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
August 31st, 2024
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.
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.
Two weeks ago my plan was to stay away from most markets; stocks, bonds, gold and silver. I did buy more WEAT, an ETF that tracks wheat prices. Above and to the left are charts of corn, soybeans and wheat over the last 20 years. Can they get cheaper? Maybe, but they are approaching price levels reached after good weather and good harvests in past cycles. As the price drops my plan is to add bit by bit as one would dollar-cost-average in an indexed mutual fund.
In the last update I was worried that stocks might copy the pattern following previous sharp sell offs and trade back toward the lows sometime in the next month or two. Charts of tech related things looked more bearish than other sectors while small caps were below highs set in past years. Traders were watching data for confirmation that inflation and the economy are cooling enough for the Fed to cut but not weak enough to signal a recession. This would be "the best of all possible worlds" kind of environment.
August is vacation season and markets tend to drift on low volume with most of the energetic trading taking place early in the day before money managers go back to the beach or lake. Many of the usual market commentators were off last week but those that took their place were positive on everything. Stocks - higher. Bonds - higher. Gold - higher. Betting markets were back and forth on Trump vs Harris but the retail trade is sure that Trump will win and stocks will rally as we get closer to the election and the polls swing in his favor, so why wait? As a result, retail traders were heavy buyers on the dip.
Here is some of the data you missed while on vacation.
The Conference Board reading on Leading Economic Indicators (left) fell to COVID shock lows without COVID. Another set of Purchasing Managers surveys came in with the same trend as most of this year (upper right). Services showed some strength and manufacturing in decline.
Private economists expressed skepticism over the government's official employment numbers from the last year. What they were seeing and what the government reported were out of alignment. The Bureau of Labor Statistics posted their annual adjustment to their employment numbers and poof: over 800,000 jobs that they previously reported, vanished. Analysts were angry after the adjustment because they use these numbers into their models. Most traders thought it was a good thing because it was more ammunition in favor of a rate cut..
Sales of existing homes (upper left) were up slightly from depressed levels. New homes (right) did better with builders offering concessions to move properties. An index of Pending home sales (left) hit a new low. Mortgage rates fell a bit over the last month. Analysts will be looking for sales to pick up in response and for data on August to come in better than July's numbers.
House prices in the nation's largest cities continued to climb.
Regional Fed surveys continue to show a slow down in economic activity (left). New orders are down as are spending and hiring. The headline reading on Durable Goods orders for last month was positive but that was due to a rebound in aircraft orders (Boeing). If you take out those orders the number was down (right).
At Jackson Hole, Fed Chairman Powell said it was time to worry less about inflation and more about the softening labor market. For clues on the direction of labor, analysts pay close attention to New Claims for Unemployment Benefits (left) that come out every Thursday morning. Along with the New Claims data they watch a four week average of those claims and Continuing Claims (right) that track how many people are regularly getting unemployment benefits because they have not found work. Last week's initial claims number showed no sign of weakness in the labor market. Continuing claims are still elevated so it was a mixed picture.
The Fed's favorite measure of inflation, the Personal Consumption Index deflater came in as expected in the mid 2% range. Prices for goods continued to decline while services were up again. Personal Income and Spending were fairly flat with spending greater than income again last month.
With spending higher than income the Personal Savins Rate fell again (left). So, what is keeping things going in this election year? Government transfer payments (right) hit an all time high. It is said that corporate earninings will do OK as long as the consumer is spending or government is spending. Companies report that the consumer is spending less. Borrowed and printed money from the government is keeping things afloat. What happens if the next congress passes a budget that cuts spending?
On Thursday morning the government's Bureau of Economic Analysts revised 2nd quarter GDP up to a 3% growth rate (upper left). Stocks rallied in response. It was confirmation that the economy is not headed into a recession. The factor that boosted GDP was an increase in Personal Consumption (upper right). According to the government, we all spent more on things in the second quarter. Earlier in the week, LuLu Lemon, famous for Yoga Pants reported second quarter earnings. You can see the result on the lower left graph. The morning of the government's reassurance that everything is OK, Dollar General reported terrible results for the same time period (lower right). as consumers slowed purchases. Do you make decisions based on official data or reality?
