Wednesday, October 24, 2018

The Daily, Part 1, 10-24-18

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10/24/2018 Investment House Daily
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- Tuesday's potentially constructive day not so much so as the indices dive to new selloff lows.
- ABCD patterns on the large cap indices. Great. But, we have seen patterns on these before.
- Same issues and more. Economic, trade, elections.
- Obama wants thanks. Volcker correctly blasts the 2% inflation target.
- Defensive is the leadership
- Even good bases and breakouts are not surviving.
- More calls for a bottom but the pieces are not all falling in place and they have to: still need VIX, good patterns.

Tuesday I opined that the selloff and recovery was potentially constructive. Yes, and a score to take the lead right before halftime can potentially set up a good second half for the scoring team. You still, however, have to play the second half.

Wednesday the market started the second half so to speak, and that late score in the first half only set up a trampling. Futures started low, recovered decently thanks to BA's earnings (masking -- somewhat -- a flood of top line misses from UPS, ITW, HLT, TXN), but then turned lower as the opening bell rang. Then stocks sold, and sold, and sold. Then they sold some more, closing at session lows. Pretty severe butt kicking.

SP500 -84.59, -3.09%
NASDAQ -329.14, -4.43%
DJ30 -608.01, -2.41%
SP400 -3.02%
RUTX -3.79%
SOX -6.61%
NASDAQ 100 -4.63%

VOLUME: NYSE +11%, NASDAQ +8%. NYSE added another 100M downside to already stronger, above average volume. NASDAQ trade jumped even farther above average, close to the 10/10 selloff day that saw NASDAQ initially break the 200 day SMA.

ADVANCE/DECLINE: NYSE -3.4:1, NASDAQ -5.5:1. Decently negative as NASDAQ puts more and more stocks downside.

NEW LOWS: NASDAQ 561, +50. NASDAQ continues to play catch up with the NYSE earlier 500+ readings. NYSE new lows are not minor (483), but the small and midcaps are so beat up already.

Certainly there was news driving this? Nothing particular, just the same themes of the Fed, trade, and economy with a few garnishes.

Fed: Trump blasted the Fed chair again, saying Obama at least had 0% interest rates, that every time the economy does something good, Powell hikes rates. Well, if you wanted 0% rates Mr. President you had Yellen as the chair . . .

Economics: New home sales, September -5.5% month/month! Not year/year but monthly. Those darn interest rates.

Earnings: A parade of top line misses, increasing the 30% reading the WSJ noted over the weekend for this earnings season. UPS, ITW, HLT, TXN and afterhours tonight AMD, LVS, WHR. Beats afterhours include MSFT, V (TL in line), TSLA, XLNX.

The problem: no few earnings reports are going to change the market in this selloff.

Obama reminds everyone to thank him.

While stumping on the campaign trail, Obama said Tuesday 'When you hear all this talk about economic miracles right now, just remember who started it.' Working hard to rewrite his economic legacy.

As soon as it was clear that the person who would continue the Obama policies was defeated and a person who wanted to reduce the Obama regulations and taxes was elected, the stock market exploded higher. Then after regulations were slashed and taxes cut, the economy blasted higher with 4% growth after its first 10 year stretch without a year of 3% economic growth since the Great Depression. Last month there were over 1 million job openings as companies look for workers to fuel their business. It was as if a switch that was turned off was turned back on.

If you are honest with yourself, however, you have to admit that Obama is RIGHT, that he started it: his economic policies were anti-growth, his economy was very sluggish as a result of his regulations, taxes and policies. As I said leading up to the election, whoever was elected could preside over a strong economic recovery if he or she would cut the taxes that were raised, slash the hundreds of thousands of regulations enacted, and let people go to work. That could not have been done without Obama's actions that so slowed the economy and put it into a Jimmy Carter malaise.

