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 4th, 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.

Anxieties for this week!

 

 

 

 

 

 

 

 

 

 

 

 

In last week's update I wrote that the market would likely have some kind of sideways consolidation before heading lower. Bears can make the case that we finished a "flat correction" in a down market with Friday's big opening rally, sparked by great employment numbers. The left side graph shows the ideal interpretation for a big bear market. The sell off into March was the first set of five waves lower. What followed was a three wave correction, a,b,c into early June. The Barchart.com chart on the right takes it from there. The monster one day sell off was wave 1 of a larger five wave move. After that low the S&P 500 traced out an almost text book 3 (a,b,c) up, 3 down then five waves up corrective pattern. The implication of this labeling is that stocks will decline next week. S&P 500 Futures traded in the electronic market this morning and were down 13 points from Thursday's close.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Two weeks ago Industrial and Materials stocks did better than the FANG stocks of the NASDAQ 100 for a few days. This sparked lots of commentary in the financial press about a long overdue resurgence of the Dow Jones Industrials versus the NASDAQ 100. That talk disappeared this week when FANG stocks reclaimed their leadership. Note that the NASDAQ 100 hit the top of its channel on Thursday before pulling back. The S&P 500 has more of the big tech stocks in it than the Dow Jones Industrial Average. The Dow made a pattern similar to the S&P 500 minus some of the upside strength.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Above are three of the FANG stocks. Apple hit its high on the 23rd of June. Thursday's top tick fell short of the June 23rd peak. Amazon shareholders love news about potential new virus closures since consumers will shop on line and want everything delivered. Look at the 11 year graph of Microsoft. Why didn't I buy it in 2009? On Thursday I pulled up the FANG stocks just in time to see Microsoft surge from 2006 to 2008 within a minute or two. Why, after a 73 point rally since March and a parabolic advance into early 2020, does an investor or money manager feel the need to buy at 206? My experience with parabolic patterns is that near the peak there is often a sharp decline followed by one last burst of enthusiasm. This is often coincident with great news about the company and a belief that even if it pulls back a bit, current buyers will be rewarded in the future.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

This headline from last week tells you where we are in the "hopes and dreams" cycle - "Tesla replaces Toyota as the world's most valuable automaker." Notice the gap higher on Thursday after Tesla announced that they sold 90,000 cars over the last three months. Last year Toyota sold and average of 40,100 cars per week! Toyota sells internal combustion engine powered cars so unlike Tesla, their buyers are not getting State and Federal environmental tax credits. Governments, states and municipalities around the world are deeper in debt than ever following virus shut downs. How long will those tax giveaways to wealthy consumers last?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Companies that make big things for industry and consumers were already in down trends before the virus hit. If the economy is roaring back these stocks should be great buys. So far, they don't look like winners.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IEF tracks the U.S. Ten Year Treasury Note, the world's most popular sovereign debt instrument. It closed the week with a 0.675% yield for current buyers. Thirty year paper closed at 1.43%, fives at 0.293%, and six months at 0.16%. A buyer of ten year notes is earning around half a percent more than that of a buyer of six month T Bills while taking on more risk. What I mean by more risk is the possibility that a wave of selling hits our Bond market. Just look at the March trading on the right hand graph. One day you owned $100,000 face value of Notes trading at $123,000 and four days later it was worth $115,000. The Fed tells investors that they don't have to worry because the Fed will keep buying Notes, underpinning demand. At some point something will happen that will cause the Fed to back away or selling in the open market will simply overcome the Fed's willingness to rig this market.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The path of LQD, the big investment grade corporate bond ETF tells us about market forces followed by Fed intervention and just how "safe" the bond market is. Bond portfolios fell close to 30% on economic worries before Fed promises to buy propped up prices. We saw two good months of re-employment but the overall unemployment rate is 11%, a level usually reached near the bottom of severe recessions. Companies are borrowing record amounts of money to stay afloat. If the Fed was not buying where would the price of LQD be? 120? 115? Who knows? Junk bond buyers (JNK) are not as confident. Corporate bankruptcies are soaring with many bond holders turning into empty bag holders.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer credit card company Capital One and sub-prime auto lender Santander Consumer Credit both fell last week despite better economic numbers. Stimulus checks and borrowing are keeping a lot of people going as they wait for their jobs to return. We just started earnings season. It will be interesting to see what these and other lending companies say about delinquencies. The stocks are telling us that the news is not good.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The graphic argument against gold is that it made a five wave decline from its all time high. This implies that it will have another move below "1." With all the turmoil and money creation around the world this seems totally unrealistic. Then again, in 2011 there were many articles talking about $5,000 gold and $10,000 gold based on the Fed stimulus of the day. Silver and gold are thought to move together with silver being "the poor man's gold." Over the last decade silver made the poor man poorer still. Investors bought millions of ounces of silver above $25 per ounce. Since 2015 every rally was met with selling. Traders are watching the red trend line to see if silver can show some life.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The chart on the left shows daily "spot prices" for gold. The graph on the right from the Barchart.com web site tacks August Gold Futures traded on the NYMEX. Last week there was a lot of talk about gold having "broken out." August Futures got close to $1,810 then fell $30 an ounce. Today, in electronic trading they are in the mid $1,780s. The blue line on the Futures graph is the path of the S&P 500. Gold buyers like to think that the metal is a hedge against stock market volatility and that their portfolio has diversification because it adds an asset that trades counter to or at least independently of stocks. This graph reveals that lately this is not the case. The ups and downs of both markets are similar. If this correlation holds then gold investors are in the same risk pool as stock market speculators.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Platinum and palladium prices also followed the stock market for much of this year. In the last month both metals started going their own way, sideways while stocks rallied. If the stock market sells off I suspect that both these metals will also.

