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 Feb. 27th, 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 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.

 

 

 

 

 

 

 

 

 

 

 

 

Last week's update had a lot to say about the interest rate market. They have been kept artificially low by Central Banks while stocks priced in a robust economic future. Something had to give! How many times did you read or hear the word "inflation" last week? On the left is a picture from an article on the Zerohedge.com website following the release of the Consumer Price Index. The Services component is down due to State mandated closures but the rate of increase in the price of "things" even without food and energy is up and above the Fed's 2% magic number. Energy and Food had big jumps in price over the last six months so leaving them out is sort of like saying that the air quality on Mars is great if you don't include oxygen. The right side graph shows DBA, an ETF that tracks the price of crops and meats (green) and the daily interest rate on the U.S. 30 Yr. T Bond. The correlation was very tight over the last six months.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The rate increase for the Ten Year T Note and 30 Year T Bond is dramatic and stunned all markets. The intra-day highs last week, shown in red followed a poor auction of U.S. 7 year notes. That might have been the short term peak in yields. The rate increase spread around the world. Bulls will note that we are just back to pre-COVID levels, a rational expectation if you think things are getting back to "normal." Interest rates are still near 5,000 year lows so what is the big deal?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In the past there was always a typical interest rate and stock market cycle as shown by the left side chart. When the economy slowed down, the Fed lowered interest rates. While the economy was still in decline the stock market hit its low and started up in anticipation of a recovery. When the economy showed signs of turning around the Fed stopped easing and interest rates headed higher. Economic and corporate profit growth was above interest rates so stocks kept moving up. At some point the Fed thought things were once again heating up with inflation rearing its ugly head so they started tightening to the point where higher interest rates impacted profits and economic activity and stocks turned lower. If reality follows the script then we are somewhere in the area of the yellow rectangle with more stock market gains to follow. Critics will point out that inflation is already running "hot" and that unlike previous cycles, the Fed has not stopped easing since 2008! They will also introduce you to the graph on the right from the Real Investment Advice crew. It tracks growth rates in the economy and Total Debt As a % of GDP. As debt grew, growth rates declined. While "stimulus" might temporarily pump up the numbers for a quarter, as soon as the economic cup of coffee wears off, the drastic increase in debt will correlate to next to no growth in the economy and corporate profits. The whole system is more fragile than ever before.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Durable Goods orders were great last month. The overall level is back to the pre-COVID range! On the right is a Goldman Sachs chart of U.S. Economic activity. It hit a record high last month fueled by government transfer payments. The U.S. House of Representatives just passed a 1.9 Trillion Dollar stimulus bill. What needs stimulating? The only thing missing is States re-opening so that travel and leisure business can get going again and hire employees! My cynical guess is that they are staying closed until this bill passes. Within it is a massive bail out for poorly run Democrat controlled states with huge structural deficits including grossly underfunded pension programs. These tend to be the same states hanging on to restrictive policies despite the science showing they have had no beneficial effect. Once they get their bail out they will re-open.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Two weeks ago the S&P 500 traced out a little contracting triangle and burst higher, a pattern that often leads to a reversal. Last week the market rallied in to mid-week amid Fed talk about unlimited stimulus before the reality of higher interest rates grabbed investors' attention. The most widely watched market benchmark, the S&P 500 closed near its 50 day moving average, a level commonly programed into trading systems as a trend tipping point.

To the right is a graph of the weekly closing price of the S&P 500, its forty week moving average and the distance between its close and that average. Note that despite the sell off we are at levels that coincided with previous tops in past cycles. This doesn't mean that the market has to crash. It could trade sideways for months while the purple line moves lower.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Dow Jones Industrial Average closed at its lowest level in weeks. Bulls will point out that the hourly RSI momentum reading hit "over sold" levels at the end of the day. Bears will note that some of the biggest stock market losses occurred after the stock market was already over sold. They will also note that on the daily charts we have a ways to go before reaching such readings. Furthermore, when stocks close near their lows on Friday the sell off tends to follow through into Monday.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The small cap Russell 2000 joined the losers, closing at levels last seen the first week of February. The daily price bars broke below a trend line in force since late October.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The tech heavy NASDAQ 100 was the hardest hit. On the right is a Sentimentrader.com graph showing the performance of market sectors following a steepening of the yield curve. Tech was the worst! We live in a period of time when all of this kind of data is quickly seized upon. One has to wonder if some of the selling is just because of the historical correlation charts as opposed to looking at current earnings and revenues of the individual companies.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Talk about a sector rotation from growth and momentum into economic recovery plays like cyclicals, financials and small caps started in August then accelerated in late October. The problem is that the big tech stocks are still the biggest positions in money managers' portfolios. There is no spare cash that can be used to buy the perceived future winners because they are fully invested, so something has to be sold first.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The only source of funding is last year's big winners despite their great quarterly earnings announced just weeks ago. Is there any hope for this group? Yes. In some way they are seen as safe plays because of the hoards of cash they hold and continue to generate. If the sell off goes into next week, at some point there will be doubt about the "recovery" story and money managers will remember that these companies have a higher net worth than most countries. Also, the NASDAQ has a seasonality pattern with February being one of the weakest months of the year. March is typically an up month.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

I was hoping that Amazon would make a pattern like Microsoft's above, leading to a final burst then reversal. Instead it is close to breaking below the "c" point which would point to a decline instead of one last pop. Wal-Mart also hit the skids. They were allowed to stay open during the pandemic and reaped a windfall. Now that things are re-opening they will face increased competition.