Okay, since he so desperately seeks praise: thank you Obama for providing another textbook example along with the 1930's and the 1970's and the USSR how highly regulated, highly taxed, centrally planned governments do not produce prosperity.

A 1980's Fed chairman discusses the absurdity of the Fed's inflation gauge.

Paul Volcker, Fed chairman during the Reagan years, opines and laments as to what has happened to monetary policy, specifically the adoption of the 2% inflation 'standard' as a worthy goal. According to Volcker, it started in 1996 when Fed governor Yellen and chairman Greenspan had the following exchange:

Yellen: How do you define price stability?
Greenspan: The state in which expected changes in the general price level do not effectively alter business or household decisions.
Yellen: Could you please put a number on that?

In laymen's terms, Greenspan said current prices for the current economic situation are considered stable when prices remain at a level within what people expect and they go about their business without worrying about them. Also in laymen's terms, Yellen wanted to reduce prices to a one size fits all economies standard, kind of a 'monetary policy for dummies' benchmark.

Over the subsequent years, the commonsense definition of stable prices that was dependent upon the particular economic circumstances of the time in question morphed into a 2% inflation rate as the targeted goal in all situations.

Volcker saw the problems, problems that I have discussed many, many times on these pages: how can inflation of any level be accepted as something good, something to shoot for year after year?

Volcker: I puzzle about the rationale. A 2% target, or limit, was not in my text books years ago. I know of no theoretical justification. It's difficult to be both a target and a limit at the same time. And a 2 percent inflation rate, successfully maintained, would mean THE PRICE LEVEL DOUBLES IN LITTLE MORE THAN A GENERATION.

Yes! Why is it acceptable in the first place, much more something to strive for, to reduce the value of our currency, of our wealth, by 2% year after year after year? These same governors who are quick to say that inflation is a tax, and a cruel tax, are the very ones who strive to engender 2% inflation every year. In other words, the Fed's view of the congressional mandate of price stability is to create inflation that continually eats away the wealth of US citizens. As I noted last week, since the Fed's inception, the value of the US dollar is -97% with the bulk of the damage done in the last 50 years. It is this kind of Fed policy that steadily decays the wealth of US citizens by virtue of destroying the value of their dollars.

Thus, the shepherd of our currency is not a good shepherd. It is one that actively seeks to reduce the value of our savings on a continuing basis. Nirvana for the Fed is reducing our wealth in our currency holdings by 2% per year, and as Volcker states, that means a doubling of prices every generation. Well, gee, isn't that EXACTLY what has happened since the Fed's inception?

Why then, why, do we have a Federal Reserve? It was allowed to take a commonsense definition of 'price stability' and pervert it into continual inflation. Once again, man, particularly the Fed, believes it is smarter than markets, believes it has 'the' answer to our economic problems distilled down into one formula: +2% inflation per year.

What is price stability in the long run -- not the Greenspan definition for the current moment noted above -- is ZERO inflation (0%). That is the common sense, by definition of the words themselves, meaning of price stability. That is what Congress intended: no inflation, no deflation, but a level where the citizens' currency holds its value and they can go about their business without worrying about prices. That was the Fed's mandate.

Of course, one can argue that Congress was utterly foolish itself in believing it could create a body of men and women that were knowledgeable enough and wise enough to control markets, currency or otherwise. A fool's mission destined to fail at the true goal. Good at appeasing special interests, but utterly feckless in truly maintaining the value of the currency under the guise of 'price stability.'

That only leads to the question that answers itself: why do we need at Fed at all? Well, we can have one and it can serve a useful purpose, i.e. provide liquidity for a limited time, short in duration, to stave off serious economic upheaval. That really was the Fed's initial purpose, but given so much vague power, the Fed sucked up all the power it could, and now it micromanages the economy using interest rates.

