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 July 24th, 2021

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.

As usual, I will show pictures and graphs found on Zerohedge.com, Sentimentrader.com, which include the Seasonality charts and charts made on Barchart.com. I will also mention "cycle low timing bands" suggested by another market website to which I subscribe, Cyclesman.com.

Hard data -

New State Unemployment Claims rose to 410,000 last week, something totally unexpected by economists looking for a continuing recovery. The good news was that the number of people getting some type of unemployment benefit dropped to around 12.4 million, the lowest reading so far. The rate of unemployment is flattening out in both Blue and Red states with Red states doing better. Most of the Red states stopped the $300 emergency checks and the program will end in September. my state that still pays the $300. This week I spoke with the owner of a local heating and air conditioning company. He told me that no one wants to work.

Home prices are at record highs like everything else. Real Estate companies blame it on lack of supply and many would be buyers are being squeezed out of the market. Supply picked up a bit last month as owners began to cash in. I notice more FOR SALE signs around my neighborhood. My guess is that this trickle will turn into a stream. The price increase in residential real estate is an international phenomenon. Central Bank easy money policies are behind the surge. Rents are rising too and with more income needed for basic living expenses there will be less for discretionary spending. Purchasing managers surveys are widely watched because they show a decent correlation to future economic activity. Lately, the surveys (soft data) have been more optimistic than hard data. Last week the Markit composite turned down. Manufacturing was up a bit but services unexpectedly declined. It could be that cost increases for food, gasoline and rent are slowing demand for other things.

Charts of the week -

Chart Mysticism dogma says that the same patterns repeat on varying scales. Regular readers know that I think the stock market formed an expanding triangle between January of 2018 and March of 2020 and that this pattern is usually followed by a final manic burst to new highs then a collapse. One can make the case that the S&P 500 formed a mini version of the same thing in July and is close to the end of it's burst. It would be pure poetry for the larger triangle to be mirrored by a smaller one that caps the great speculative mania of 2020-2021. If it doesn't work out I will pretend I never wrote about it. If the market reverses violently and crashes you will never hear the end of it!

On May 10th the Dow Jones Industrial Average hit an intra day high of 35,092. On Friday it got to 35,095 then closed at 35,062. People who watch market internals note that fewer and fewer issues are keeping up with the major averages. This "thinning out" of market participation is often seen close to reversals. Evidence of this can be seen in the Russell 2000 Index that includes smaller companies. AMC is heavily weighted in the Russell and the day trading crowd is losing interest in pumping and dumping it. A month ago it was trading at 57. It closed the week at 36.99. Another sign of the cooling in speculative fervor is BitCoin, once thought to be the future of everything. It hit 6 month lows early last week then rebounded on comments by Elon Musk.

If fewer stocks are participating in the rally then how are the major averages going higher? Most of the action is in some of the most heavily weighted stocks in the NASDAQ 100 and S&P 500 starting with Apple and continuing with Microsoft, Alphabet (Google), Amazon and Facebook. Apple, the largest is the key as I have often written over the last year. It is so heavily weighted that everyone has to own it to keep up with the S&P 500. One could argue that it formed a "running triangle," a series of 5 downs and ups where the "b" leg surpasses the orthodox top. The rally following such a pattern is the final move before a larger correction. Apple's earnings are coming out on Tuesday. The recent price action in the stock discounts great numbers.

Wealth is now chasing a smaller group of stocks both domestically and internationally. Last week the German DAX failed to make new highs. The Japanese market topped out earlier this year as did emerging markets. It is no wonder that despite all the predictions about a Dollar crash, it rose instead. Investors love our markets and our FANG stocks in particular. In past cycles, such concentration into a currency and then an asset class and a small group of issues within that asset class warned of a top.

So who is right? Are stock markets going higher because the economy can only get better or are bond market participants correct in believing that we already hit peak growth and inflation pressures? Another answer to the bond question of why people are parking money at 5,000 year lows in interest rates is that the Fed is now the biggest player in this market with institutions stepping away from it. Some analysts from major Wall St. firms suggested this last week in articles talking about how illiquid the bond market has become. This used to be a market where billions of Dollars could change hands easily. Now there are fewer participants because it is not really a market any more. It is a rigged game by the Fed.

Here is my regular update on the path of interest rates implied by the level of the 30 Year U.S. Treasury Bond (red on both charts) and DBC, an ETF that tracks a basket of commodities and DBA, an ETF that follows agricultural prices. The theory is that something is wrong when the prices of things are going up and interest rates are going down.

Junk bonds are very popular. Investors are buying them at near record low spreads relative to much safer bonds. Companies with less than excellent balance sheets are taking full advantage of investors' appetite for junk and are borrowing heavily in this market. The graph on the right is found in a free news letter from the Real Investment Advice website. I suggest you subscribe to it. The red line tracks the number of publicly traded Zombie Companies, many of whom issued junk bonds to stay afloat. If the second quarter was the high water mark for our economic recovery and inflationary pressures force consumers to cut back purchases, junk will be the canary in the coal mine and one of the first asset classes to sense the trouble.

Last month I wrote that the numerous articles talking about how disciplined domestic oil producers were by not increasing production, probably meant that production was about to increase. That is exactly what happened. OPEC + came to an agreement on production and the market tanked! It recovered a bit as the week went on. Institutions have been telling clients that the energy sector is a sure winner but most energy patch stocks are down a bit from March levels. In the mean time, gasoline demand slipped a bit with the passing of peak driving season.

Last week another major European bank said they would no longer finance new fossil fuel projects. They joined a growing group of virtue signaling banks and funds. While oil can decline on virus news or Iran supplying China all they want, it is a commodity that requires huge exploration and production programs to consistently replace reserves. If financing is cut off to these companies the eventual result will be shortages and much higher prices for oil and products made from it.

