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 Sept. 11th, 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 26 Fructidor 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.
The stock market wiped out two months worth of trading on Friday closing at levels last seen on July 11th. Despite the long sideways pattern and low volume, investors of all types, professional and amateur turned more optimistic on the market over these two months, usually a bad sign. SentimentTrader.com, a web site to which I subscribe keeps track of all types of investor sentiment gauges. Two of their charts, ratios of money market funds relative to equity exposure, caught my attention. One was for professionals and the other for "Mom and Pop" investors. In both cases exposure to stocks is at peak levels.
Chartists will look for support in the trading range that formed between April and July. Nasty sell offs on Friday usually have some type of down side follow through into the next week even if the market tries to rally early on Monday.
Regular readers know that I repeatedly warned that the favorable trend in interest rates appeared to be ending. You can cite recent comments by Fed officials or economic statistics. I look at the charts and the patterns were similar to past potential tops. This graph from the Barcharts.com web site shows the December 5 year T Note future. It closed at a 1.22% yield on Friday, up 8 basis points over the last month. That is a 7% increase if your financing costs are related to this security. In August the note closed lower (rates higher) one session and the stock market did not sell off. There is a feeling in the air that things are about to change and that we are only at the beginning of it.
IEF tracks the pattern of the 10 year T Note. TLT follows the less popular 30 year T Bond. In past updates we were waiting for these markets to break up or down from their respective ranges. In some cases you could have the interest rate on the shorter maturities such as the 5 Year move up while longer dated bonds stayed the same or moved down. This would happen if investors thought that higher rates on the short end would result in slowing the economy and stopping inflationary expectations. That didn't happen on Friday. Yields across the curve went up. Everyone knows that Central Banks around the world rigged the bond market by buying massive amounts of governments bonds and notes, keeping rates down. In Europe they are so desperate that they are now buying private debt. Behind the markets there has been a feeling of discomfort. This has never been done before. There is no past record of trial and error. It was suppose to be a temporary event that would end when the world wide economy recovered. "TARP," the first big bail out was signed by George Bush on October 3, 2008. That was 8 years ago. If your were 21 that year you have lived almost half your life with Central Banks artificially juicing the markets. If you are a portfolio manager most of your trading over the last decade took place in an environment where it was thought that "The Fed" put a floor under the stock market. Friday's action in both bonds and stocks was like the first fall cold front approaching after a long warm summer.
The fall off in bond prices after the sideways trading range has similarities to the trading action in Oil between the blue lines. People who watch charts note that this "coiled energy" tends to produce oversized follow through in one direction or another. For bonds this means that the odds say there is more down side to come over the next few weeks.
Telecoms, utilities and other big cap companies that pay good dividends benefited from the scramble to find alternative yield as Treasury bonds rallied. They could smell the possibility of a bond market top and topped out in early July. If bonds follow the crude oil pattern there is more pain to come in these industry groups.
This is a graph of TLT, the ETF that tracks longer dated U.S. Treasuries, adjusted for changes in the U.S. Dollar Index. When the Dollar is going up in value foreign holders of our Treasuries get an extra return from being in a winning currency. The Dollar rallied a bit last week with interest rates firming but it was not enough to off set losses from the bond market tanking. There is a lot of "hot money" circulating around the world looking for the best return on a quarter by quarter basis. Managers look for the potential winning currency and asset class within that currency. They look at charts with trend lines and squiggles just like everyone else. A break of the lower green line could exaggerate the bond decline as hot money exits.
The best action against the Dollar has been the Yen. This chart is based on data from a Yen ETF so the price is a little lower than the cash exchange rate that closed at .009737 of a Dollar on Friday but the pattern is the same. Short term rates on government securities are negative in Japan. If our rates are bottoming out one would think that the Yen should be forming a top against the Dollar. Japan's economy is in the doldrums. Employment is high because the population is aging, retiring and shrinking. There is no way they will ever pay off their debt obligations. I say the same thing about the United States but the reality of the situation is likely to hit home in Japan before it does in the U.S. One of my bets last week was a short on the Yen against the Dollar. Hopefully it works out.
I am sticking with my "trading range leading to a big up move" for the U.S. Dollar. If we breach the yellow zone all bets are off. The action against the Yen last week was interesting. At first the Yen sold off against the Dollar as our rates rose then it traded sideways as the stock market melted down on Friday with wealth looking for temporary safety in the Yen.
