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 May 23rd, 2020

dedwards-1@comcast.net

Please remember, the following is pure speculation based only on my experience and chart patterns. "Every sunken ship has a room full of charts."

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.

What I am watching for next week.

 

 

Going into last week I was unusually optimistic. Monday's stock market gapped higher on good news about Remdesivir, an experimental treatment for the virus. I was holding a small short position on the S&P 500 and covered when the stock market dipped on Tuesday. The rest of the week was a back and forth affair on declining volume. It fit the text book pattern of a contracting triangle that will lead to a final burst higher some time next week. It could be that this ending move will start right out of the gate Tuesday. The graph on the right would look best with a pull back toward the lower red line. On Friday, at 6:00 PM the New England Journal of Medicine released the results of a study showing that Remdesivir had minimal efficacy for only a small group of patients who were already very sick and on oxygen. Perhaps this news on the drug that was suppose to save us will be the catalyst for a down opening on Tuesday with a move back toward the lower red line. My theory is that a final pop higher will coincide with a short term peak in "opening back up" optimism. A future where the sky could be the limit is inspiring. Actual results might disappoint. I will use a number of graphs from the Barchart.com web site because it allows me to show shorter term past patterns and I am a short term trader, not an investor.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In February I started following the inflection points of the 1965 - 66 stock market because they were similar to this year's market. The tendency continues. The next matching date is Wednesday of next week. Remember, there is no rational reason why this correlation should continue so don't bet the farm on it.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sentimentrader.com is one of the investment websites to which I subscribe. Among their indicators is "Smart Money versus Dumb Money." Dumb Money is very confident at highs and convinced that the world is ending at lows. Smart money is selling near highs and buying near lows. They build their models from proprietary measurements of investor behavior including options trading and purchases of leveraged ETFs on the bullish and bearish side. Usually Smart Money and Dumb Money move in opposite directions. Last week both were more than 50% confident of future gains in the stock market. Sentimentrader noted that this was very unusual and happened only once in the past at around November 5th 2001 close to two months after the attack on the World Trade Towers on 9/11. On the left is the pattern of trading at that time. There are two red arrows on the graph marking periods where the pattern was similar to our own recent trading. One was 33 days from the terror attack low and the other 69 days later. Friday was the 43rd day of trading following our low. In my neighborhood there are "We are in this together" and "Thanks to our front line workers" signs similar to encouraging yard signs common after Nine Eleven. Sentimentrader says that following the "both Smart and Dumb confident" reading of 2001, stocks chopped higher for another month then rolled over.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

It is still a two tiered market with a small group of mega-tech, cash rich companies capturing investors' wealth. The NASDAQ 100 has most of them and is leading all market measurements. Smaller firms that might be more prone to credit problems are winning fans who are trying to bottom fish but they are clearly under performing.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Even a broad market measurement like the NYSE Composite looks wimpy compared with a big winner like Apple. Investment managers tell us to diversify our portfolios when we should have just bought Apple! Apple is a safety play because of their cash but the world now has less purchasing power than it did four months ago. It is hard to believe that Apple's earnings will be just as good as they were in our new, poorer neighborhood.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wal-Mart and Amazon were big virus winners. A few weeks ago I wrote that I was hearing Amazon mentioned too many times and this probably meant it was close to a top. Now that we are re-opening the U.S. there will probably be a new appreciation for those small store fronts in our downtown areas that manage to survive even if we can get the same thing on Amazon $2 cheaper. The same will be true for Wal-Mart. These companies had a kind of government mandated monopoly and now it is over.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

XLV and XLY are two popular ETFs that are close to their pre-virus peaks. Money is pouring into health care companies now that the world's focus is on treating virus patients, coming up with a vaccine and the potential on-shoring of critical pharmaceutical ingredients. With the prices of these companies high again the risk is that the virus does not have a rebound. States that opened up earlier are doing well instead of getting a second wave as predicted. If the bug goes away on its own then all that healthcare won't be needed and the stocks should decline. The biggest payer for health care is the U.S. Government and it is increasingly in debt. At some point there will be a period of austerity either by choice or necessity. That is another potential strike against health care revenues. Within the chart of XLY are the four largest holdings of the ETF. Amazon is the largest so in a way, XLY is another Amazon play. Investors believe that as we open up again there will be a spending binge. One thing to remember is that for millions of low skilled workers, current unemployment checks are the best payday they have ever had and combined with their stimulus money they are able to afford more now than they will after returning to work. Any spending binge in a post-virus world might be short lived.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Going into last weekend it looked like we were reaching a peak for panic markets and doom and gloom which meant a top in gold. We got a sell off and now, the question is, was it a standard a,b,c correction before higher prices or the beginning of a major decline. Any move below the "c" point on the right side chart will be evidence that it is heading lower.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Both these Barchart.com graphs of gold show the last month of trading in the June futures contract. The left side chart has the path of June Treasury Bond futures on top of it in blue. The right side picture has the S&P 500 on top of it. All three of these markets are moving roughly together. Sometimes the moves are coincident and at other times they are a day or two apart. It is always naive to assign "meaning' or "cause" to the whims of human decisions. The best explanation I can come up with is that markets are reacting to the belief that our Fed will continue to open the money spigots. They are already in the market buying bonds of all types. Many are writing that stocks will be next and gold bugs believe that this will lead to a collapse in the Dollar and inflation so they are buying on the same basis. It sounds good but look at the analysis of pending elections or football games and then see the results. Smart talk is just that.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The blue line on these platinum and palladium graphs is the S&P 500. Moves in these metals and the stock market are more tightly correlated than gold and stocks. Again, one can come up with explanations that sound good. The correlation will work until it doesn't.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

