Following are my personal comments on specific markets and issues. I chart markets for a hobby and my comments are the result. They are not recommendations to buy or sell anything and should not be thought of as such. They are for entertainment purposes only so enjoy.
David Bruce Edwards - Northern Front LLC October 15th, 2016
Please remember, the following is pure speculation based only on my experience and chart patterns. "Every sunken ship has a room full of charts."
Today's date under the French Revolutionary Calendar is 24 Vendémiaire CCXXV
Note - I got a new wider screen monitor and when I look at this web site with the screen size in full, the site spacing does not come out properly. By making the window less wide all of the text and graphics slide into place. Perhaps you are having the same experience. DBE.
In the last few updates I pulled out some old charts from the crash of 1987 and the trading range that dominated much of the 1960s. In both cases there were dramatic sell offs. It always draws more interest among readers when predictions are radical in one or the other direction. I know that many of you read web sites dedicated to gold. They often feature dire predictions. I try and stay away from them. However, going into the next week I see the possibility for just such market action. I say "possibility" because nothing is certain and all chart reading is subjective. I could be that I have been listening to too much Wagner. The Wikileaks latest e mails are symptomatic of our times. Among most people there is a feeling that we are being played, that the news can't be trusted and that things are being rigged for an elite of business and politicians who pay to play. This is why we have Donald Trump doing well here in the U.S., Brexit and other such candidates and parties gaining strength around the world. It is taking its effect in our markets. With manipulated interest rates and monthly statistics that are always described as "unexpected" plus large revisions to the previous months who knows what is really going on?
Above are charts of TLT and IEF. The first tracks the trading pattern of longer dated U.S. Treasury Bonds. The second follows the Ten Year Treasury Note. A few months ago the charts were suggesting that interest rates were bottoming. Since early July rates on government debt edged higher in the U.S. and around the world. Bonds are loans, in this case to our government. The value of the loan (price of the bond) is based on investors' expectation of future interest rates and the probability of the promised cash flow being paid out and the principal paid back at maturity. It could be that these loans are losing value because investors think that they can sell them now and reinvest the money later at a higher rate. It could also be that big pools of wealth are acting on the obvious; these loans will never be repaid. There is no plan in place by any politician to run the government with a fiscal surplus or even at break even. If you see the economy continue to stagger along at a one to two percent growth rate and bonds keep selling off you will know that you are looking at the infancy of a sovereign debt collapse. Short term, sentiment is extremely negative toward bonds. I suspect we are days away from some type of short term low and period of consolidation (as shown on the TLT chart) that will be followed by another sell off.
Utility and big dividend paying telephone stocks were beneficiaries of the "rates are going to zero" frenzy. So were big blue chip stocks that pay hefty dividends. Now the utility and telephone sector are back to last May's levels. If I am right about a short term low for bonds then these groups should also pause. If I were in them I would use a bounce to sell.
I got lucky with the Dollar in that its pattern conformed to my art. If it obeys my drawing then we are near a short term peak. Expectations of higher interest rates here in the U.S. relative to other currency blocks help the Dollar. The other big factor is perceived safety. If you casually listen to the news you would not know that Russia ordered its citizens over seas to come home and get their children out of foreign countries. This is the kind of thing you do when you are preparing for war. In the last Russian election our State Department under Hillary, actively supported Putin's rival. It is said that he hates her and has zero respect for her. Money flees to safety. We are further away from Russia than Euro based countries. My pattern theory suggests some kind of brief pull back for the Dollar over the next few weeks. The red lines might overstate the extent of the sell off but they express the text book, ideal form.
Life can be seen in terms of probabilities and markets are the perfect example. I bought some gold oriented things at the end of the week. Here are my excuses. On the left is a chart of gold priced in Euros and an RSI momentum oscillator below. For some reason, the RSI readings on the gold in Euros chart has an excellent record of rallying when the RSI reading is near the low of its range. On the right is a weekly chart of gold priced in Dollars with an RSI oscillator in red. Rarely has it been this low. A low RSI reading is not a "buy" signal. It is more like a "don't sell" warning because an oscillator at the low end of its range indicates that the market has already taken a good hit. I bought because my pattern on the Dollar calls for a short pull back. Gold is over sold enough to have a brief bounce. If it is down $20 an ounce on Monday's opening you will know that I am crying.