The Dow Jones Industrial Average hit new highs on Friday. Analysts that focus on market momentum and breadth metrics in market sectors say that recent behavior is a good sign for more gains into next year. Note that the lift off from last fall's lows into March of 2024 was straight up but since then the path was more difficult. On the right is the daily closing price with a simple RSI oscillator below in green. The oscillator finished in over bought territory by the end of the week. The last two trips above .80 were short term highs. Yellow ovals mark two periods where over bought readings followed lows that were accompanied by extreme investor pessimism. In these cases, the high RSI didn't matter. My guess is that the current reading is more like the last two marked by the vertical red lines.
The S&P 500 finished the month close to its all time high. The last five sessions saw back and forth action with Friday down into mid-day then a rally into the close on light volume with most traders away from their desks. They will see a break of the lower red line on the right side chart as an indication of a small top.
The technology sector is lagging the S&P 500. So far, the NASDAQ rallied back to technical resistance between the 4s on the graph. MAGS, an ETF of the Magnificent 7 did the same.
NVIDIA's earnings were supposed to be a game changing event for the market. I thought they were very good but holders of the stock sold on the news. AIQ is an ETF that focuses on Artificial Intelligence companies. As NVIDIA goes, so goes the group. One troubling thing is that the volume of trading in the group (red line) is falling. So, why did NVIDIA not rally again after great earnings? Here is one guess. Time is not a friend to new technology. Companies around the world are trying to copy their chips, software and take away some of their market share. Eventually, they will have to cut prices to keep their slice of the pie.
The price of crude oil might be the best indicator of what kind of "landing" the economy will make. We closed the week near the lower boundary of a long trading range. Every chart has the same lines drawn in so the world will be watching them. On Friday, OPEC plus said that they would increase production again later this year. Absent a war in the Middle East the odds are for lower prices. One could argue that at current prices, traders are not anticipating any major disruptions to supply. Domestically, even Kamala now says she favors fracking. Aside from the Strategic Reserve, oil in storage across the U.S. is sitting at around 4% below the five year average for this time of the year. Production is hovering between 13.3 and 13.4 million barrels per day. Exxon Mobil is the oil producing giant that dominates the sector. Here is a great article on the company - https://www.zerohedge.com/energy/exxonmobils-guyana-oil-trillion-dollar-opportunity Even though the fundamentals on the company are rock solid, its margins are still linked directly to the price of oil. If oil breaks below its trading range you could see reflexive selling in the energy sector and a chance to buy Exxon and some others at good prices.
We are used to paying attention to domestic economic trends as the driver of markets but in the case of oil, China is watched more closely. Again, this weekend there are more articles highlighting the slowing Chinese economy and the inability of the centralized government to stop the slide. https://www.zerohedge.com/markets/chinese-offices-emptier-now-during-peak-covid-lockdowns-economy-crumbles
The red line shows the shape of the yield curve on U.S. debt obligations going into the weekend. When I graphed the numbers I was surprised to see that the rates on 7 year paper and longer were higher than they were 4 weeks ago before the Jackson Hole speech. Even the rates on some shorter durations are above where they were a month ago. Note the spread between 10 year rates and 30s on the upper right side chart. Last year, in one of my updates I wrote that a growing spread between the two might indicate hesitancy at locking into U.S. Debt for longer periods of time. Most people pay attention to the strength of the economy and employment statistics to make decisions on bonds. Now, a third element is just as important. After Treasury actions the government releases statistics on how much demand there was for it (bid to cover ration) and how much of the paper was taken down by foreign entities (known as "indirects.") Analysts compare this with historical averages. Last week there was a 2 year note auction that went very well. The bid to cover ratio was in line with the six month average and indirects took more of the auction than in some recent months. Then there was a five year note auction that was OK but not as good. In the past, demand was always assumed. Now, it is going to be auction by auction with special attention being paid to longer dated paper as a sign of foreign investors' willingness to keep financing our profligate spending.
Directly to the right is a chart of JNK, one of the two big junk bond ETFs. If you are a chart purest it looks like it completed an A,B, C flat correction. It is almost perfect in its structure to an idealized form that you find in the text books. If reality follows art, the next move is down.
