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 August 13th, 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 27 Thermidor CCXXIV
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.
Chart of the week!
This week's favorite is the graph of December Corn Futures. On the left is the price action for the last four months. You can see that it has been mostly down. When corn prices are high farmers buy more of everything having to do with growing the stuff because each additional bushel they can squeeze out of an acre pays off. When the price declines so do things associated with growing it. On the right is CORN, an ETF that tracks the price of corn. I frequently write about potential "contracting triangle" formations. This one is text book. After a persistent rise or decline these structures form as the next to the last pattern before a final move in the previous direction. They break out then reverse forming a top or bottom. In this case it is a low and the burst down was Friday. There is a chance that the sell off shown was only part of the final fall and that it will continue into Monday. My guess is that Friday's low in corn prices was the bottom for now.
Silver, my favorite from two weeks ago is still unresolved. Prices continue to trade within the range created between July 5th and 8th. The market could be forming a shelf of support that is about to collapse as shown on the left side graph or a contracting pennant as shown by the right side chart. Note that the right side form is the inverse of CORN above. It implies a quick pop to new highs then a collapse.
Last time I was leaning more toward the right side silver chart and hoping for a final pop. Last week both palladium and platinum had big reversals. They are secondary players in the precious metals complex but when the small guys begin to falter I worry about the big markets. Going into the last two week period speculators bought a near record number of long platinum futures contracts, a bad sign. They are loaded up with silver and gold also so caution is advised.
On the left is a weekly chart of silver. The upper red line shows the level one would expect the metal to rally toward. The chart on the right shows silver prices adjusted for changes in the value of the Dollar. If the Dollar had not increased in price against other currencies this would be the pattern. It gives me an idea of what people in non-Dollar areas see when they study their charts on the weekend. Note that in non-Dollar terms we are at resistance now!
The peak in gold formed around the aftermath of the Brexit vote. As with silver, the price has been moving sideways since. I am going to watch the silver pattern and expect gold to do the same. Note that both interpretations call for prices to be lower a month or so from now. On the right is a graph of the daily closing price of gold and a number of moving averages. I watch this chart because a lot of funds trade off of simple moving averages. When one of the shorter ones crosses the longer they sell or buy. Currently they are flattening out. It won't take much to turn them down.
Here are two related charts. The blue line on both is an index of gold and silver mining company shares. The chart on the left is a ten week moving average of this industry group's performance against others. You can see that the red line has only been this high a handful of times and they were not good times to buy! On the same spread sheet I have a column where I put a "1" down if the gold mining sector scored in the top 20 industry groups for the week. If below 20 I add a "0". I keep a ten week moving average of this column. As with the red line on the left side graph, it is best to be a buyer when it is at the bottom of its range. It is near its high going into next week.
Everyone watches the price of copper. If economic activity is picking up so should the demand for copper. Most of us are hoping that it is forming a bottom around $2 a pound. After all, we want to be employed next year! My worry is that it might be making a pattern similar to CORN, a contracting triangle that will result in a final plunge. "Yes," you could argue, "but wouldn't that be a final move followed by a rebound?" That is true, but I would rather not go through the economic trauma that would accompany a sell off below $2. And don't forget, the price could rise on mine shut downs as opposed to strong economic growth.
I've put a lot of key strokes into commentary on the bond market over the last few months. This is a chart of TLT from the Investools.com web site. TLT tracks the price of longer dated U.S. Government Bonds. It goes up when interest rates fall. Remember, it is my opinion that rates hit their lows last month or are about to do so with one final thrust up in bonds due to some shocking news. The pattern is very similar to the silver chart. The market could be consolidating for the big drop or coiling for a final spike higher then reversal. As with silver, speculators are holding record long positions in T Bond futures. When they start to head south it will be all sellers and no buyers. Corporates and Muni bonds should follow along with interest rate sensitive sectors such as utilities and telephone stocks.
Is the world getting Central Bank fatigue?
In the last month we learned that the U S economy grew at only a 1.2% rate in the last quarter continuing a string of sub 2% numbers. For a couple of months retail sales did better but last week the number came out and it was flat. Productivity was also low. The Dollar sold off again. It conformed to my pattern so far. Next should be a rally phase toward the "d" point. I drew in a yellow bar below previous low points. A weekly close below 93 will have everyone who bought over the last year and a half sitting on a loss. A flushing would follow!