This is a graph of the Dow Jones Industrial Average adjusted for daily changes in the U.S. Dollar Index. The sideways action of the last couple of months looked a lot like one of those contracting triangle patterns that lead to a final burst higher, until Friday. You can see that there were other declines of about the same amplitude that were quickly reversed. Longer term fans of stocks will point to these and hope for higher prices.
Chart guys who are bullish will remind us that often after a "break out" a market forms a "W" type consolidation before pressing higher. If this is the case you would not want to see the S&P 500 get below the 2050 zone.
I subscribe to Cyclesman.com, an excellent web site written by Tim Wood. ($300 per year) As the name suggests he follows cycles in various markets. He points to a 22 week cycle in stocks that bottomed on June 27th. His cycles have "timing bands." Historically the average period is 22 weeks but they can shrink or expand a bit. The next timing band low is from October 19th through December 21st. Some equate cycles to Voodoo but Tim's commentary has been excellent. I am a multi year subscriber. There have been times when I was very bearish on the market and he wrote about a cycle low in the next week. I held back form selling short and sure enough, the market bottomed. Without his warning I would have loaded up on the short side right at the low.
Here are two more bearish pattern potentials I am watching. On the left is the NYSE Composite. It could be making a rare expanding pennant formation. One last down segment would finish the form and lead to another rally. A sell off like that would be enough to convert a lot of professional bulls into timid bears who predict the end of western civilization. The graph on the right shows the NASDAQ Composite. Lately a lot of smaller more speculative issues outperformed the big blue chips. The pattern since the May 2015 high could be a "flat" formation in a bull market. In this case prices will sell off to levels a bit below the a point to finish the move. Predicting anything longer term is silly. I include these as a reminder to myself so that if I see them forming I don't turn radically bearish as they are ending. Don't forget; if they do form, every financial market prognosticator who has been telling you to buy will at that time tell you to get the hell out just when you should be buying.
The Goldman text book a,b,c correction in a down market had a target just above the a point. Late last week it hit that level. If reality follows art then another sell off is in the cards. It goes against common thought in this sense: pundits say that higher rates are good for financial companies so that they can earn something from renting out money. If bonds continue to sell off that should be good for Goldman Sachs. My chart mysticism is warning of another declining phase. We will see who is right.
The blue line is a daily chart of XLF, the financial sector SPDR ETF. The red line is an on balance volume graph. You take the day's volume of trading. If XLF went up you add it to yesterday's volume number. If it went down you subtract it. The conventional theory is that when something goes up but the volume is lagging there will be a divergence between the security and the OBV chart. There is no divergence on this chart but I noticed that the OBV pattern fit nicely as and Elliott Wave five wave advance. After five up one would expect a correction that retraces a good part of the up move. That would imply a correction in the sector, not a continued rally.
XLV is the Health Care SPDR ETF. Over the last decade this industry group has done better than most. I am a baby boomer. My aches and pains are not that severe but many of my peers are often at the doctor's and taking a lot of meds to combat the symptoms of aging. The theory is that the next few years will be prime time for health care firms as more and more of our savings goes toward medical costs. It is just a matter of demographics. Yet, few of us have saved for the costs. Most expenses will be paid for by tax payers and reimbursements are likely to fall as the government runs into financial problems. The biggest buyers which are government agencies will squeeze all the fun out of owning these stocks and activist groups will insist that our meds are a "right" and that profiting on them is immoral. Watch the lower red line for a breach.
My son has a friend who is brilliant and knows he is brilliant. When you hear him talk you figure that he must have a good paying job and be a key person in some business. It turns out that he has a hard time getting along with others and works nights as a baker, preparing breads for the morning rush. I am beginning to wonder if TESLA is similar. The company sounds good and Mr. Musk is a great speaker. The cars are fine if you have the money but the company depends on tax incentives to sell cars to rich guys. TESLA and other high tech firms are giving big bucks to Hillary. They are our modern oligarchs, the new military industrial complex. If the Donald wins how long do you think he will suffer middle class people's taxes subsidizing the purchases of the wealthy?