This is what the RSI oscillator looks like on a chart of gold priced in Dollars using the daily closing price in NY. Again, there is no guarantee that gold will rally just because it had a rapid decline. The odds say that if you had to do something you would be better off buying than selling short. I suspect that any bounce will be temporary, just as I project the Dollar pull back to also be a short term move. If war breaks out in Europe or the U.S. gets into it with Russia in the Middle East you could see more than just a short term bounce as investors move to safety. In 1987 gold went up in response to the stock market tanking so if you see stocks decline rapidly next week this could also help gold.
On the left is a chart of gold priced in U.S. Dollars. On the right the weekly high low and close price is adjusted for changes in the value of the Dollar Index so that you can see what the pattern looks like if the Dollar was constant. My theory is that the trading following the 2013 low is some type of correction that will be followed by lower prices. The normal chart on the left would look more like the text book if it had one more up move into the low fourteen hundreds. When I look at the adjusted pattern on the right it looks complete.
On the weekly charts the labels since the 2013 low are a,b,c. The "c" leg should be a five wave up move. People who think gold is beginning its final sell off to new lows see the count as shown on the left side chart. The more bullish interpretation is shown on the right. Check out the chart and comments on the Goldman Sachs graph below. It formed the more bullish pattern seen on the right side chart. Support would be just below $1,200.
I expect any rally next week to be followed by another decline. Gold and silver mining stocks are giving back a portion of their big up move. XAU is at one support level now. I expect it to test the 65 to 70 range later this year or early next year.
My longer term bearish outlook suggests even lower levels.
Silver was rather tame over the last week with fairly narrow daily ranges. Whatever gold does I expect silver to do the same. On the way up the market paused between $16.20 and $18.20 so traders will consider this to be some kind of support range with the $15 area below that.
In the opening remarks I worried about a large sell off in the stock market. Platinum and Palladium tend to be influenced by the direction of equities trading. Even though both have been hit by a lot of selling lately I would not be a buyer until I see better stock market action.
Here is an update on copper. If it is beginning a final thrust down from a contracting triangle it should accelerate toward $1.80 over the next month. Remember, these patterns lead to a reversal after spiking to new lows.
A trade above $2.25 would bring in the buyers.
Both these charts feature the S&P 500, the most widely watched market bench mark. Last week we broke below the September lows on an intra day basis. A two day rally followed but Friday opened strong then gave back a good amount of the early gains. Note that we are trading at July's levels. Everyone who bought over the last two months is sitting on a loss. Morning Star statistics show that a massive amount of public money moved out of actively managed mutual finds over the last year and into index funds. Last month other statistics showed that hedge funds are loaded up with stocks and money managers have a much lower amount of cash as a percent of their portfolios than usual. If there are redemptions they will have to sell stock to meet them. All this has me worried about the possibility of a larger than normal sell off over the next few weeks. Today's money management world tracks performance by the quarter and the year. Once you get into October, if the market looks shaky there is little reason to stay highly invested. The prudent thing to do is to get out and protect your gains. I worry that this kind of thinking could have everyone headed for the exits at the same time. On the right is a "come to your senses" reminder that after a break out to new highs, it is typical for a market to consolidate, forming a W as it heads higher.
My most bearish scenario calls for a waterfall decline toward the lower trend line. If it happens I expect the brunt of it to take place between now and the end of the month. Remember, this is an extreme prediction. I hope it does not come to fruition.
Many people my age are hoping we can get through the next few years with little disruption in the markets so that their retirement nest egg stays in tact. They took a hit between 2000 and 2003 then again after 2007. Their portfolio has not had any real net gain in a decade. Three strikes and you are out.
