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 Nov 28th, 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 - On my wide screen monitor 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.
At the start of last week I was short precious metals. The sideways trading along a shelf of support looked like it was likely to fail leading to a "get me out" kind of sell off. It worked out leading me to once again believe that it is better to be lucky than smart. On the right is a chart of the daily closing price of gold in NY and a simple RSI momentum oscillator in red. It finished the week below .20. I covered my shorts during the sell off.
On the left is a chart of gold's daily moves with the gains or losses in the U.S. Dollar Index added. This picture lets me know how gold's trading looks to non-Dollar traders. It was weaker than the Dollar denominated chart which is one of the reasons I kept my shorts into last week. On the right are the prices with an RSI oscillator below. Note that over the last few years gold adjusted for Dollar moves was rarely this "over sold." This warns traders that we are likely close to a bounce even if gold eventually heads lower.
To the left is a weekly graph of gold with my very subjective markings included. It is possible that we finished a five wave advance in August and are due for a larger pull back or a major bear market. I subscribe to Cyclesman, a $300 per year service that is well worth it. The writer tracks daily cycles, weekly cycles and dominating longer term cycles. According to his data, gold is due for a short term cycle now, a weekly low in February to early March of 2021 and a longer term low in 2022. On the right are the weekly closing prices and an RSI oscillator below. Unlike the reading on the daily graph, the weekly level is not in "over sold" territory. Gold made some bottoms with the RSI near current levels but those tended to be after a longer period of declining prices. The best buys for longer term investors came when the red line approached 20. This leads me to believe that any bounce we get will be followed by lower prices into the timing band for the Cyclesman's weekly low in February or March.
On the left is a chart of the weekly closing price of gold in NY above and a four week rate of change oscillator below in red. Past good buying opportunities for longer term investors took place when the four week rate of change approached minus 10 percent. We are not there yet. The gold bulls are saying, "But, But, look at the money supply!" On the right is a picture found on the Zerohedge.com web site showing the astonishing explosion in created Dollars . You could look at a similar graph of Euros or Yen! Currency was created in amounts far beyond available goods and services and to many that means explosive inflation. Most of those Dollars are locked up in the banking system and banks are tightening lending standards including those for home loans. Wherever banks have been willing to lend, you find inflation. This includes residential real estate, used cars, college tuition, stocks and bonds. Economists note that things that governments look at to measure inflation are lagging price increases in goods and services that people use such as food and medical services. They are included in inflation calculations but under weighted relative to their impact on consumers' wallets. Bears on gold will point out that near market peaks, all logic leads to "buy." At the time it seems like the only rational conclusion.
I will be using charts from Barchart.com and Sentimentrader.com and want to give them credit up front.
XAU is an index of gold and silver mining company shares. They also fell below their recent trading range. The graph on the right shows the path of XAU and the daily closing price of gold in NY. The red vertical lines point out instances where the gap between the two was the widest. Recently, despite all the excitement surrounding gold, the shares traded at some of their widest discounts! There might be logical reasons for this, primarily the profitability of companies engaged in gold and silver exploration and production. Older deposits grow more expensive to exploit as miners have to dig deeper or move more waste rock to reach the ore and newer mines could be located in regions where the costs are higher. In past cycles, when gold was close to a top, investors looked past mining costs and valued the shares of these companies based on ounces in the ground as if they were in nature's safe waiting to be removed at higher prices. It didn't happen during this cycle which tells me that either investors are smarter now or that we have not yet seen the peak in precious metals. It could be that ETFs that buy or lease physical gold such as GLD captured the interest of those that bought shares of Newmont and Barrick in past cycles. I read some commentators who say that Central Banks and governments know that they are creating fiat currency in a way that the world has never seen. They are trying to move everything to digital currencies to prevent bank runs and make it easier to tax you at higher rates at the click of a mouse. Gold and silver are threats to this scheme. Already they are trying to restrict gold purchases in Europe. If the Great Reset crew gain control of the U.S. with Biden, restrictions will spread to here. Shares of mining companies might be the only way to participate in skyrocketing precious metals prices! Is that the future or is it a reflection of wishful thinking at a major top in precious metals?
Silver was a poor performer relative to gold despite its fans who constantly talk about $100 silver. On the right is a chart of the weekly closing price of silver in NY, its one year moving average in red and the distance between silver and its one year moving average in blue. The blue line is well above the red line. Pink circles mark high points and we just saw one. In past cycles investors made the best money when buying after the price was below its one year moving average. The hope for silver is similar to the argument for mining shares. Governments might restrict gold ownership making silver the alternative.