I like to listen to CNBC, Fox Business and Bloomberg early in the morning as I sip my two cups of coffee and eat my English muffin. Last week I heard the phrase "end of the earnings drought in the third quarter" multiple times. It is almost as if the word went out to every analyst to start using this terminology. Yet recent data has yet to verify the theory that the economy is going to suddenly get better in September. They are all hoping for the yellow shaded area on the graph to the left. This is the point where interest rates begin to increase due to improving economic activity and investors buy industrials that will do well in a rising tide. Even though rates are higher, earnings are growing at a faster rate. So far this is wishful thinking.
The S&P 500 led averages to the upside last week. The Dow Jones Industrials and the NASDAQ made new highs with most looking for follow through. On the right is a chart from the spring and summer of 1982. I was a lowly stock and commodities broker at EF Hutton in Boston at the time. There were a number of empty desks in our office. No one wanted to be a stock broker because no one wanted to buy stocks. This was before personal computers. We had terminals on our desks to retrieve current prices. On the wall of the office was "the tape" It was a very large display where symbols of companies moved from left to right along with the number of shares transacted. When volume picked up the symbols sped across the display. In the summer of 1982 the tape moved slowly and on some afternoons stopped for a second or two. The market hit a low in early June, a slightly lower low in mid June then tied the first low in early July. You can see it on the left side of the red rectangle. It was a pattern similar to the Copper pattern feature above. Then prices rallied. Every guy who ever read a chart book yelled "Head and Shoulders Bottom!" Volume picked up for a few sessions then prices stalled and began to drift lower. They approached the June and July lows. Confident guys said that it was just a "retest". But then prices broke below those June and July points and stayed there for a week. I remember the mood in the office and the commentary among analysts. It was the end of the world. Stocks were useless. On August 16th prices jumped higher and never looked back. The tape couldn't keep up with the volume and ran 20 minutes late. The great bull market had begun. What bothers me is that the summer of 2016 is just the opposite in pattern and sentiment. We traded around the highs and just popped above them. Sentiment is extremely bullish and active money managers are fully invested.
Not all market measurements are at historic highs. The Russell 2000 is made up of smaller companies and is lagging. The NYSE Composite monitors all the companies traded on the NYSE and has yet to better previous peaks.
The pessimist in me is watching these two markets with the following mystical overlays: On the left is a shorter term chart of the Russell 2000 from the Investools.com web site. I drew red lines around the most recent action. It could be in the same situation as silver; close to a final pop or ready to break down. I am hoping for a final pop into Labor Day, one of the market's most frequent periods for a change in trend. On the right is a longer term chart of the NYSE Composite. One could still argue that it is making an expanding triangle formation with the sell off toward the lower red line yet to come! These expanding patterns are not that common so don't bet the farm on it!
Aside from potential topping patterns the biggest caution flag for stocks is the extreme level of bullish sentiment. How do I know? I subscribe to SentimentTrader.com, a web site that concentrates on tracking levels of sentiment toward various markets.
You can Google VIX and get the exact definition. The practical way of looking at it is that when it is very low, investors are anticipating a period of low volatility and higher prices. It spikes when the market sells off. We are entering a season when volatility rose in past years. When the VIX and volatility expectations are at the bottom of their range there is only one way to go.
Bulls should argue that with all the bad things going on in the world, why fight a good time in the stock market? Even if the sentiment numbers are tilted toward bullish extremes it doesn't mean that a crash is coming. Frequently when a market moves to new highs it forms a W type pattern with the low points touching the top of the previous trading range then resumes its advance. This would dampen the sentiment numbers and give the economy time to catch up to stocks.
I lean toward a more bearish view of things but if I see a pattern such as the one on this chart I will prepare for a good move higher. If the bond market starts to collapse that wealth will be looking for a home and it might just find it in the stock market. In the mean time here are some random charts.
Goldman Sachs could make a text book finish to a flat correction in a down market by rallying toward the 4 point on the chart. If my conjecture works out the next leg of its decline would follow.
XLE is the energy sector SPDR. It is dominated by Exxon Mobil (18.14%) and Chevron (14.51%). With oil dropping from its $50 range why isn't this ETF also falling. If anything it looks like it is winding up for another rally phase. One explanation is that XOM has a 3.46% dividend yield and CVX pays a 4.22% dividend. As long as they are making enough money to cover their dividend payout investors might not care about ups and downs in oil.
