Thursday, June 26, 2014

Good Morning America, How Are You?

Yesterday was a challenge to remain positive in the stock market. It was an exhausting day helping bond traders from my desk.  I'm glad I was not helping with the equity markets yesterday.

Summary: 

·         Yesterday I commented that the market would probably not move much higher.  I was wrong, and that is the first call in over a month where I was that incorrect. 

·         The GDP news and almost any other news was negative.  The market kept moving up relentlessly.  I rarely comment on "why" the market did what it did; being a believer that prices are relatively random on a daily basis.  Of course, some of you will argue there are trends during the day, and that is certainly correct.  Trends (in my opinion) depend on your time frame.  In the 24th the trend on any intraday time-frame was down.  On the 24th it was up.  On the daily chart, the trend is up.  On the weekly chart it is up. 

·         GDP revised to -2.9%...  Ouch... Something is definitely wrong somewhere Dr. Yellen.  Everyone is going to be on pins and needles now until GDP is released for the 2nd Quarter. 

·         Durable Good Orders missed expectation, and were down substantially.  The stock market went up.  We have 2 months in a row that durable goods are down.  That has not happened since August 2011.  There has been larger drops than yesterday's print of course; November 2013 for example, but not 2+ months in a row.  Basically, durable goods were much lower than expected.  Transportation was hard hit.  Equipment investment improved, which was a bright spot.

·         Treasuries were on the rally track yesterday.  10 year yield fell to 2.54% from 2.58%.  Yield is what it is, and like prices in nearly every asset class, prices are not reflecting fundamentals very well.  Are traders betting on the Fed? 

·         China appears to me to becoming comfortable with capital markets (rather than centrally controlled planning).  Peoples bank Of China (PBOC) printed that they would remove the ceiling on foreign currency deposit rates in Shanghai.  The State Administration also announced that Chinese companies would be allowed to sell foreign-exchange options starting in August rather than only buying onshore.  Starting in August this allows a two-way flow of money.  Be warned:  This is an ongoing move to remove the US dollar as the reserve currency.

·         Watch out if you are a day trader in Gold.  It could go either way.  Longer term, Gold is showing bottom pricing action.  Gold's price will depend on geopolitical problems (Ukraine, Syria, Iraq, Pakistan).  Radical Muslim groups are within miles of gaining control of long range missiles and a nuclear bomb. 

·         FATCA's rules were eased yesterday by the IRS.  The problem for foreign banks still exist, but I continue to write that unlike some pundits in the world, FATCA will not cause the collapse of the US dollar or a revolution in the streets of the USA.  The overseas US citizen uber rich will become expatriates as they renounce their citizenship.  The number of expatriates are increasing, and the USA has never seen this level of activity.  I expect that to increase - not from taxes, but from the onerous reach of bureaucracies taking away the last rags of freedom provided by the USA Bill of Rights.

·         This morning's jobless claims are a small amount above the forecast.  Not to worry though, it had no affect on the S&P 500 futures markets or the NASDAQ. The number is always revised next week.  Why depend on it? It is useful if one uses a 4 week moving average. Using a 4 week moving average and comparing jobless claims against recession starts, the current jobless claims indicate there is no recession in sight.  Jobless claims (using the 4 week MVA) has been a very good indication of when a recession is to start.  The raw jobless claims data is too volatile to be used effectively. 

·         I hear lots of pundits comment on the VIX.  I submit to you, the VIX has little forecasting power when it is below 15.  More information is provided when the VIX is high.  Right now all the VIX is saying (to me) is the market is calm.  If you do not know,VIX is calculated from the implied volatility on S&P 500 company options.  It is to measure the volatility over the next 30 days.  However, VIX (statistically) is much more sensitive to declining price, and why high values of VIX are associated with bear markets.  Very little information is being provided at these low values - for example what will the S&P 500 close at today is not forecasted by the current VIX readings.  Takeaway? - in the current environment traders should look to other indicators to forecast movement in equities market. 

·         Today's equity markets look to open flat, and the market is poised to go either direction with little pre-market bias.  Oil is down a bit, and it may suggest a bias to a down day.  However, that is a weak argument at best.  It is better to say the market is giving no indication of direction today (at this point).  At 7:00 AM PDT Kansas City Fed Manufacturing Index will be released. Since Jobless claims has not moved the market, the Kansas MI may cause a blip.  Econoday consensus is for a small decrease from the prior level.