unlike equity and bond investors, gold investors do not appear to have many doubts about its direction---and that is down. GLD got crushed again on Friday. Importantly, there is no visible support until it reaches the lower boundary of its very short term uptrend (the upward slopping green line) and that is 10% below current levels. However, remember, GLD got overextended to the upside and can fall a good deal before any longer term technical damage is done.
The dollar followed its trading pattern from the prior week. It tried to rally but was unable to make a new higher high. Still, the lower boundary of its short term trading range (horizontal brown line) is holding; and the longer it does, the stronger its support becomes. My assumption remains that while UUP has made a bottom, it has a struggle ahead to affect any follow through to the upside.
Friday in the charts.
Review of the Week
The US data last week was positive, including the primary indicators (three plus, one negative). That keeps the string of upbeat stats alive---long enough that I think safe to conclude that the worst of coronavirus economic disruptions are behind us.
Still, two questions. ‘One, will the recovery accelerate, closing the output gap in a short time or will the economy continue to struggle to regain its historical secular growth rate? I think that this is the easier question to answer because I see no reason to alter my assumption that the current grossly irresponsible monetary and fiscal policies will act as a drag on economic growth. So, while I expect growth to continue, I do not expect either its rate of growth to match the levels reached as the economy bounced off the bottom or the economy to close the existing output gap in the foreseeable future.
Two, will or won’t the economic recovery be accompanied by an increase in the inflation rate that will push it to levels that historically have proven problematic for both the economy and the securities’ markets? This issue is a bit tougher to analyze.
At first blush, it seems reasonable to assume that if economic growth remains subpar, then there will be few upward price pressures aside for those temporarily created by the dislocations due to coronavirus government restrictions.
On the other hand, with the vast amount of liquidity sloshing around the global economy, commodity prices could respond to speculation (as they appear to be doing now). Throw in higher labor costs resulting from an increase in the minimum wage and there is an argument for upward supply side pressures. At present, I am not convinced to the merits of this thesis.’
However, with each passing day, bond investors increasingly are. That doesn’t mean that they are right. Plus, Friday’s pin action in the TLT may be indicating that the worst is over. Patience.
Overseas, the stats were also positive---which is a plus for the US. Though as I have noted previously, the recovery in Europe will likely be more anemic than our own.
The February Chinese manufacturing PMI came in at 50.6 versus estimates of 51.1; the Chinese Caixin (small business) manufacturing PMI was 50.9 versus 51.5; the nonmanufacturing PMI was 51.4 versus 52.4 reported in January.
The February German manufacturing PMI was reported at 60.7 versus expectations of 60.6; the EU manufacturing PMI was 57.9 versus 57.7; the UK manufacturing PMI was 55.1 versus 54.9; the Japanese manufacturing PMI was reported at 51.4 versus 49.8 in December.
February German CPI was +0.6 versus consensus of +0.5%.
Powell changes the rules.
News on Stocks in Our Portfolios
Altria (NYSE:MO) declares $0.86/share quarterly dividend, in line with previous.
What I am reading today
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