On the left is XLV, the Health Care SPDR. On the right is IBB, the IShares NASDAQ Biotechnology ETF in a chart from the Investools.com web site. Both had quite a run over the last few months. The pattern in IBB fits nicely as a correction in a down market. In the 1990s there was a big run up in all things Health Care. The theory was that baby boomers were aging and would have to spend more and more on doctors, drugs and nursing homes. It was the basic demographic argument. In my neighborhood the owners of a roller skating rink and indoor soccer field want to sell their building to a group that will tear it down and build a nursing home. They are running into objections because there is a surplus of nursing home beds in eastern Massachusetts. The new drugs helping to keep us alive are very expensive. The government programs that will pay for them are broke and likely to be cut back with either party winning the next election. It could be that we are topping out on both the bodies to fill nursing homes and the wallets to pay for care.
Here is an update on XLP, the consumer staples SPDR. It corrected some of its recent decline but failed to make new highs with the broad market. I am still anticipating a test and failure at the lower green line. Remember, many of these issues pay good dividends. If we are at the end of the "lower interest rates" gravy train this group could stall.
I started this update with a chart of corn and CORN, an ETF that just formed a contracting triangle, burst lower and hopefully a reversed. I am watching for the same with the Shanghai Composite. This is somewhat of a rigged market because the government is threatening large money managers who sell. It could break to the upside instead so it is better to wait and see if it continues to coil then break down. A sell off in China would certainly effect the rest of the world's markets. Remember that this pattern leads to a final burst in the previous direction then a reversal. If China follows CORN there will be a well publicized collapse in prices but after a couple of weeks it will be a buying opportunity.
Unneeded Commentary - More Complaints about things.
Original Sin and Self Driving Cars
The Judeo Christian tradition that many of us grew up in has a concept known as “Original Sin.” Adam and Eve had it made in the Garden of Eden but gave in to temptation by eating the apple. The story illuminates the universal condition of humanity, our inclination to choose misbehaving over complying with the God ordained original nature of things. St. Paul in the New Testament Book of Romans puts it like this.
18 The wrath of God is being revealed from heaven against all the godlessness and wickedness of people, who suppress the truth by their wickedness, 19 since what may be known about God is plain to them, because God has made it plain to them. 20 For since the creation of the world God’s invisible qualities—his eternal power and divine nature—have been clearly seen, being understood from what has been made, so that people are without excuse.
21 For although they knew God, they neither glorified him as God nor gave thanks to him, but their thinking became futile and their foolish hearts were darkened. 22 Although they claimed to be wise, they became fools 23 and exchanged the glory of the immortal God for images made to look like a mortal human being and birds and animals and reptiles.
24 Therefore God gave them over in the sinful desires of their hearts to sexual impurity for the degrading of their bodies with one another.25 They exchanged the truth about God for a lie, and worshiped and served created things rather than the Creator—who is forever praised.Amen.
When you look at most religions broadly a similar theme emerges. At some previous time there was a state of perfection or unity. We, as human beings screwed it up either through our actions, our very nature or the emergence of consciousness which has an unreachable subject only able to perceive things inaccurately as objects. I would argue that Plato’s Republic is perhaps the most influential pre-Christian theory of right and wrong in the Western tradition. Plato posited the metaphysical reality of perfect “forms.” His parable of the cave says that the most we can perceive is the shadow of a dulled down reflection of reality. There are layers of things keeping us from the Truth. The remedy in most traditions is for us to do something. This might be engaging in rituals or sacrifices to appease God, Gods or spirits, meditation and study to change or merge our consciousness, correct thinking or in the case of Christianity, to give in to our depravity and accept Devine forgiveness and try and live a life worthy of it. The science of the cosmos also agrees with this idea. Before the Big Bang there was some kind of unity and oneness. “Original Sin” as a concept has been in and out of style. The idea that we are individually depraved at birth and that man to man short comings are what is responsible for crime, poverty and getting treated rudely at the Registry is too simplistic for many. As people tried to apply the scientific method to human endeavors different explanations for bad behavior emerged that took away from individual choice and responsibility. There were complicated “causes” such as a mother’s rough handling, cultural conditioning and unconscious bias. Many of these explanations simply pass the buck of individual bad behavior from one group of people to another. For instance: X is a part of group W that has