My wife and I stayed at an AIRBNB cottage on Friday night in Rockport MA, the town in which I grew up. We woke to the view on the left Saturday morning. Rockport has a permanent population of 6,952 with more people vacationing there in the summer. The house next to our rental just sold for 1.8 million. Two doors down another is for sale for 2.1 million. The view is wonderful but the price to see it every morning is steep. It turns out that in this little tourist town there are currently 127 houses for sale. I notice that in other well to do neighborhoods, properties that have been for sale for a couple of years at above market asked prices suddenly moved in the last month or two. There are a lot of new FOR SALE signs as owners sense the irrational desire to spend the big bucks on real estate. I smell a top. On the left is XHB, the home builders SPDR ETF. It looks like a potential head and shoulders formation. The idea of Fed intervention was to help the economy recover. There is little recovery but a lot of misallocation of money into assets whose purchase can be easily leveraged such as stocks, bonds, cars and real estate. It has been the best of all possible worlds for people with money and their ability to leverage their purchases pushed the prices of those assets higher. If the low interest rate party is over then so is the boom in home prices.
I plead guilty to going to Starbucks when I am in the mood for a dark roast. Other than that it is too expensive. The recent pattern of trading looks like bonds did before they broke support. Until price declares itself it is impossible to know if it coiled for one last burst higher or if it is about to fall off a cliff. I have to go .65/.35 with the latter going into next week. A break of the lower line will mean that everyone who bought since July of 2015 is sitting on a loss. That is a lot of transactions that will then be losers.
If you want me back as a customer then lower the price to below $2 for a medium.
Gold and silver stocks also took a hit on Friday along with everything else including the metals. This is a break with the pattern from earlier this year when the metals moved counter to the stock market. Back in January when stocks had a big sell off gold, silver and bonds were the flight to safety play. Just as bonds and gold moved together back then to the up side, bonds sold off Friday and dragged metals down with them.
My support area is still back at the level of the red lines.
Gold has a shelf of support near $1,310. Prices tested this level three times already. I fear that the fourth touch will lead to a break to the down side. Last week when the price jumped higher on lack luster economic statistics I was hopeful for higher prices. Then I saw the commitment of traders report from the CFTC. Speculators are loaded up on the long side with both gold and silver contracts to close to record positions for recent history. When silver pulled back a few weeks ago they bought even more. The specs are convinced that these metals "have to" go higher. In past cycles this signaled lower prices, if not today then in the very near future. I did not like the change in trading tempo on Friday (stocks down and gold down). Watch $1,310.
The gray reaper also claimed its scalp on Friday after looking promising earlier in the week. With short term rates near zero it has been easy to finance metals positions. With an uptick in short term rates the metals don't look like such a bargain.
Last week I heard a gold and silver bull. He mentioned that other Central Banks are moving their gold out of NY vaults back to their home countries. For some reason he cited this as a bullish factor. It could also be that they are bringing it home to quietly sell it. After the crash in 2008 and 2009 when unemployment was high millions of people around the world brought their gold and silver jewelry to pawn shops and coin dealers to sell for cash. With economies not responding to extreme monetary ease and tax revenues not covering expenditures don't you think that governments are likely to sell assets such as gold for cash if borrowing costs increase? If one starts the ball rolling the rest will do the same.
Everything took a hit on Friday including Platinum and Palladium. Platinum closed $22 lower and Palladium $9 lower. These markets are fairly illiquid and not for the faint of heart.
In many trading sessions in NY over the last month the lows of the day were hit in the first hour then prices recovered. Friday looked like a similar morning but the recovery stalled then gave way to a dramatic sell off. Europe and other markets were closed and could not react. I will be watching the Patriots play tonight with one eye and futures in the electronic markets with the other. Shanghai will be my first cash market indication of things to follow on Monday. You can be sure that the Chinese government is already rolling out the buy orders to try and mask any weakness.
Strategy for next week: Stocks rarely bottom on a Friday. Short term they are over sold enough to get some kind of temporary bounce but after that lower prices should follow. Remember, in past down cycles the Fed came out with supportive announcements to calm markets and assure them that interest rates will never go higher. Last week's sell off in bonds was market led. It is as if government bond buyers have had enough and the free market interest rate is coming unglued to Central Bank manipulation. Above I mentioned Cyclesman.com and the timing band for the next weekly low. I did this because it is at least a month away. If past history is any guide to the future then even if we have some rallies here and there, the trend should be lower going into that period. The sell off in metals along with stocks is very worrisome. When a trading pattern changes like that it warns me to stay away. Speculators are extremely long metals contracts. Who is left to buy? I am not buying anything.
If you are a fan of the Elliott Wave Socionomic writings you note that up stock markets correlate well with the incumbent party winning the election. If we keep going higher Hillary is likely to win. A sell off favors the Donald.
Best of Luck,