 

 

 

 

 

 

 

 

 

 

 

Last week the Dept. of Energy inventory number showed a drop of 7.195 barrels of crude oil in the U.S. This was the biggest draw-down since December of 2019. Gasoline was up a bit while distillates dropped some. The crude oil number was four million barrels better than than analysts predicted!

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Despite the great inventory report Crude Oil barely budged! Oil related stocks like Exxon-Mobil also did little even with the stock market as a whole doing well until mid-day on Thursday. If they can't rally when the numbers are good and when stocks are going up then what will they do in a bad week?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Above are charts of December Corn Futures and September Coffee Futures from the Barchart.com web site. Last week I expressed my very subjective opinion that agricultural prices were at the low end of their cycle and that I was buying DBA, an ETF that moves up or down the the price of crops. For weeks, analysts have been talking about a huge corn surplus then the USDA report came out saying that many fewer acres of corn were planted than originally expected. Corn (and DBA) shot higher. A few weeks ago I noted the sideways action between the red lines in Coffee Futures and wrote that it should lead to a final burst down and reversal. I thought the sell off would stretch toward $0.90. Two weeks ago I read a very convincing, long article going through the inventory numbers of stored coffee all over the world along with current crop conditions in Brazil. The conclusion of the article was that there was an extreme surplus of both Arabica and Robusta beans and a bumper crop this year. The analysts suggested that coffee would have to go to at least $0.70 per pound. Then coffee futures jumped higher. Where did the surplus go? In Brazil, rain is falling during a normal dry harvest season and weather forecasts suggest colder than normal temperatures for the mountainous growing regions, something my updates have been talking about for the last year. Then the International Coffee Organization reported that global October to June coffee exports fell 4.7% year over year. So much for a very well written bearish report on coffee prices.

 

Strategy for this week -

Stocks - the almost text book perfect bearish pattern in the S&P 500 has me worried. I went home short on Thursday. If stocks start to fall on Monday it could be the start of something bigger than expected. I will watch Apple and Microsoft in particular. As long as they are going up, portfolio managers will hang in there. If they begin to slide it will add greatly to the belief that you had better get out while the getting is good. The same analysts who were telling you that FANG stocks were bullet proof last week will now say that "anyone could see" that they were over loved and over bought.

Bonds - They could rally a bit more if stocks weaken, not because investors think they are a good deal but because they think the Fed will panic and buy more, pushing prices higher. This is a suckers market.

Gold - I didn't like that quick sell off from above $1,800 back into the $1,780 range. You can see that gold has not been moving counter to stocks. In a way it is the same trade. I am short some gold mining shares and will watch for a break of last week's lows.

Agricultural things - Watch for a pull back as shorts think this was just a dead cat bounce. If they can't make new lows over the next week or so the shorts will get nervous and start to cover. The weather forecast for the Mid-West is for higher than normal temperatures and less rain fall as two domes of high pressure, one in the southwest and the other in the southeast trap hot air over our major growing areas putting stress on crops. Remember this is corn's tasseling period. Very hot and dry weather will not be good.

Have a great 4th of July weekend!

Best of Luck

DBE