On the left is a daily bar chart of gold in NY. I subscribe to Cyclesman.com, a website that tracks regular cycles in a handful of items. Gold has a 21 trading day cycle. This means that 70% of the time, it makes a short term low within a week of 21 days. One of these is due on Thursday the 29th of July. The yellow ovals mark the last few cycle inflection points. There is also a 23 week, weekly cycle with most lows coming within a few weeks of either side of the ideal 23 week low to low cycle. This coming week is week number 21 from the previous weekly low. Remember, cycles work until you bet the farm on one. A lot can happen between now and Thursday. Gold could be $50 lower by then or a few bucks higher. The future is unknown.

Silver has been in a trading range for a year! I had high hopes that the contracting pattern would resolve with a final blast to new highs for the cycle. Part of my hope was from the seasonal tendency of silver to rally in July and early August. The metal ignored its seasonal pattern and traded sideways to slightly down instead. The right side graph is the bearish implication for the metal. Silver usually follows the same cyclical pattern as gold. If we are due for a 21 day cycle low this week then we could get a brief pop in silver too.

Industrial metals traded in line with the stock market. No one knows what is going on. Is inflation transitory or ready to accelerate? Will supply shortages last or did companies double and triple order from different vendors when things got tight? Will the Fed finally raise rates in response to a stronger economy and inflation or is any taper talk off the table because governments around the world have to borrow so much that they need near zero rates to avoid defaulting? These are big questions with no answers. The confusion is seen day to day in the volatility of our markets. After Monday's 900 point drop all analyst were talking doom and gloom. By Friday they were predicting a great future economy. Like palladium, platinum and copper they just tell you what they think the stock market is telling them in the last few hours of trading.

If you were a reader of this update in 2019 you will remember that in every one of them I pounded the table over agricultural commodities, particularly grains and coffee. The reason was that sun scientists were warning that the sun was entering a long term cycle of lower energy output and that previous cycles led to colder temperatures and weird weather. This cycle is not due to bottom for another decade! Coffee was one of my favorites because it was trading below a Dollar a pound. It is a bush that requires years to grow and is planted at high elevations, prone to frost in cold cycles. Last week, there was a nasty frost in Brazil that killed a lot of corn and froze coffee bushes. You can see the price reaction in coffee. I spent the last 6 days driving in Wisconsin, Illinois and Iowa, big corn and soybean growing states. The fields look extremely healthy and robust which is why corn didn't react like coffee. The corn belt is suppose to have unusually hot and dry weather over the next couple of weeks with some scattered showers. We will have to see how widely scattered the rain is. Beans and corn will trade day to day with the weather. Floods are hitting other areas of the world, some that grow rice, a staple of millions of people's diet. I am watching the coiling action in the September Futures.

The headlines are full of COVID Delta news. On the left is a graph of cases and deaths in the UK, a country hit hard by the Delta variant. So far, cases are way up but deaths are not. In my state of Massachusetts cases are also up but deaths are still below 10 per day. I have heard a few virologists say that the typical path for corona viruses is that they mutate into versions that are more contagious but less deadly. Hopefully that is the case now. This is not stopping politicians from fear mongering the bug. The days of masks and social distancing with daily press briefs were the highlight of many of their careers and they want it back. On the right is another picture that is more worrisome. It is from a free newsletter put out by Harry Dent. He is a popular expert on demographics. He says that the statistics show that generational peak spending comes at around 47 years after peak birth rates. In the case of the United States the peak was 2007. For Japan it was 1989, the year of their stock market peak. Dent says that this is not an accident nor is the crash after 2007. 70% of our economy is consumer driven. The Fed's massive money expansion is their attempt to offset a natural cycle with monetary stimulus. He thinks it will fail and that between now and 2023 there is likely to be some kind of crash in markets, especially real estate and car sales. He also claims that China is in much worse shape than the U.S. We have an "echo boom" generation that will start to take up the slack in around 2023. Because of China's one child policy there is no echo boom generation. They are doomed to economic decline as the number of working age people crashes. He points out that real estate is the focus of China's bubble. The table shows which of the major, highly leveraged real estate development companies are at risk of default. Leading is Evergrande, the largest with billions of Dollar worth of bonds owned by institutions around the world. I wrote about them two months ago when there was panic selling in their bonds before the government stepped in. Dent thinks the speculative bubble world wide could be pricked by something happening in China because their demographic future is the poorest. He says that given this, there is no way they will surpass the U.S. Where are demographics the most favorable for the future? India. PIN is the ETF.

Best guesses for the next two weeks -

Stocks - The time between now and the first week of October is a seasonally weak time for stocks. Given the poor market internals and concentration of wealth in a few mega cap techs, the market looks vulnerable. I would not be surprised to see more days like last Monday. Stocks are at record prices and valuations. Investors are leveraged up to the hilt. The economy looks like it had peak growth in the second quarter. What could go wrong?

Bonds - Bonds are trading at levels that imply a recession! With rates at 5,000 year lows I won't touch them. Junk bonds look particularly vulnerable.

Gold and Silver - Let's hope the cycle noted above kicks in and and we get a pop coming into August. Sometimes, as we come into the timing of the cycle low there is sharp sell off. Hopefully we don't get one.

Grains - Watch the weather. The usual seasonal pattern for corn and soybeans is weakness into the fall but rainfall and heat are the keys from now on.

Dollar - On a short term basis it looks like it could retreat a bit but something is brewing around the world and wealth is moving into the Dollar.

Best of Luck,

DBE