Think of a surgeon trying to reconnect severed nerves using a Sawzall and barbecue tongs. No, no, that is an incorrect analogy because the surgeon was taught by someone who actually knew what needs to be done. More like a lawyer (who believes by definition he is the smartest person in any room), who read a book on neurosurgery authored by a person who ignores facts, trying to reconnect severed nerves using a Sawzall and barbecue tongs (because to a lawyer, if a surgeon can do it, of course a lawyer can learn to do it). That's it: the Fed believes in theories that do not apply to the real world (Keynesian theory), the Fed uses the wrong tools, and the Fed has no idea what the outcome should be (because it cannot even correctly define price stability). That should make you uneasy, and it answers the question do we need a Fed with such a broad authority.



The large cap charts show the same upside pattern, but they have to prove they can move. Even so, everyone continues calling a bottom and though the numbers are getting extreme internally, there is also a lack of panic. VIX has not spiked. There are those saying that suggests a bottom. Look at my discussion in the Sentiment section on that -- they are dead wrong with their read on the VIX and how it operates. In any event, the indices are selling hard, everyone is calling bottoms after each selloff, but the panic has not hit panic levels. It could very well be that this is some selling with an utter lack of buying that has really snowballed because the midterm election outcomes most are waiting to see or at least get close enough where the market can get a clear bead on what it believes the outcome will be. Or, perhaps it has ALREADY done that and is selling off in response.

NASDAQ: So much for a 61% Fibonacci retracement double bottom. NASDAQ is now at the 78% Fibonacci retracement of the April to September rally. Perhaps it sets an ABCD bounce at this point given the 78% level is very good pattern as well. At this juncture it is simply a matter for the upside to see where it holds and rebounds. Now, even if it does bounce and rallies off this pattern, you still do not look for a new high. Thus, with this kind of drop, a lot of momentum is lost and it typically takes more time to base out for a move that can attain new highs.

SP500: Also at the 78% Fibonacci retracement and showing the same kind of ABCD pattern. Thus, the same issues as NASDAQ.

DJ30: Closed just below the 78% Fibonacci retracement. Negative for the year. Basically the same pattern as the other large cap indices and it could bounce from an ABCD pattern but just have to see where the move tries.

SP400: Now down near the February low as this selloff is now more aggressive than that one. There is, and I almost hate to say it, some support here.

RUTX: Now at the February and November 2017 closing lows. Massive disgorgement of the 2018 gains.

SOX: Diving lower below the April/May low and now at the June 2017 peak. As with SP400, there is some support here, but as with all thus far, it will have to show it can hold.

NASDAQ 100: Broke below the 61% Fibonacci retracement of the April to October rally. Same potential ABCD pattern but same caveat: has to prove it.


Not much left unscathed. Defensive stocks still solid.

Personal products: PG surging, CLX holding well. REV looks solid.

Food is still decent, e.g. MCD, KO, HRL.

Telecom hanging in, more or less, e.g. VZ, HLIT, SWIR. S, T, TMUS diving, however.

Discounters decent, e.g. WMT, DG.

Precious metals: Holding up but not moving up yet, e.g. HMY, AU.

Drugs: Mixed. JNJ holding well thus far. PFE, MRK, LLY starting to show cracks.

FAANG, SCAANN, chips are getting bombed.


Stats: -608.01 points (-2.41%) to close at 24583.42

Stats: -329.14 points (-4.43%) to close at 7108.40
Volume: 2.94B (+7.69%)

Up Volume: 397.13M (-782.87M)
Down Volume: 2.53B (+990M)

A/D and Hi/Lo: Decliners led 5.45 to 1
Previous Session: Decliners led 2.13 to 1

New Highs: 20 (+6)
New Lows: 561 (+50)

Stats: -84.59 points (-3.09%) to close at 2656.10
NYSE Volume: 1.079B (+11.09%)

Up Volume: 932.417M (-397.583M)
Down Volume: 139.511M (-2.84B)

A/D and Hi/Lo: Decliners led 3.43 to 1
Previous Session: Decliners led 2.25 to 1

New Highs: 25 (+17)
New Lows: 483 (-13)


VIX: 25.23; +4.52. A solid gain no doubt, but with loss of 2.4% on DJ30 being the smallest of the indices, this is hardly showing a commensurate level of fear. As noted earlier, the selling is not panicked. A theory was floated by some, including Cramer, that a lack of acceleration in the VOX on a selloff shows a bottom to come because, as it was put, the VIX high comes before the rally.

