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 November 26th, 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 6 Frimaire 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.
For a bit more than a decade there have been constant commercials on the radio for gold and silver. The adds warn us of the coming economic chaos and failure of the monetary system. A guy gets elected with policies that spurred growth and employment in previous cycles, stocks rally and all of a sudden gold does not look as necessary. $1,207 was the often sited support level on the metal. When it broke through overnight, stop loss orders were triggered and the metal quickly fell $20. In another overnight session, as we were digesting Turkey it fell to $1,170 then rebounded. There are news stories saying that some big funds dumped the metal last week. Note two things: 1. Gold only retraced part of its advance from last December. 2. The red oscillator is an RSI momentum oscillator. It is near the low end of its range. In past cycles a reading this low led to some kind of bounce. Web sites that track sentiment say that everyone dislikes gold.
Both the above charts feature the weekly closing gold price in NY. On the left the red oscillator is a simple four week rate of change measurement. It finished at -7.4% on Friday. It has been lower, but rarely. On the right the red oscillator is another RSI indicator. It only gets this low on the weekly chart when the market gets hammered. Since 1999 there have been only a handful of times when it got to this level. A low RSI reading is not necessarily a "buy" signal. It tells you that most who wanted to sell did so. Often it leads to at least an "over sold bounce."
On the left is a daily chart of gold starting in July of 2011. On the right is the same data with the price adjusted daily by changes in the value of the Dollar Index. I keep this chart to have a visual reading of how much the Dollar's value effects the gold price in my currency. For non-Dollar buyers the rebound in gold into this fall was a lot higher and the current sell off is not as deep.
You can see the same effect with silver. Investors in non-Dollar currencies are seeing silver decline but not as much as we who hold it against Dollars.
A simple chart of Gold and XAU, an index of gold mining stocks, shows that both are taking back part of this year's gains. So far the decline can be seen as a normal correction of a previous rally.
On the left is a chart of the Dollar Index with letters and lines implying an eventual top at or above 107. This is the way I have been viewing the chart for a while. Now I am having second thoughts. Last spring sentiment was very negative on the Dollar. The Trump election has international wealth rushing into Dollars and our stock market. Sentiment toward the green back is extremely positive. They hate em at the bottom and love em at the top. This has me considering the pattern projection on the right side chart.
On Wednesday I noticed this pattern in UUP, an ETF that tracks the Dollar Index on my Investools.com chart. This contracting consolidation usually leads to a final burst in the direction of the previous trend, up in this case. In over seas markets the Dollar made it to 102.19. UUP went a bit higher on Wednesday. Both the Dollar and UUP pulled back a bit Friday. There is a good chance that the rally is over for now. It could lead to a temporary correction as in the left side chart above or it could be larger. The reason to suspect a larger correction is the extreme belief that the Dollar can only go higher from here.
Here is another example of how important currency moves are when looking at commodities. If you are planning a copper mining project in U.S. Dollars you see copper rallying toward $2.70 a pound. That is a decent price. On the right is a chart of copper adjusted for changes in the value of the Dollar. If you are considering a mine in a country whose currency has declined in price relative to Dollars your copper chart looks more like this and your mine looks more profitable. The other side of this equation is that commodities are more costly for other countries because of the devaluation of their currencies against the Dollar. Higher prices cause reduced consumption and more production.
Traders love palladium while ignoring platinum. JM says that demand for both will be greater than the supply from mines this year. There was a shift toward using more palladium in auto catalyst applications due to its lower price. Analysts claim that this is why palladium is more attractive. On the right is a chart of palladium and the Dow Jones Industrial Average. The ups and downs correlate. Don't forget, the Trump stock market rally is accompanied by an increase in interest rates. Low rates were good for auto sales. As they go up it gets more difficult to finance the purchase of a new car.
This is a chart of the daily closing price of gold and TLT, an ETF that tracks longer dated government bonds. Investors bought bonds because there was no growth in the economy. They bought gold because most major governments are spending much more than they take in and there is bound to be a day of reckoning that will effect the world's currencies. After Trump's election both markets are technically "over sold" and due for a bounce.
Interest rates of all durations rose rapidly over the last few weeks. This chart shows the current rate on a 30 year government bond. Three percent does not sound like much. For every tenth of one percent rate increase the additional interest payment on a billion dollars worth of debt is a million dollars. The U.S. is borrowing around ten billion dollars a week. If borrowed in 30 year bonds that is an additional 300 million dollars in taxes needed to pay the interest. The three month T Bill rate is at 0.49%. The annual interest payment on ten billion dollars at that rate is 49 million dollars. These are astronomical amounts of money that are extracted from our economy just to pay interest payments with much of it going over seas. With Obama doubling our debt load and much of it due to be refinanced we are headed for a collision course between debt payments and leaving enough money in the economy to create growth. Will pro-growth policies in the Trump years get the economy going quickly enough to off-set increased interest payments? We are about to find out.