In the financial media there is talk about "pent-up demand." The implication is that retail sales will spike once things are open. The crew at Real Investment Advice put out this graph last week. It shows that overall, retail sales did not decline, they just shifted their focus. There is pent-up demand for spending money at restaurants, travel and leisure and shopping at brick and mortar establishments but that will only shift the already robust activity from some of last year's shutdown winners.

Will people crowd into bars? Yes, but if you walk around your neighborhood on trash pickup day and check out the glass recycling bins you will see first hand that liquor consumption did not decline. It will just relocate and it might not be safe to be driving after ten PM on Friday and Saturday nights!

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Both the "have to" collapse in the Dollar and Bitcoin's move to $100,000 paused last week. In three days Bitcoin went from $58,000 to $45,000. When I think of a currency I think of something that can sit in my wallet or account and buy a similar amount of things this week as it did last week. Bitcoin doesn't meet that qualification. The Dollar perked up a bit as interest rates on shorter term U.S. Bills and Notes firmed and stocks looked shaky. The Japanese stock market sold off along with the Yen and everyone knows that Europe is more fragile than the U.S. Any rate increase will crush them. My longer term Dollar dream trade is a continued sideways move followed by one last sell off toward 88 followed by another rally phase.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

What happened to gold? Every other word on the financial news networks is "inflation" and gold promoters always told us that gold protects you from inflation. Is gold telling us that there will be no inflation? The RSI momentum oscillator on the daily closing price chart is still not at "over sold" levels!

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The RSI on the weekly closing price is not officially in over sold territory either! Despite the sell off gold is still in the price range of a normal correction that could be followed by another rally phase. Last week was the end of the Cyclesman's normal daily timing band. Sometimes these bands run a bit long. Next week is the middle of the timing band for his weekly cycle low.

To the right is a chart of the daily closing price of gold in NY and TLT, the ETF that tracks longer dated U.S. Treasuries. When gold was going up there were lots of web sites showing the path of gold and inflation adjusted interest rates. Those rates were negative which meant that inflation was greater than the rate paid on Bonds. As bonds fell (rates increased), they began to catch up with inflation. The theory is that gold is now less attractive. During the late 70s, gold and interest rates rose together. A few years later they both fell together. If you look at long term correlations between gold and interest rates you will see no consistent pattern. At times a market fixates on a single variable for a while. Then that variable loses its clout. Last week, bonds had a blow out low when the results of the 7 year auction hit the tape then recovered. It looked like a temporary low for bonds. Hedge funds have huge short positions in T bond futures. The bond market could test those lows early next week then rally as shorts figure the sell off is over done. If this correlation stays constant we could see a similar rebound in gold. At least, that is my wishful thinking.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares in the companies that mine gold and silver ended the week at levels last seen 8 months ago. By all technical measures they are "over sold." Silver had a better week than gold but the chatter that it is going to $100 due to a short squeeze could not be found by week's end.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Palladium has been trading sideways for months. It sold off late in the week along with most industrial commodities as stocks hit the skids. A few bad days in the stock market results in everyone wondering if their faith in a big recovery is just hopes and dreams. On the right is a graph from the Sentimentrader.com website. It shows that commercial hedgers are long palladium with the short side taken by speculators. In past cycles this led to higher palladium prices, a frightening prospect for industrial users of the metal.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Platinum and copper took note of stocks and sold off a bit too. Platinum formed a contracting triangle then surged to new highs before reversing. Support should be within the range of the red lines. Copper could sell off over the same time period. Bulls on the metal will say that in past cycles when copper had a big run it tended to move much higher than reason would imply before reversing.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

A couple of weeks ago, major brokerage firms went all in on energy, declaring oil and energy related stocks to be the big future winners of a new commodities super cycle. I was writing about the energy sector last summer and fall when XLE was below $30. Now, after crude nearly doubled in price and with XLE in the forties, your broker is calling you and telling you that now is the time to buy! Remember, the oil market is a rigged market. Major producers can decide to pump and ship more at any time. Even if they are right about the cycle, they are late in the game. It is likely that some of the best gains are in the rear view mirror.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Soybeans and Corn stalled out a bit over the last few weeks. My theory is that bullishness about everything is levered to the stock market. We will have to see how commodities do if stocks continue to decline.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

I won't say anything about Tesla's sell off because I don't have an "I told you so" bone in my whole body.

I used to post charts on the Shanghai Composite regularly until a few years ago when, during a down cycle in Chinese stocks, the government imprisoned some big sellers, sending a message to investors that "stocks only go up." Still, it made a potential topping formation over the last 9 months that will be confirmed with a move below the long sideways formation. China's economy is more leveraged than ours and is every bit as fragile.

 

 

 

 

 

 

Hospitalizations are down again in Massachusetts just as they are around the country. On the Internet there are dozens of articles featuring graphical evidence showing that the course of the virus was the same for states that took less precautions and those that had extreme restrictions. Masks, social distancing, lock downs - none of it mattered. It reminds me of the ending of the original War of The Worlds when the aliens died due to earthly bacteria or viruses following all of man's futile efforts to vanquish them. Now, nature is having its way with COVID just as many cancelled epidemiologists foretold 12 months ago! Given all of this "science" why are we not wide open? Again, the cynic in me looks at the state bail outs in the proposed stimulus bill. If unemployment falls, the reason for the whole thing will collapse.

Strategy for next week -

Stocks - I am hoping that any rally attempt early in the week fails and that we get a blow out low some time in the middle of the week. I will get out of all shorts and look to buy.

Bonds - Thursday's action looked climactic. There might be a test of those lows but the shorts are probably getting nervous. Look for some kind of short covering rally.

Gold and Silver - I expect them to follow bonds for now.

Dollar - My theory calls for more sideways action into March.

Best of Luck

DBE