On the left is TLT, an ETF that tracks longer dated Treasury Bonds. Last week the Treasury sold twenty billion Dollars worth of 20 Year Bonds. The auction went well and bonds rallied a bit off of the red line. A break of this line will have everyone who bought over the last two months sitting on a loss. Critics believe that the Fed will swoop in and buy T bonds to keep the price up. My guess is that at some point, market pressure to sell will overwhelm the Fed. The graph on the right shows the trading pattern in June 10 year Treasury Notes. It has the same sideways form with traders watching for a move out of the range. In a free market, rates would be rising in reponse to a world where everyone needs to borrow.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Last month when the news was full of stories about the world running out of places to store crude oil, I noted that these kinds of stories appear at price extremes. Last week inventories of crude and gasoline in the huge Cushing Oklahoma storage area fell for the second week in a row as production in the U.S. drops and people start driving again. WTI Crude was rallying in anticipation and popped higher on the news. The simple RSI reading on a daily chart (right side graph) rose above .90, a sign that prices were getting ahead of themselves. Note that the last time RSI peaked above .90, oil eventually reached higher prices.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Dollar is stubbornly trading in a narrow range, frustrating those calling for its collapse and those warning of a Dollar shortage due to Dollar denominated loans around the world. When gold fell last week so did the Dollar with the Euro rallying. That warns me that much of the strength in gold is based on worries about the viability of the Euro, not the Dollar. At some point the tight trading range will break. Predicting that day is a losing trade.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Last week I read two articles on grains. Both said there will be a surplus of corn and wheat this year and that any shortages are temporary. On the left is a graph of September corn futures. It looks like it is forming a contracting triangle that will lead to a final low and reversal to the upside. If it breaks above the upper red line first then it should move sharply higher. On the right is a chart from the Sentimentrader.com web site showing that companies that deal in grains are very long corn futures contracts. In past cycles when they owned this many contracts there was little down side risk for corn prices.

 

 

 

 

 

 

Strategy for next week -

Stocks - If the chart mysticism works then there should be one more burst before a trade-able sell off. We are coming up on the same time period as the short term peak in the 1966 market and though I warn against following this long ago market I can't help myself. If I see a pop into Wednesday I will be shorting. If we don't rally but close below the lower red line I will also put on shorts.

Gold - A break of last week's lows will warn me of a change in trend to the down side. Until then I will remain agnostic. The same with silver.

Bonds - I am waiting for a break of the long sideways trading range. The Fed is propping this market up with billions of Dollars worth of purchases a day. If the re-opening of the economy goes better than expected there might be talk of no need for more hyper stimulus and bond market protection. If traders start worrying that they can't sell their over priced bonds to the Fed they will start dumping them in the open market.

JETS is an ETF of airline companies. Anyone paying attention knows what rough shape the industry is in right now. There are a number of stories about hundreds of thousands of new accounts at TD America, E Trade and Schwab opened by people under the age of 45 who are taking their first serious fling by buying beaten down groups like airlines, cruise lines and anything else that was trading at $60 and went to $7. I hope they are right and make lots of money. I am worried that we are just beginning the long road back into town after the tornado and that some of the buildings we had hoped would still be there no longer exist. Right now, hope and optimism are high. The encouraging yard signs say it all.

Unneeded commentary - Flattening the curve.

Those of us who watched the daily Presidential briefings heard over and over that we needed to social distance to flatten the curve. Other epidemiologists disagreed and said that there was no evidence that social distancing would stop a respiratory virus from spreading. Their opinions were mocked and taken down from web sites. Washing hands frequently has evidence behind it but 6 feet apart in a line at Whole Foods, no. Then there was the mask reversal. Masks were not needed and now I can get fined for walking downtown without one. There was the hysteria over Georgia and Florida opening up. If the experts said that we needed to stay home, social distance and wear masks when we went out only one or two times per week to not spread the bug then states that allowed people to get out and about were going to experience a massive wave of infections. They didn't. Here is my theory: There was no flattening the curve in the sense that we, the public did something to slow the spread of the virus. Evidence of this is two fold: 1. The states that were extremely restrictive like my state of Massachusetts had the most cases. Surfacing once a week with our masks and keeping behind the tape marks on the floor at supermarket checkouts did nothing to keep the bug from killing the elderly. 2. Based on the same assumptions, states that opened up were supposed to be burying thousands. Instead they are seeing fewer cases. Doesn't logic tell us that if the actual results are not consistent with the assumptions, the assumptions must be wrong? Humans have always worried about an unknown dark future and want to think that there is something they can do to change events that are beyond their control. Religions often have rituals that involve some kind of appeasement sacrifice or confession to turn away a future negative outcome. Storms, earthquakes, pandemics and events like terrorist attacks bring it into focus and give meaning to the lives of those who believe they are doing something to prevent the next one. Many have pointed out the similarity in language and actions between those who push the climate change agenda and those who are most likely to call the police because they see you walking to your mailbox not wearing a mask. Supporters of virus and climate hysteria want to think that their rules can change theoretical future catastrophes similar to other religious practices. It is so important and real to them that anyone who objects has to be silenced and punished. Those who will not turn down their air conditioning are similar to the governors of Florida and Georgia who loosened restrictions on their citizens. "They must be wishing for the deaths of millions!" Behind both potential genocides are "experts" whose models are consistently wrong but whose conclusions are so frightening that something must be done just in case they might be right. Could it be that in the case of the virus, it is just running its course and that the curve of that course is flatter and much less deadly than the "experts" predicted and that there was never much that we could do in the first place to hinder it? Yes. Will we ever be able to flatten the curve of human nature when it comes to hysteria over a fearful future unknown and the desire to think we can do something to prevent it? No.

Best of Luck

DBE