Okay, but just because the VIX spiked on the first selling in a selling event does not mean that spike was the HIGH.

More to the point in terms of reading the VIX: if this was just a modest pullback then a move into the mid-20's would be adequate. This is NOT a modest pullback and is already on par with January/February on SP500, worse on RUTX and SP400. At that prior selloff VIX spiked to 50.30 on the high, twice what this move has shown.

The catharsis selling is not hear yet. VIX is showing this.

VXN: 30.25; +4.99
VXO: 26.81; +5.24

Put/Call Ratio (CBOE): 1.29; +0.25

Bulls and Bears:

Bulls tumbled 10 points from 3 weeks back. Bears just are not moving at all, indeed falling as the market weakens. For a good signal the selling is ending you want to see the bears actually start a serious advance. As it is now, the drop in bulls is starting to suggest an end to near term selling, but if something serious downside is lurking, then it will ultimately take a spike in bears to stop that. But, don't want to be like the Fed and see things that have yet to manifest.

Bulls: 51.9 versus 56.3

Bears: 18.3 versus 18.5

Theory: When everyone is bullish and has put all their capital to work, where does the ammunition to drive the market come from? There is always new money to start a new year. After that is used will more money be coming? That is the question.

Bulls: 51.9 versus 56.3
56.3 versus 61.8 versus 60.6 versus 59.0 versus 57.7 versus 60.1 versus 59.6 versus 57.7 versus 57.3 versus 54.9 versus 54.5 versus 54.9 versus 55.3 versus 52.4 versus 47.1 versus 47.6 versus 52.0 versus 55.5 versus 52.9 versus 50.0 versus 49.1 versus 46.6 versus 43.1 versus 43.6 versus 48.0 versus 43.6 versus 42.2 versus 49.5 versus 55.5 versus 54.9 versus 48.6 versus 48.1 versus 48.5 versus 41.9 versus 54.4 versus 66.00

Bears: 18.3 versus 18.5
18.5 versus 18.6 versus 18.3 versus 18.1 versus 18.3 versus 18.1 versus 18.3 versus 18.3 versus 18.6 versus 18.8 versus 18.6 versus 18.5 versus 18.5 versus 18.6 versus 18.4 versus 17.6 versus 17.8 versus 17.7 versus 19.2 versus 19.2 versus 19.4 versus 19.4 versus 20.6 versus 20.8 versus 19.6 versus 19.8 versus 18.6 versus 17.5 versus 16.8 versus 15.7 versus 15.5 versus 14.4 versus 14.6 versus 14.4 versus 15.5 versus 12.6 versus 12.8 versus 12.7 versus 13.5 versus 15.2 versus 15.1 versus 15.2 versus 15.1 versus 15.1 versus 15.4 versus 15.4 versus 14.4 versus 14.4 versus 15.1 versus 15.2 versus 15.1 versus 17.0 versus 17.1 versus 19.0 versus 20.2


Bonds: 3.111% versus 3.1692. Another auction was held and it was the lightest bid of all the auctions of late. As the stock market plunges one would expect bonds to surge, but that is not happening. Cashin says that makes you wonder if China is boycotting buying treasuries.

