The Morning Call
The S&P see sawed last week. First, recovering on Monday back above the lower boundary of its short term uptrend which it broke the previous Thursday. Then, breaking this trend line again on Wednesday and confirming that break on Friday---despite that day’s positive pin action. That resets the short term trend to a trading range. It also marks the 100 DMA (red line) as nearest support level---which is about 160 points lower.
Two points: (1) just because the nearest visible support is 160 points lower does not mean that the S&P will trade that low. It just defines the near term risk. (2) breaking a short term trend is not a catastrophic occurrence. The S&P needs to push through more support levels before getting beared up. All considered, my Market assumption remains: ‘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.’
Is the rotation to cyclicals over?
Like the S&P, the long bond re-challenged its nearest support level (lower boundary of its very short term trading range) and like the S&P was successful on its second try. That trend is now voided. Nearest support is the lower boundary of its short term trading range---about three points lower. As I noted last week, the deterioration of TLT’s chart is about more than technicals. It is bond investors grappling with the speed and magnitude of a potential rise in inflation. It appears that the bet is on higher inflation/interest rates.
A buy signal in bonds.
GLD continues its downward move; 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. That said, with interest rates and the dollar rising, weak gold is not surprising.
The dollar found some life last week. It continued the rally off the lower boundary of its short term trading range and pushed through its 100 DMA (if it remains there through the close today, it will revert to support). Clearly , this supports the thesis that the dollar has made a bottom. Somewhat confusingly, a strong dollar tends to push inflation lower.
Friday in the charts.
Review of the Week
The US data last week was positive, including the primary indicators. So, it appears that the recovery is well underway. The news media are describing in much more upbeat terms than I think that the numbers justify. Don’t get me wrong. The rebound is clearly happening and with some vigor. But not with the magnitude implied by the verbiage.
I still believe that the economy is carrying two heavy anchors (irresponsible fiscal and monetary policies) that will prevent it from closing the output gap and that once this growth spurt runs its course, it will resume its below average long term secular growth rate.
I also remain unsure about whether or not inflation can occur while there remains a significant output gap. That said, Milton Friedman’s thesis that inflation is anywhere and everywhere a monetary phenomenon is about to get a severe testing. And if you believe the current message from the bond market (i.e., lower prices) that thesis will be proven correct.
Overseas, the stats were negative---again illustrating that the US is ahead of most of the rest of the world in its post coronavirus recovery.
The January Japanese preliminary leading economic indicators index was 99.1 versus 97.7 in December.
January German industrial production fell 2.5% versus estimates of +0.2%.
Higher inflation is in our future.
(Too many) things are broken.
David Tepper ‘balls to the wall’ bullish.
News on Stocks in Our Portfolios
Medtronic (NYSE:MDT) declares $0.58/share quarterly dividend, in line with previous.
What I am reading today
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Analyst's Disclosure: I am/we are long MDT.
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