a high crime rate. It is not the fault of group W. They were treated badly by group Z. Group Z is responsible for their own bad behavior but group W, the victim of this bad behavior cannot be held responsible for their own day to day decisions. If X commits a crime it is the fault of individuals in group Z. A century ago C.S. Lewis wrote an essay condemning this type of thinking. A materialistic or mechanistic view where free will is subordinated to “causes” relieves individuals of responsibility for bad behavior. If true then it is in society’s best interest to incarcerate or kill them just as you would throw away a calculator that stopped working correctly. Millions of words have been written on behavior and causes. In the 60s, the concept of Sin was alive in my Sunday school while the secular world adopted Freudian terminology. A favorite for guys trying to get a lady to say “yes” was to inform her that her modesty was a result of “repression,” an obviously negative sounding thing which ought to be overcome. The work of B.F. Skinner was also popular. His theory was interpreted by many to mean that humans start out in infancy as blank pages. Through experience and conditioning you can end up with any kind of person you want. Strongly held moral beliefs or aberrant behavior were just two sides of the conditioning coin. One side might be better for the coexistence of people than the other but any moral judgment was unfounded because the judger’s own opinions were the result of conditioning. This period of reclassifying bad behavior from sinful to being the result of other causes outside of the perpetrator resulted in a rethinking of punishment. If I steal your car but my actions are the result of “causes” how severely can I be punished and can’t I just be reprogrammed by an enlightened legal system to be a model citizen? The 1960s saw the highest crime rates of my lifetime.
It is fifty years later. The concept of Sin is still available in church. Outside of church we no longer believe in God or a metaphysical moral order. It is the age of genetics and big data. We know that many traits such as intelligence, shyness or aggressiveness and athletic ability are inherited. At times researchers suggest that they have isolated genes that cause a pre-disposition to risk taking associated with criminal activity. If the 60s saw the zenith of “behavior caused by nurture” our current era is more focused on “nature” and probabilities. Google “percent of sociopaths” and the first entry will be Martha Stout’s 2005 book that claimed 4% of people in the population are sociopaths. Try “percent of personality disorders.” The second entry will be a government funded study claiming that roughly nine percent of the population has some type of personality disorder. In 2016 a different concept of Original Sin is alive and well. The Christian form of Original Sin offered a chance of redemption to the individual through Salvation and Repentance. God was watching and there was ultimate Judgment to be avoided. When God goes away the focus is not on what we ought to do and our ability to repent. All that is left is our shortcomings. Today there is a big data acceptance and a sense of the inevitability of bad behavior by a significant percent of the population. It is a distanced and diminished sense of original sin that no longer sees the Sinner, only the numerically grouped data points representing their behavior. There is no ultimate Judgment and no God watching. Companies are well aware that employees steal tools and other company gear. Google “Employee Theft Statistics.” According to Statistic Brain fifty billion dollars worth of things are stolen annually from U S businesses by employees. Cameras are installed and items tagged with special sensors to reduce theft. At Amazon warehouse employees are scanned on their way out. The security industry thrives because we know that a large percent of the people who pass us on the highway, if given the chance, would do harm to us or take our possessions. Type in “employees who won’t follow directions” and you get multiple web sites helping a manager deal with them. Obviously it is a problem. Look at all the quality control programs that are instituted in business. I like them because they give a detailed description of exactly what is to be done and what to do when things don’t come out right. Every company needs to identify how and why they do what they do and document it. Yet part of the reason they are in place is because some employees don’t work well. SAP, while not specifically a quality control program follows each task with a code so that every employee’s input can be measured. In a world where few believe in the concept of a moral order set in place by God and future judgment for rejecting it, businesses have to establish written order, supervision and process control documentation along with the treat of termination. The old religion saw individuals with the potential for good or evil. The new concept of original sin sees groups people with a probability of screw up along with supervision and programs to keep us on the straight and narrow for at least 8 hours a day. As such it is not concerned with our moral self, only our behavior as an input toward the desired workplace outcome. It is a technical and cold view of humanity. One result is that the biggest driver of proper behavior is having a work place to go to where we are supervised. It is no wonder that being out of work correlates to higher crime rates.
