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 5th, 2019
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.
On the right is a three year chart of the NYSE Composite. Much of the action took place in the yellow box. When a market trades sideways for a couple of years the fans get nervous. Is it a broad top that will lead to a major collapse or just a long consolidation that will eventually break out to the up side? When we get a few bad days at the track the analysts talk about a recession and how we are "late in the business cycle" with the implication being that you should be getting out of the stock market. After a day or two of up markets the same crew pulls back on their most bearish predictions but still advises caution. Because the commentary is simply a reflection of the short term trend in prices it is useless. If you click between Bloomberg, CNBC and Fox Business you also see a clear bias in each with the first two featuring more analysts who clearly don't like our President and tend to dismiss the positive statistics such as yesterday's report showing a record number of people in the U.S. work force. On the other side of the bearish predictions are various sentiment readings that show pessimism among the investment community and this fear is made visible through their current bets on the markets. On the right is a graph from the Sentimentrader.com website. It shows the level of opening purchases of put options. You buy put options when you think the market is about to hit the skids. The current level of buying correlates with some previous market lows! This week I will be featuring graphs from both Sentimentrader and Barchart.com. The Sentimentrader site is a subscription service for which I pay and it is well worth it. Listening to the news you would be selling everything. When you see a chart such as the one above you realize that there are two sides of the story. The Barchart.com site is free and features delayed quotes and graphs of stocks, commodities and currencies. It is perfect for those of us who are weekend warriors or checking price patterns on a daily basis.
Here are two more charts from the Sentimentrader.com web site that advise caution when getting bearish on stocks. The left side graph shows the volume of trading going into Inverse ETFs. These are ETFs structured so that they go up in price when the market or market sector upon which they are based goes down. You buy these trading vehicles when you think stocks are going to take a hit. In past cycles, traders tended to load up on them near the low point of a sell off. On the right is a graph of the SKEW Index from the Chicago Board of Options. You can get this from the CBOE web site. It is a measure of expected market volatility built into options pricing. When the SKEW Index was at current levels in the past, the odds of a big sell off were low! After watching the news I am as worried about things as you are but when I see charts like these I realize that many of those worries could already be priced into the market.
The last update advised watching the NASDAQ 100 and Microsoft, two market leaders. Both fell below trend lines then snapped back at the end of the week. A break of last week's lows in both and the blue horizontal line on the NASDAQ 100 will flip the odds toward more selling.
This is a one year graph of the S&P 500 from the Barchart.com web site. Two things are worth noticing in this picture. At the bottom is a slow stochastic oscillator. It is near the low end of its range. Big sell offs were most likely to take place when the oscillator was close to peak levels or declining from the highs.
The two red lines enclose a series of back and forth moves that could be interpreted as a coiling pattern leading to a final blast to the up side. As unlikely as this seems given the news as of today, if you are a chart purist you have to include this in the range of possibilities, especially with the types of sentiment readings shown by the previous charts.
Two recession worry type sectors are getting a lot of investment interest. On the left is the Consumer Staples SPDR ETF and on the right is the Utilities. When you see a buying binge and a concentration of wealth in a particular asset class like this you have to begin walking to the door before the police come and break up the party.
Sectors being shunned are Industrials (left) and big financial stocks. Over the last month, the repo market which is institutional overnight lending, tightened up and the Fed repeatedly came to the rescue. The rumor in the markets is that Deutsche Bank is about to go under. Big US financial institutions such as Goldman Sachs and major banks have a lot of exposure due to their participation in derivatives that have Deutsche Bank as the counter-party. This set off panic buying of Dollar securities as big money gets out of the Euro. Investors pulled back on overnight lending because they are afraid that the Bank could collapse, taking others with it and they will not get their money back. It could be that Deutsche Bank is about to go under, however, I remember September of 1982 in the first weeks of the great bull market. There were persistent rumors that Citi Bank, then the world's largest bank, was about to go into insolvency because of huge South American loans. It never happened.
Here is an update on the futures positioning of big players in the gold and silver markets. The blue lines show that "commercials" are very short these markets and when they have been so in the past it was not a good time to be a long term investor in the precious metals. The other side to the position by "commercials" is speculators who are convinced that this is the time to buy the metals to protect from other markets going to hell. If it doesn't happen there will be a lot of sellers and few buyers.
These graphs show the weekly closing gold price in NY and a simple RSI momentum oscillator below. The chart on the right adjusts the gold price by the gains or losses in the U.S. Dollar Index for the week to remove the influence of a stronger or weaker Dollar on the metal price. In both cases the RSI reading is near the top of its range. There is no logical reason why gold cannot go higher, however, if you look at the history of this oscillator and the price action following peak readings in the oscillator it shows that longer term investors are better served waiting for the oscillator to be close to its lows before buying.
On the left is a daily chart of gold in NY with notations implying that the current rally is part of a large correction of the move down from 2011 to 2015. The original target for this move was $1,591 but the high we saw is "good enough for government work." The graph on the right from Barchart.com shows the last month's action. The sell off from the September 4th high was followed by an "up, down up" move to point 2. That could be the end of the upward correction with gold now beginning another declining leg. It is also possible that gold will have a more complicated upward form toward the "or 2" point. A closing below $1,480 should tilt the odds toward a more immediate decline. If we don't do much to the down side over the next few sessions I will look for the "or 2" form.