Silver was smacked along with gold but held above September's bottom. My guess is that it will eventually make its way lower. Precious metals were not the only victim of selling last week. Bitcoin and other cryptos hit the skids as well. The form of the decline is similar to stock market patterns that eventually lead to lower prices. A rebound toward the red line would be typical. I talk to many younger men who do not invest in stocks or gold but for some reason decided to buy Bitcoin or one of the other crypto currencies. They are the crew who started with home brewing then collected expensive whiskeys before they got married and now they follow crypto currencies. Few of them know why they are buying except that they believe it is going up.
Platinum kept its rally alive last week. The graph on the left shows the daily activity along with a slow stochastic oscillator below. Platinum price moves are a mystery to me despite my 30 something years in the precious metals industry. Not buying when the slow stochastic is at the top of its range is about the only rule I follow. Palladium also fought off the gold and silver malaise and traded within its recent range. As long as stock markets do well, traders in platinum group metals will assume that a recovery is in place and that the demand for industrial metals will hold up.
Copper had a good week. In past updates I mentioned that the moves in the yellow box matched a text book "flat correction" in a down market. Last week's poke above the first move north of $3.20 in 2018 should finish the pattern. On the right is Sentimentrader's proprietary sentiment gage of copper market participants and it is at its high for the last 20 years. When it was close to this range in past cycles was it a good time to buy or sell?
If you read gold and silver friendly web sites you get the impression that the Dollar is sinking rapidly. It's recent low was on September first, almost three months ago. In 2008 it hit 71 and change, far below where it is now. I am watching for two patterns, both shown above. The first on the left side chart anticipates a "flat correction" in a down market similar to copper's shown above with a rally back to the "c" point. My other alternative is on the right side graph. It could be that the Dollar is making a wedge type low with prices breaking the September low around the end of the year. Remember, currency trends have a habit of reversing in the late December, early January time period. It has to be extra disturbing to gold and silver fans that the Dollar is edging lower but their hedges against fiat currencies and Dollar weakness hit the skids.
The Japanese stock market has been on a wild romp higher. Before it did so it traced out an expanding triangle pattern labeled "a" through "e" on the graph. These forms lead to a manic final move before a major decline. The nearly vertical rise over the last few weeks tells me that we are closing in on a top as far as time goes. Who knows how high it will carry before it reverses. One of my theories is that our stock market could be making something similar. If so then the final peak could be way above current levels. The chart book says that any point past the high of the expanding range could be the top and that sometimes the move runs short of energy before making new highs. That is basically an admission that chart patterns work when they work and don't always give you a definitive trade.
The S&P 500 shows a similar form with a more robust upside due to the capitalization weighting of Apple, Microsoft and a few others. On the right is a reminder to myself that stocks are showing characteristics coincident with previous tops. The purple line tracks the distance between the S&P 500's weekly closing price and a forty week average of the closing price. It has never been higher. It might not be a "sell signal" but it is most likely a "don't plunge in now" kind of warning.
If it is a warning then no one is listening! The left side picture found on the Zerohedge.com web site shows that investors of all stripes piled into stocks at a rate greater than right before the 2018 peak! The graph on the right is from an article posted on the same website. It shows where the S&P 500 is trading relative to the sales revenue of its constituent companies. If you have been holding off on getting into the stock market but are thinking of it because of recent headlines, does this look like a good week to bet the farm?
Last week I showed a graph of the 1980-1981 market. In late 1980 stocks made a November high, a correction into December then a final up move into early January. The charts of the last month's action in the Dow Jones and S&P 500 are subjectively marked to suggest that the markets are making a "flat correction" in an up market. This is similar to the pattern in copper shown above but inverted so that the third leg goes down to a range around the bottom of the form.
Last week's update featured graphs of Tesla and the Shanghai Composite because both looked like they might be forming almost text book topping patterns. The right side dashed blue line on the Tesla graph showed the amplitude of the widest part of the triangle formation added on to the surge toward new highs. The theory is that this burst goes the distance of the triangle's range. Well, we did it last week. At this point any tick could be the high. I have the Bloomberg app on my cell phone. As I was writing this a headline popped up saying that investors are experiencing FOMO, fear of missing out on Tesla. Friends, if you did not already buy it is too late. You missed out. On the right is the Shanghai Composite. It's pattern is not as far along as Tesla's so my drawings are more of a fantasy trade. If it completes a contracting triangle form it will pull back toward the lower red trend line then have a final Tesla like surge. The peak for Shanghai was 5,175 in June of 2015, far above current levels. My fantasy surge in this cycle would mark the end of an upside correction that falls far short of 2015's major top.
Crude Oil and Gasoline had good weeks with prices breaking above previous ranges. This seemed to be more on hopes for a future recovery than inventory numbers. Gasoline in storage in the United States rose to a level 6% above its five year average for this time of the year. Last month it was only 1% above the average so things are moving in the wrong direction. Crude inventories are also expected to rise as Gulf production, halted for much of hurricane season resumes.
