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
July 20th, 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.
The last ten sessions of market trading were some of the craziest I have seen. It started a couple of weeks ago as President Biden tried to make up for his debate performance by appearing at events and taking interviews. His visibility convinced more people and leaders of the Democrat Party that they can't win with him at the top of the ticket. At the same time, polls swung more and more toward former President Trump. Traders began to edge into sectors of the market they thought would benefit from a Make America Great agenda. After the assassination attempt the shift turned into a stampede. Two weeks ago I was highly skeptical of the continued profitability of the Mag 7 and AI trade. It peaked three days later and it was all down hill from there. By Friday's close, Mag 7 stocks were down 1.3 Trillion Dollars. That is a big deflationary dent in the world's wealth. When you lose money in your investment accounts you spend less now and worry more about the future. In the mean time here are some newsworthy bits of information.
There was more evidence of consumer spending exhaustion. Helen of Troy sells all kinds of consumer goods. You might not know the name but if you look up the company you will be familiar with lots of the things they sell. Shares hit an air pocket when their earnings and guidance fell far short of expectations due to people buying less. Leslie's Pool Supplies continued its post-COVID dive after its dismal quarterly numbers. If you own a pool you know that the two happiest days of the year are in late spring when you open it and in early fall when you close it. A pool is a hole in the ground through which you pour money. It looks like this summer, many people chose not to open their pools to save the hundreds of dollars on chemicals and water testing. Domino's reported OK earnings but is sharply cutting its expansion plans due to their view of future business. You can see what happened to the shares.
The most watched economic data in the week of the 8th was the Consumer Price Index and it didn't disappoint inflation doves, coming in down on a month over month basis (left). Both goods and services inflation subsided with goods going negative. Bonds and stocks rallied on the news and everyone on the financial shows talked about September rate cuts by the Fed.
Core CPI which takes out food and energy (left) rose only slightly, adding to the optimism. The shelter component (right) also moderated. Analysts say that the Fed uses badly lagging inputs on rents. In many areas of the country rents started coming down a bit this year thanks to new apartment construction. Their theory is that the shelter index used in the CPI calculation will continue to drop as the year goes by.
The next day, the Producer Price Index showed the opposite trend with prices for manufacturing inputs rising (upper left) and even the Core number (right) was hotter than expected. The theory is that these higher costs will be passed on to consumers resulting in retail inflation in the future or companies will not be able to raise prices and their margins will contract. Remember, lower inflation does not mean lower costs for things. It just means that they are increasing in price at a slower rate. Things are still getting more expensive (directly to the left).
Analysts were expecting a negative retail sales number following all the companies that are complaining about poor consumer demand. The headline number surprised The Street coming in slightly positive (left). Right after the release I heard one analysts call it a Goldilocks number and encouraged people to buy stocks. The number was quickly dissected. It turns out that if you take away government "seasonal adjustments" and subtract the rate of inflation, it was a negative number (right).
It wasn't all doom and gloom. The Government said that Industrial Production (upper left) and Factory Production (upper right) were both up in June and Capacity Utilization (directly to the right) also increased a bit. Bonds sold off on the news and analysts worried that the economy might be doing too well for the Fed to cut.
New State by State Claims for Unemployment were up on a seasonally adjusted and non-seasonally adjusted basis (left). The right side chart shows Continuing Claims in red and the four week moving average of Initial Claims in green. After the numbers, bonds didn't rally like they usually do following a weaker labor market report and stocks sold off. It could be that bad news is finally bad news.
We live in a financialized world with most things around us valued in terms of monthly payments as a measure of their affordability. Nearly all business use credit to fill the cost gap between providing goods and services and getting paid for them. Loans for different lengths of time are priced at a premium to the Yield Curve based on the risk involved. Professional and amateur investors use margin accounts that let them borrow against their portfolios to withdraw money for other uses or to buy more stocks and bonds. Interest rates matter. The reddish line on the Yield Curve graph shows this weeks closing rates. The short and intermediate time frames saw lower rates after the better than anticipated CPI and elevated New Claims for Unemployment. Longer dated paper was mostly unchanged from previous weeks. Many Wall St. analysts say that a Trump administration will bring more inflation. This is because of his focus on tariffs that will increase the cost of imported goods. Trump's history is that everything is a negotiation. It is likely that his tough stance on tariffs is the opening round of talks to lower them for U.S. manufacturers who want to sell things in countries that use tariffs to block imports.
With longer dated rates mostly unchanged, Corporate Bonds (LQD) were little changed over the last two weeks. High Yield Junk debt rallied as it usually does when mid and small capitalization stocks do well. From a purely chart perspective it looks close to finishing a classic A,B,C upward correction in a down market. There is a theory that we are in an era where risk is greatly under priced. Professional sports betting people say that when it comes to U.S. Professional Football teams, the public is always a few years behind the current performance potential of their favorite teams. The former glories of a team leave a positive glow so that this year's fans over estimate or under estimate the team's potential. One theory is that the long period of close to zero nominal interest rates is giving most investors a similar positive glow that does not reflect the new reality of higher future risk.