Silver had a rather violent initial sell off followed by a robust rebound then decline. On the right is a Barchart.com picture of the last month's moves. The form of the graph from point "2" makes it less likely that silver will rebound above that level even if it retraces more of its recent decline and rallies toward $18.
Analysts are still talking about a palladium deficit, even with car sales around the world slowing down. Palladium used in catalytic converters is a key statistic watched by the market. The Barchart.com graph on the left shows that over the last couple of weeks it made little net progress. On the right is a chart of the daily closing palladium price in NY and the daily closing price of the Dow Jones Industrial Average in blue. There is a strong correlation between the two. No one really knows what is happening in the palladium market but when the stock market is going up, the assumption is that demand for palladium from cars and industry will persist. Over the last six months palladium had some violent swings. Why is it worth $1,600 per ounce one week and $1,500 the next? It is all guess work.
TLT is an ETF that closely tracks the price moves of longer dated U.S. Government Bonds. It has a pattern similar to gold with peak apprehension about the stock market hitting in early September, a decline then a bounce. If this market conforms to my art then it should reverse to the down side this week. Bond traders were skeptical of the Friday stock market rally. Lately, when stocks rallied, bonds sold off. Not so on Friday. Investors are now always worried about what will happen over the two days when markets are closed. The graph on the right shows the current yield history for Ten Year Notes and Thirty Year Bonds in the U.S. I am still astounded that money managers are willing to park money away at such low returns. Yes, I know that a lot of it is from Europe and Japan where you earn nothing or even lose a little by putting your money in government securities. The green line shows the spread between the current yield on Ten Year Notes and Thirty Year Bonds. That spread widened to half a percentage point last week. My theory is that a widening spread between these two yields will signal a return of sanity to the bond market as investors start demanding a higher interest rate for the increased risk of longer dated bonds.
On the left is a long term picture of the U.S. Dollar Index. It is near its peak of the last decade but below three prior high points. Last week it sold off a bit after the ISM Manufacturing survey came in weaker than expected. Some of the smartest people whose analysis I read are predicting an end to the Dollar's strength. I have to see a definitive break of the trading channel before I count it out.
Last week the Saudis claimed that production is back to pre-attack levels. I have a hard time believing this but obviously the oil market believes it. Prices are back to the low $50s amid universal pessimism toward all things energy related. On the right is XLE the Energy Sector SPDR. It is close to touching the $55 level for the fourth time. There is an old trader's saying that goes something like this - When price touches the same level for the fourth time, expect extreme volatility. There is no clue as to which way the market will go after this fourth touch - a big rebound or a collapse. In the case of energy related stocks I am trading them from the long side. The group is very beaten down and out of favor. Some analysts are saying that big institutions are selling oil stocks because of share holder pressure over global warming. Look at the dividend on some of these stocks. Exxon Mobil has a current yield of 5.05%. BP is at 6.06%. Chevron is at 4.18%. Compare the chart of XLE to the Utilities SPDR shown above. Which group has more room to the upside at this point? Yes, oil could collapse but my bet is that these stocks, artificially sold for political reasons, are a bargain.
Last week I was out in farm country after the latest USDA crop update. Yields and acreage were reduced and grains rallied. Soy Beans are limping along near their lows of the last decade. There is still a big carry-over in storage from past years so there is no current shortage. One of my favorite scenes from Jaws is when the crew is first out on the water trying to attract the shark. The captain is relaxing, holding his rod when it clicks due to a small tug. He quietly straps himself in, preparing for what his experience tells him is an encounter with the beast. I am interpreting this crop report as that initial click. I am strapping myself in for higher prices!
Strategy for the next two weeks: I am dying to pull the trigger on shorting the stock market. I love down markets and tend to see things from a bearish perspective. I just can't do it right now because of the sentiment related graphs shown above. The trades I am putting on are to short bonds and gold related things. As with the bout of put option buying, investors have placed a lot of money into bonds and gold in anticipation of a stock market collapse. The first few days of the week should clarify things. On a very short term basis, stocks are "over bought" because of the big upside move from Thursday's lows. If they can't knock the market down much by Tuesday afternoon I will look for another rally phase. I am keeping my positions small. Markets that top in July then sell off into August tend to peak in early to mid-October so if we see a new high during the next two weeks along with weakness in gold and bonds, I will take profits.
Analysts are saying that consumers are confident and spending too much relative to their income. They are predicting that the consumer will run out of spending power and that will be the turning point toward a recession. To the left is a graph from the St. Louis Fed web site which has hundreds of charts that you can graze through. This one shows Delinquency Rates on Credit Card Loans since 1992. The 90s were a decent time for most of us but note that the default rate was higher then than it is now. If the consumer is "tapped out" it is not showing up in the Delinquency Rate data.
Best of Luck,
DBE