One index to watch is the Russell 2000. Until a couple of weeks ago smaller stocks were out performing larger companies. Analysts were saying that it was a sign of underlying economic strength. Late last week as the Dow Jones jumped over 100 points, smaller stocks did little. The Russell 2000 finished near its lows and just above Thursday's dive. A close below 1200 will scream "top" to most chart gazers.
Here are a few random charts.
3M is a good proxy for the industrial health of the world. I worry when it is in a down trend. Yes, it had a good up move and it pays a decent dividend so like telephone stocks and utilities part of its ownership base is selling as bonds decline and you can see that it had larger corrections in the past that were followed by further gains. Still, it worries me when it is declining, especially with earnings season beginning.
Apple did well on Samsung's well publicized problems. Anyone who flies is warned about the phone right after they are told about the oxygen masks and floatation devices under their seat. Despite the possible gain in sales for Apple the stock is still below its first quarter trading range. I heard one analyst say that they could be looking at their first year of a decline in I phone sales. Even if Samsung loses sales for a period it is just a question of time before some other company challenges Apple with a cheaper phone. That is the way markets work. Someone makes a great product with a premium price. Over the next few years others compete and gain market share by offering similar features at a lower price point.
Goldman Sachs, my favorite bear market pattern stock made another lunge higher as interest rates rose last week. The theory is that they will make more money as the spread between their short term borrowing costs and longer term lending receipts increases. If the bear market case holds then the stock should start selling off again.
Above, when talking about gold I mentioned a 5 wave pattern as the "c" leg of a correction. I presented a bullish interpretation on the right side of the daily gold charts. The Goldman Sachs "c" looks like it.
Earlier in the year Hershy's the chocolate maker was also forming a text book bear market pattern I was expecting an A,B,C flat correction up then another sell off. Some company made an offer to take over Hershy's and the stock jumped higher. The merger failed and when the dust cleared the stock fell to the point where the upward correction would have normally peaked. Now it is back on the bear market watch list.
Here is an update on XLP, the consumer staples SPDR. It broke its lower trend line, rallied back toward it then started falling again. Defensive stocks did quite well over the last couple of years. Like utilities many of them pay a good dividend and people will always need soap and deodorant. Their pattern of trading is following the bond market. If interest rates have bottomed then this group topped.
Right now this looks like a sector that topped. For decades the Health Care sector out performed the market. Behind the buying logic is the fact that the baby boom generation moved from its prime consuming years to its top spending on staying alive years. The problem is that people think that health care is some kind of right and that they should not have to pay the full cost. I belonged to a YMCA gym for years were a number of elderly people also worked out. I would over hear them talking about their trips to Florida or Europe and then their complaints about medical co-pays. Remember, the number one payer of health care expenses is the government and they are broke. It is just a question of time before they cut back reimbursements even more. That is not good for Health Care providers.
GoogleL (Alphabet), Amazon and FaceBook are the three most loved and trusted companies traded. They are though of like Apple was a couple of years ago. All three are busy helping us do things for less and less money or for free. If my fears of a stock market sell off come true then there will probably be some bad news on one or more of these companies. All of them are high priced so there is a huge amount of wealth parked in them. Bear markets have a way of turning today's heros into tomorrow's bums.
I can't go away without showing the latest trading from Shanghai. Notice the long, contracting wedge formation. If this were a normal individual stock I would give it a 65% chance of having a sudden break to the down side. I would expect the sell off to be swift and severe.
The government of China is interfering in its stock markets to prop them up. History shows that government efforts to stabilize markets usually fail.
Summary: The stock market has the potential for a very rough two weeks. This is based only on the chart patterns. Precious metals and bonds look like they could bounce briefly. If my favored pattern for the Dollar is valid then we should be at the top of the current leg of the formation and ready for a brief retreat. If stocks begin a large sell off be prepared for members of the Fed to come out with statements supportive of the market. One of the goals of quantitative easing is to artificially prop up the price of the stock market and real estate to give the illusion of better times. In one of my favorite movies, Animal House, the heros are about to get kicked out of college. One expresses his fears, "Seven years of college down the drain." If stocks crash the Fed will feel the same way.
Best of Luck,