The biggest stock market story over the last two weeks was the dramatic sell off of the NASDAQ 100 and the stunning run up in the Russell 2000. The charts above show their performance from last fall's lows. The chart to the left shows the NASDAQ 100 in blue and its gains versus the Russell 2000 in red. The Russell 2000 got a double boost. During the last Trump term it did very well, exploding higher right after the election results in November of 2016. With President Biden's cognitive issues no longer covered up and polls shifting dramatically in the former President's favor, traders treated the last two weeks as if the November results were in and front ran a Trump victory.
The other factor was rate cut expectations. I heard an analyst explain that many smaller companies finance their operation with floating rate debt. If rates start coming down, the positive affect goes right to their bottom line. On top of that, the Russell 2000 Index contains a lot of regional banks that are the epicenter of the Commercial Real Estate Crisis. Any rate relief will improve the value of those properties. These banks are also holders of longer duration government debt that was bought when rates were much lower. If marked to the market this debt would expose huge losses. With each basis point drop in longer dated rates, the losses are reduced.
So, is the spike in Russell 2000 stocks part of a continuing rotation or is it just a reaction? The rotation argument is that these stocks are cheap relative to larger cap issues and that lower rates and Trump policies will favor smaller businesses. The reaction argument is that what we saw was a huge short covering rally. On the left is KRE, an ETF that tracks regional banks. It would take a big move in rates to boost commercial real estate and most of their government bond holdings are in longer maturities. As can be seen from the Yield Curve graph above, those rates have been largely unchanged. The right side graph shows the percent of Russell 2000 companies that currently lose money. It sits at around 40%. Buyers of small caps are making a big bet on a much improved economy under a Trump Presidency.
Over the last few months, graphs of the the S&P 500 weighted index (left) versus the unweighted index (right) were everywhere. They were used to highlight the narrowness of the rally that was driven by Mag7 stocks while everything else was ignored. The red line on the S&P chart and the blue line on RSP, the equal weighted S&P 500 ETF mark March 28th. On July 10th, right before Mag7 stocks peaked, investors moved into previously ignored larger cap names anticipating a Trump rejuvenation of the economy.
The Dow Jones Industrials finally pushed above its spring peaks with big banks and Wall St. firms leading the way. One of Cyclesman.com's 39 day cycle lows has its timing band next week.
By week's end, things were not looking as rosy. Mag7 stocks and the NASDAQ 100 finished near their lows for the week. Remember, these stocks concentrated a significant amount of the world's wealth. The big shift to Index Funds over the last decade meant big money flows into the same companies. When they take a hit, the impact is significant.
The Dow Jones Industrials and Russell 2000 both peaked on Donald Trump nomination acceptance day and gave back a good chunk of their gains. Can Donald Trump turn things around to the degree that fans assume? Here are some things I am watching that tell me the job might be more difficult than it was in 2016.
I consider the price of crude oil to be one of the best barometers of the strength of the world's economy. It still looks like it finished a consolidation for another sell off into the mid-$50 zone. We need a print in the $85 range to turn it around. The energy majors (XLE) are priced for oil at much higher levels. West Texas fell more than $2 from its high on Friday. This was after three weeks in a row of inventory draw-downs in the U.S. with current levels 5% below the five year moving average for this time of the year.
Copper hit the skids again last week while industrial stocks rallied in the U.S. The left side graph shows the historical path of copper and the U.S. Stock Market. They tend to be fellow travelers. Stocks rallied recently based on the belief that economic activity was not that important because AI will boost all profits. If the AI story continues to unravel, what will be left? The graph on the right shows the build in copper at LME warehouses in Asia. Wait, wasn't there a shortage of copper? Read -
https://www.zerohedge.com/commodities/continued-deterioration-goldman-sees-surplus-market-copper-pushing-prices-lower-short
DBB tracks industrial metals in general and like copper it fell again last week toward its 200 day moving average. DBC (right), the ETF that follows a basket of commodities fell below its 200 day moving average.
Platinum and palladium, two thinly traded industrial metals sold off again. My point with all these charts is that "things" which should be doing well if the world's economy was strong are instead losing ground. Prices can change direction at any time, but, going into this weekend "things" are telling us that the economy is headed for trouble.
If there is any good news in commodity weakness it can be gleaned from the left side graph of unleaded gasoline futures and the interest rate on 10 year Notes in blue. Forget all the statistics and Wall St. analysis. Interest rates on the 10 year, a market linked to mortgages and other loans have a history of following gasoline prices. The right side Sentimentrader.com picture shows the seasonal trend for gasoline prices. If we follow the seasonal pattern then there is hope for lower rates even if it means the economy is tanking. So, what else stands out in the markets?