Regular readers know that I have been a cheerleader for fossil fuel related stocks for the last few months. Last week I thought they were topping but they got another surge. The "buy energy" is part of the bigger theme of shifting from "growth" as in big tech stocks to "value" which includes cyclicals, small caps and the most beaten down sector, energy. The Sentimentrader.com web site to which I subscribe featured an article late in the week showing that in past cycles when energy and small caps surged relative to the broader market as they did over the last month, they usually paused for one to three months. This implies that if you missed the big energy play, now might not be the time to take the plunge. On the right is a picture of the S&P 600 Index of small capitalization stocks. So far it did not take out its 2018 peak and the slow stochastic reading is close to the top of its range. I like to buy when it is at the low end of its range and everyone thinks the underlying item can only go down.
Soybeans had a sideways week with traders anticipating more exports to China. Late in the week I read an article on the Zerohedge.com website that reported a decline in the spread between the price for physical soybeans at major U.S. export ports and nearby futures. Until recently the price for physical was at a big premium. The writer claims that importers in China who did not hedge in the futures market are canceling January and February orders. The price for soybeans rose to the point where buying the beans then crushing them to make oil and meal, the products sold, loses money. This could put a cap on the great China trade for now. On the right is one of Sentimentrader's proprietary Optics charts showing the extreme bullish sentiment toward soybeans. In past cycles this was not the time to get into soybeans! In recent updates I showed the positioning of futures players in commodities in general and agricultural commodities. In both cases, speculators have huge long positions expecting higher prices. These guys tend to load up near the high so caution is the word this week.
TLT is an ETF that tracks longer dated U.S. Treasury Bonds. Last week's update showed that speculators had record short positions on T Bond futures warning that some kind of short covering panic could unleash an accidental rally. My guess is that we are beginning it now. Have you been paying attention to Treasury Market auctions? The U.S. Government has been auctioning off T Bills, Notes and Bonds in sums of 50 Billion Dollars plus per auction and it will have to do so into the indefinite future. The Fed is buying 80 Billion per month and part of the auction goes toward refinancing paper coming due. Still, our government is running up a tab that has no equivalent in the history of the world. It is just a question of time before the flight to safety is not into T Bonds but out of them. Companies with lower credit ratings are issuing billions in junk bonds with investors snapping them up. As long as the stock market is going up they figure these companies will be OK. My fear is that this is an accident waiting to happen. If I owned a portfolio of "high yield" bonds I would lighten up while expectations are rosy.
Strategy for this week -
Stocks - How high can they go? Well to the right is a chart of the last year of the 1920s stock market before the crash and Great Depression. In the final three months the stock market rallied 33% with the final 16 trading session posting a 15% up move. In these updates I show various measurements of market valuation indicating we are at the limits or above previous levels where stocks topped out. The expanding triangle and thrust form is also warning investors of an impending major peak and reversal. Other mainstream data such as market momentum and participation were followed by higher prices a year later in past cycles. Which is it? Did buyers in August of 1929 read positive analysts in the newspapers or negative ones? I am a short term trader and try to look a week ahead at a time. Monday's are usually up days. I shorted last week's rally and kept my shorts over the weekend. How many vaccine stories can they release on Sunday night that bump the stock index futures higher? Watch how Japan opens on Sunday night. It might be the leading indicator.
Bonds - I am looking for a short covering rally caused by over extended shorts in the futures market. It might give investors the last opportunity to sell.
Gold and Silver - I bought some gold mining shares (Barrick) late in the week because of the over sold metals. I am looking for a bounce then lower prices into early next year.
Dollar - I think we are close to a low.
Agricultural Commodities - Watch the soybean market. It made little upside progress and with premiums for spot beans declining it could be that a correction is coming.
Unneeded Commentary - I wrote this listening to my collection of Napstered music from the last 7 decades. One of the songs was "She's a Beauty" from The Tubes, a hit in 1983 that is often still heard on classic rock stations. The lead singer had a very robust voice with a lot of energy. On one of my last business trips before the virus I was flying into Oakland California. The guy sitting beside me was the keyboard player for The Tubes. The rest of the band was on the plane too, coming back from a concert swing at Indian casinos in the Mid-west. My new acquaintance was in his late 40s. At the baggage claim in Oakland I saw the rest of the band. They were gray haired, frail looking and easily into their 70s with a female singer possibly a decade or so younger but dressed and made up to look a lot younger and a few pounds lighter from a distance. It was a great reminder that all things come and go, bull markets, bear markets, enthusiasm for gold, residential real estate, winning teams and people too. In a way we are all renters.
Best of luck,
DBE