Here are two charts of the Dow Jones Industrial Average from the Investools.com web site. On the left is the action following the election. Note the contracting pattern between the red lines. The text book says that this form should lead to a final up move then a reversal. This does not mean that current prices are at "the top." A sell off could be a correction of the Trump rally that takes back a third to two thirds of the advance followed by an additional up move. On the right is a one year chart of the Dow with a slow stochastic oscillator below. Both the oscillator and its moving average are at the tip top of its range. I put pink ovals above previous occurrences. In March it happened in the middle of a powerful advance. In July it signaled a short term peak. Once in a great while an up move is powerful enough to drive the slow stochastic to its peak on a one year chart then keep going up. Most of the time it is a warning that some type of correction is due. Two weeks ago I noted that other great bull markets started with stocks at price earnings ratios near ten. As of Friday's close the PE ration on the S&P 500 was slightly above 25.
Here is a simple measure I track. The purple line is the difference between the S&P 500 and its one year moving average. When it is near the top end of its range the market already had a good run. If you are a long term investor you want to buy when the purple line dips toward the lower end of its historical range. Currently it is near the high end of its range, the PE ratio on the S&P 500 is above 25 and investors are extremely confident in the future. They are imagining the best of all possible economies. When I saw this combination in past cycles it was time to leave the party!
General Electric and 3M participated in the advance but are not making new highs. Both look like they topped and are correcting the first down move. This worries me.
Corning is one of my favorite companies. If you get to NY State be sure and visit the glass museum in Corning NY. Since the tech bust it moved up and down and is now at a down trending line that touched previous peaks. I am looking for a stock market pull back. If it proves to be just a correction and prices start back up I will watch for a break out above the red line and follow through buying.
Goldman Sachs has a 7.56% weighting in the Dow Jones Industrial Average, the largest of any of its members. Last week I read that the movement in just four stocks, Goldman Sachs, Boeing, United Health and Home Depot accounted for 1,000 points of the Dow's recent move. On the right is XLF, the SPDR ETF that tracks the financial sector. Investors are again imagining the best of all possible worlds for bank and Wall Street earnings next year. As the spread between longer rates at which money is loaned and short rates at which it is borrowed by banks widens, investors see higher profits for these institutions. There is a lot of talk about Dodd Frank being tossed out. I doubt if leverage of the kind we saw before the 2007 top will ever return. It is ironic that Wall Street and big banks were huge supporters of Democrats and Hillary. Behind closed doors, in $250,000 speeches she promised them a seat at the table. I heard a number of Wall Street CEOs and top analysts warning of the negative consequences of a Hillary loss. Trump wins, stocks take off and their companys' shares jump higher. These are the guys who are suppose to be experts in what is going to happen with stocks and bonds so that you will trust them with your money.
A couple of months ago I wrote that often, after a market consolidates around a peak, it forms a "W" where the right side of the W leads to higher prices. I am watching the S&P 500 for just such a pattern. Going into this weekend it seems unlikely that stocks could pull back toward the pre-Trump levels. Don't forget, our current prices are based on hopes. No legislation has been passed and no regulations cancelled. It is a long road from here to there. Democrats will do everything they can to keep Republican policies getting credit for a better world.
Most popular averages are at new highs but not all stocks are participating. The short term pattern in the Dow Jones Industrial Average looks like a topping pattern. Investors are in a state of euphoria about a future that is not yet realistic. Stocks are priced for the total Trump agenda to be immediately implemented with the best of all possible results. It smells like a top!
I would like to be dead wrong and for stocks to stall a bit then move higher. After all, I want my retirement money to grow just like you do.
This is the key chart to watch. It is the Velocity of M2 money. You can find it on stlouisfed.org. Since the Dot.com bubble hoarding of wealth increased. This trend accelerated during the Obama years as the future became less certain and starting a business and hiring people became more costly and less likely to be successful. Listen to the anti-Trump college students and you get the impetus for keeping your money close to your vest. I read that Americans are hoarding a record amount of paper money outside of banks. In college Towns and some BMW suburbs there is stress, safe rooms and service dogs to help people deal with the tragedy of the election. In most of the country there is a big sigh of relief and a belief that things will get better and that effort and attitude will again be more important than bathrooms. That alone is going to cause a bit more spending this season. Two months ago I heard an interview with Alan Greenspan. He referenced this hoarding and referred to it as a pool of pent up consumption. He said that as soon as some kind of catalyst caused people to begin spending there would be a burst of consumption that temporarily makes it look like inflation is accelerating and that the economy is taking off. He did not think that it would last long enough to get the economy above 3%. We will see. The graph ends in October. Let's see if it takes a Trump up turn.
Next two weeks - People are too happy over stocks. I hope we get just a consolidation. I fear that we are at peak expectations and they are already reflected in stock prices. At a PE of 25 on the S&P 500 there is lots of room for disappointment. The daily headlines talk about new highs in the Dow Jones Industrial Average. On November 4th it closed at 17,888. A week later it closed at 18,848, a thousand points higher. Two weeks later it is at new highs every day but only 300 points above its closing on November 11th. The U.S. Dollar is also over loved. Both the Dollar and the Dow Jones Industrial Average made very short term patterns that suggest a top. Gold and bonds are over sold and abandoned. Yet gold only retraced part of its 2016 advance. The RSI readings on the daily and weekly charts are low enough to anticipate some kind of bounce. I am nibbling at gold stocks.
Best of Luck,