The Dollar to Euro relationship has been remarkably stable over the last year. One Euro finished the week at 1.088 Dollars. The sideways pattern between the dashed red lines looks like a contracting triangle formation that will resolve with an upside breakout. One could make the case that the breakout already started when the Euro crossed above the blue dashed line. I prefer to see last week's high print as the "d" point with a sell off toward the lower dashed line likely. Often, the final fake out move toward the "e" is sparked by some frightening news story.
Long, contracting patterns are extremely fickle. Because it followed a large rally, the odds are that it will resolve to the upside but I have seen them collapse. And when they do, they lead to a waterfall decline. Directly to the right is what would happen to the Dollar if the Euro fails. Former President Trump commented on the Dollar last week, indicating that he thought other currencies were too cheap relative to the Dollar which hurts U.S. exports and makes locating businesses here more expensive. He could be his own worst enemy when it comes to our currency. If the U.S. moves away from regulation and green, business killing policies and spends less on DEI departments and employee thought camps, confidence in the U.S. will surge and with it the Dollar.
Gold and silver rallied with the Russell 2000 and everything else not Tech. I could not figure out why it was so strong. Silver diverged, not hitting new highs as other industrial metals sold off. Late in the week both metals got clobbered. Gold's high for the week was $2,484 basis spot in NY. It finished the week at $2,398.70. Silver peaked at $31.80 on July 11th. It's low on Friday was $28.85 and it closed at $29.17. You can understand why I include "The gray reaper" as a subtitle on the chart. Precious metals do best in an inflationary environment and one in which other commodities are also performing well which is not the case now..
The chart to the left shows the relationship between the Dollar and Gold. The red line shows the daily closing price of the Dollar Index upside down so that when the Dollar gets stronger, the red line goes down, not up. I do this so that the correlation is easier to see. The yellow rectangle marks a period where both gold and the Dollar rallied at the same time so the correlation does not work 100% of the time. A fearful period of bad news, such as war outside of the U.S. can move both higher. Over the years it works enough of the time to be meaningful. This is why I showed the Euro and Dollar Index graphs. Something big is likely to happen with the Euro and the Dollar over the next year and whatever way these currencies break will have a big impact on gold and silver.
Lastly, adding to the deflation, economic slowdown theme are the recent price of grains. While consumers benefit, a big part of the world's economy is agriculture. Cost inputs to farming rose a lot over the last few decades but grain prices are low. Rainfall in the U.S. Grain belt has been plentiful, likely having to do with one of the articles to which I provide a link below. Corn, in particular is predicted to be in a worldwide surplus after this year's harvest. If you are a long term investor, do you buy when prices are elevated and analysts are predicting shortages or when they are telling you about endless surpluses and problems storing the stuff?
Best Guesses -
Stock Market - I am looking for a short term low some time next week. Most of the time (but not all the time) when stocks close near their lows on Friday, there is downside follow through the first half of the next week.
Bonds - I am looking for a low in bonds late next week. Longer term I am still skeptical. Everyone in the world needs to borrow which should keep rates on the long end higher than people think. Watch JNK. If it rolls over it could lead the next crisis.
Dollar - For now, I favor a rally then sell off scenario as shown by my charts above.
Gold and Silver - They should do the opposite of the Dollar.
Other commodities - Most commodities (except for cocoa and coffee) look like they are falling apart, especially those associated with a strong economy. It is not a pretty picture.
Things in the news -
https://www.zerohedge.com/weather/tonga-volcano-contributed-global-warming-not-cow-farts-or-taylor-swifts-private-jet
If you follow climate and weather related stories then paste this to your browser and read it. Water vapor is the most common greenhouse gas and due to the Tonga volcano, the atmosphere is full of it. This is on top of a peaking 11 year sunspot cycle that warms all the planets. I am thinking it will be much cheaper to heat my house this winter.
https://www.zerohedge.com/markets/lights-out-sunpower-after-solar-installs-shipments-halted
Speak of climate issues. Another government subsidized company bites the dust with tax dollars going down the tubes. Near Nantucket, an offshore windmill blade shattered, leaving debris all over the beaches and closing them down during the hottest week of summer vacation season.
https://www.zerohedge.com/geopolitical/bangladesh-riots-force-government-cut-internet-nationwide-chaos-erupts
In a recent Unneeded Commentary I wrote about the historical precedent of better educated young people who couldn't find jobs that matched their elevated images of themselves joining revolutionary movements. You are seeing this now in Bangladesh. If our economy slows it might be coming to a city near you!
Best of luck,
DBE