Lately there is a lot of talk about self driving cars. One of the possible benefits is fewer accidents. Right now this technology is at the apogee of a movement that began in my life time – automation, the clear admission of Original Sin. You hear the proponents of robotics say that robots don’t call in sick. They don’t complain about the boss. They don’t ask for raises etc. The perfection of a robot in doing a limited task is the exclamation point on our shortcomings as humans. Isn’t it the admission that the old time religions and Plato were right? Each of us in our humanness is an example of a “falling short” of perfection in some way, morally or in behaviors that don’t get the job done. There is no redemption. We just look at the stats and the graph that the numbers produce. If we are optimists we ask if there is a program we can institute to move the curve up or down. The pessimists among us mutter something like “It is what it is.” There is no judgment and no sense of individual moral responsibility. If the error rate gets too high we will discuss spending the money to automate the process at the next quarterly meeting.
Movies such as The Terminator capture the spirit and the logical extension of what a robotic world view is toward the weaker “carbon based life forms” (See Star Trek: The Motion Picture). All inefficient and emotional human life is wiped out. You also hear economists worried that most jobs will be replaced by robots. When I turn on Fox News early in the morning I now see two or three ads promoting automated investment systems that are deemed superior because of their lack of human input. Does it have to end this way? I would argue No! The new toys we have are increased computing power and cheaper storage. When any technology is popular there is a feeling that it will take over everything because people project its past growth trajectory into the future. Digital watches were the rage in the mid 80s. Unless you run or scuba dive you don’t use one now. Here is my best (and human) argument that a change of trend is possible.
Go to YouTube. Watch and listen to https://www.youtube.com/watch?v=QLj_gMBqHX8. It is Bach’s Brandenburg Concerto #3, from sometime between 1707 and 1721. It is possibly the best song ever written. Some see it as the greatest composition of the Baroque era. German Baroque music was very “heady” and technical. Bach had perfect balance and movement between mini episodes of musical tension and relief. Listen for a few minutes then notice with what part of your brain you are enjoying it. Now listen to https://www.youtube.com/watch?v=4Tr0otuiQuU Beethoven’s Moonlight Sonata, another perfect piece of music completed in 1801. It is a simpler, closer to you, more soulful and human tune. Bach’s work had a technical perfection and particular beauty that was distant from immediate feeling. Fifty years later people turned back to “Classical Music” that emphasized tune and more human emotion. When Bach wrote the Brandenburgs the audience was aristocrats, a very small group of the population who owned most of the land. At the time land was wealth. The music speaks of an order filled with complication but in the end, order. Over the next 80 years the industrial revolution changed the makeup of people with money enough to afford to pay for a concert. A middle class emerged, wealth and education spread out to a larger group and along with it the idea of who should make decisions. In the world of aristocracy the opinions of the literate and educated very few were thought to be important. Anything said or thought by others was worthless. The success of merchants and tradesmen changed that. Who could be trusted to made decisions, whose input and thoughts counted were spreading out to a wider and wider group. It was no longer the case that a small group of enlightened elites deserved to run the show. The rest of humanity was becoming an asset, not a nuisance. The valuing of humanness was reflected by the change in music. The result was the beginning of an expansion in western civilization that created wealth and a standard of living for most that peaked with the United States, the country that used to value ideas from all sources.
Are we headed in the opposite direction? In some ways, is the implementation of quality control, best practices and the need to document every step a shrinking of the number of people allowed input? “How things should be done” has already been decided. Your job is to do it and document every step. There are a very small group of people with IQs above 130 and degrees from top schools. It is their job to do the thinking. In our “sinless” world the probability of screwing up needs to be mitigated or just avoided. It is our humanity, our statistical original sin that is at fault. Automation is the final solution. The move from a few calling the shots to the many being thought of as competent to make decisions led to the spread of wealth. Will the current reversal do the opposite? Are we already seeing the results in the current distribution of income? Some blame over regulation and taxes for our stagnation. Isn’t regulation another way of saying, “We few in power know you won’t do it correctly on your own. You need to be guided step by step and put in your place.” Aren’t higher taxes a way of saying, “Your decision making is not good. You won’t spend your money correctly. We will do it right!” The concept of Original Sin lives on with many of us due to be “replaced.”
I liked it better when I could find Redemption on my knees and the work world saw me as an asset. Let’s hope we head back in that direction as they did in the past.
Best of Luck,