Historical: the last sub-2% rate was in November 2016 (1.867%). 3.1692% versus 3.20% versus 3.196% versus 3.1779% versus 3.209% versus 3.165% versus 3.158% versus 3.167% versus 3.146% versus 3.169 versus 3.206% versus 3.233% versus 3.189% versus 3.183% versus 3.061% versus 3.087% versus 3.061% versus 3.052% versus 3.048% versus 3.048% versus 3.085% versus 3.066% versus 3.068% versus 3.076% versus 3.057% versus 2.99% versus 3.00% versus 2.972% versus 2.963% versus 2.977% versus 2.937%

EUR/USD: 1.3972 versus 1.14682.

Historical: 1.14682 versus 1.14626 versus 1.1538 versus 1.14556 versus 1.14961 versus 1.1578 versus 1.15906 versus 1.15592 versus 1.15901 versus 1.15324 versus 1.4966 versus 1.4916 versus 1.1598 versus 1.15164 versus 1.14762 versus 1.15517 versus 1.15774 versus 1.16038 versus 1.16357 versus 1.17501 versus 1.17658 versus 1.17476 versus 1.17486 versus 1.17772 vs 1.16833 versus 1.16692 versus 1.16858 versus 1.16226 versus 1.16900 versus 1.15863 versus 1.16016 versus 1.15946 versus 1.15534 versus 1.16243 versus 1.16341 versus 1.15832 versus 1.16029 versus 1.1664 versus 1.17035 versus 1.1691 versus 1.16802 versus 1.16216 versus 1.15390 versus 1.15709 versus 1.158 versus 1.1487

USD/JPY: 112.091 versus 112.427

Historical: Last below 109 in June 2018: 112.427 versus 112.680 versus 112.527 versus 112.385 versus 112.553 versus 112.558 versus 111.848 versus 112.222 versus 112.076 versus 112.158 versus 113.01 versus 113.12 versus 113.706 versus 113.894 versus 114.383 versus 113.642 versus 113.690 versus 112.734 versus 112.981 versus 112.811 versus 112.575 versus 112.448 versus 112.247 versus 112.369 versus 111.849 versus 112.06 versus 111.81 versus 111.491 versus 111.608 versus 111.192 versus 111.064 versus 110.680

Oil: 66.82, +0.39. After dropping through the 200 day SMA Tuesday, a modest rebound that failed to hold a move back through.

Gold: 1231.10, -5.70. Still holding the lateral move of the past 2 weeks, working laterally over the 50 day MA.


Okay, was THIS a bottom? Some on the afterhours shows were saying it was time to buy this dip. Perhaps it is. At some point it is the right dip. I prefer to buy into good patterns when good patterns in good, market moving sectors are plentiful. That is not the present situation. Sure we will make some plays for trades, but we are seeing even good bases get hurt, e.g. HRS, and that is a classic sign: good pattern breaks higher with authority, tests, then just gets sold off.

With a lot of defensive sectors sporting the best patterns and action, that is not an upside environment to go and load the boat. Play the edges upside while we watch for another bounce to test the breakdown and if that one fails, play downside.

Once there are more patterns in growth areas forming, then you can gain some confidence a bottom is here. That can come before, during, and after a reversal. Thus you can play some on the reversal, more on a follow through as patterns are built and then start breaking higher. At that point the probabilities are in your favor, the risk/reward is on your side. Until then it is totally fast trades given the treatment of stocks in good patterns.

Recall just a couple of months back a stock would announce, perhaps sell a bit, then get bought aggressively? Now they announce, pop, then get sold aggressively. Dips were used to buy good stocks with good earnings, now pops are used to sell even good stocks with good earnings.

Thus there can be a bounce here given the virulent selloff, but the internals have not all come together to put in a sustained move and certainly the patterns are not there to support a move to a new high. So, perhaps an ABCD yields a decent bounce to play with some rebounding stocks. We will see if that develops, but even then VIX needs to get a bit uglier. The worst thing: that gap higher tomorrow. If there is another day of harsh selling, or two, that should drive VIX up near 35. THAT would likely have enough of the pieces in play to generate a tradeable rally. We will see.

Have a great evening!

End part 1
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