With the world expecting the Fed to cut rates as part of a whole cycle of rate cuts, the Dollar sold off against other currencies. On the left is a graph of the daily closing price of the Dollar Index and a simple RSI momentum oscillator below. Previous oscillator readings near .20 were followed by bounces. The yellow box on the left side graph is the time period contained in the right side picture. From the Jan 2024 low the Dollar rallied in a zig zag kind of form then sold off in another zig zag. I tend to believe that the current sell off will be interrupted for a few weeks then resume but from a pure chart mysticism point of view, it could be that something more complicated is happening such as in the JNK chart above.
The upper left side graph shows the daily closing price of spot gold in NY and the Dollar Index in red, upside down so that when the Dollar goes down, the red line goes up. Over time there is a strong correlation between a weak Dollar and gold going up. The yellow rectangle highlights a period when both the Dollar and Gold rallied. The upper right chart is a close up of the trading since April of this year. I circled the recent action because prices stalled and the rally into the circle had deep pullbacks. This led to the declining momentum oscillator shown in the lower left side picture. Two weeks ago we needed a good burst to the upside to get momentum back on track but we didn't get it. The lower right side graph has the daily high, low and close with the percent gain or loss in the Dollar Index added. This gives a picture of what the trend of the metal is minus the influence of a rising or falling Dollar. We are not much above levels seen 4 months ago despite threats of war and lots of elections around the world adding to uncertainty.
Much to the consternation of its fans, silver is only a bit more than half way toward its previous peak. Will it play catch up to gold? It's industrial side might keep it from doing so. The right side graph shows the pattern since April of this year. Bulls are hoping we just finished a simple a,b,c correction and are headed back up. Watch the levels around the "b" and the "c." A break of one or the other will tilt the odds toward higher or lower.
On the left is a picture of the daily closing prices of platinum and palladium in NY. Trying to make sense of all the squiggles is impossible. Prices are happy where they are for now. It will take civil unrest at the mines in Africa or cutting off of Russian supplies or some sign of recovery in China to bring in buyers. Platinum traded above its 200 day moving average for most of this year but it still shows little life. The next couple of months are usually seasonal lows for these two metals. If I needed either of them to run my business I would be a buyer while no one is interested in them and they seem to be forgetten. On the right is a weekly chart of copper. Until China turns around it is probably not going to show much life unless we get more unrest in Chile and strikes at major mines. We should not underestimate the potential for unrest and strikes anywhere in the world over the coming year.
Best Guesses - If you are like me, you are checking the news every few hours to see if war is erupting in the Middle East. Ukraine is determined to spark severe retaliation from Russia that will bring Europe and especially the U. S.directly into the war against Russia. Israel is hoping for the same against Iran. Oil and Gold would be the winners. This is probably what is keeping gold elevated. Holding it is one of the only ways to make money off of a conflagration. When I see it do well I am always worried that some player in the drama is buying before they attack.
By the end of the month, fans of every asset were bullish. Stock guys, gold guys, bond guys. Over the weekend a well known analysts repeated his call for a major bull market in commodities despite being wrong last time. When the sky is the limit for everything it is time to be cautious.
Stock Market - Stocks surprised me by doing better than I expected in the second half of August. Tech and AI plays still look like they are correcting a down move before another sell off. I don't trust late August rallies and am betting against this one.
Bonds - Despite rate cuts coming in September, bonds fell last week. Watch for the details on the auctions. The bid to cover ratios and foreign demand might become more important than employment and inflation.
Dollar -We got the bounce I wanted. I think the Dollar goes higher this month then sells off again.
Gold and Silver - If a war were not likely I would be shorting both. For now, I will sit and watch. Sept. 11th is a couple of weeks away. We have millions of people in this country with beliefs and motives that we can only imagine. I rate it more likely that some incident will happen than not. Hopefully I am wrong and we sail through September.
Other commodities - Oil and China are still the things to watch along with war or no war. OPEC is allowing production cuts to expire. If oil breaks the long term trend line on the chart you could see oil prices hit the skids.
Weather Commentary -
Good news on the climate front -
https://www.zerohedge.com/weather/atlantic-oceans-sudden-cooling-baffles-climate-scientists-have-they-ever-heard-la-nina
The thing that got my attention is that the temperature drop in the Atlantic was not predicted by any computer model. "Experts" are using these computer models to predict the weather 50 and 100 years from now and frightening young people with their results. Yet, their models fail to predict events that happen next week!
Best of luck,
DBE