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
Feb. 1st, 2025
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.
Going into this weekend, tariff battles are creating uncertainty. If the U.S. can not come to some kind of an agreement with Canada and Mexico President Trump said he will impose 25% tariffs. China will get 10%. By early afternoon on Friday there were rumors that oil might be exempt. I agree with an analyst who said that Trump's moves against our closest trading partners are a signal to the rest of the world that if he is willing to fight with friends he will do much more with those at a distance. There were economic numbers from the past two weeks. Here are some of them.
The Personal Consumption Expenditure Price Index (left) is a measurement of inflation. The headline number rose 0.3% month over month and 2.6% annually. The core reading (minus food and energy) rose a bit faster at an annualized rate of 2.8% . Both readings were within the expected range. Personal Income (right upper) rose 0.4% month over month. Expenditures rose 0.7%.
The first estimate of 4th quarter GDP came in a bit lighter than expected at 2.3% (left). Many components in the calculation were weak but one was much stronger: Consumer Spending (right). It came in at 4.2% and was still up on an inflation adjusted basis. Some analysts say there was a post election relief spending spree.
Initial Claims (left) for unemployment benefits fell to 207,000 on a seasonally adjusted basis and 227.400 on an unadjusted basis. A state by state breakdown showed a huge drop in claims from California which does not make sense because of the destruction and dislocation from the fires. It is most likely that there were reporting problems that will be corrected in future reports. The four week moving average of Claims (right side green line) fell to 212,500 and Continuing Claims sat at 1,858,000, still below the 1,900,000 that everyone is watching.
Pending Home Sales (red line on left side graph) fell last month. The orange line shows Existing Home sales and the green line tracks New Home sales. The right side graph is a record of price increases in the 20 largest cities. 19 of the 20 were up again last month with Tampa being the only lower reading. People in the area report that there a lot of storm damaged homes that are on the market needing repairs before they can be lived in again.
Durable Goods orders (left) were down 2.2% month over month and 3.8% year over year. The right side graph shows the non-defense aircraft and parts component which was down last month, mostly due to Boeing. Minus aircraft, the reading looked a bit better.
My big bet for the new year was that longer dated bonds would rally (interest rates move lower). So far, it is doing OK. Above and to the left is a short term graph of TLT, the ETF that tracks longer dated government bonds. On the right is its mirror image, the interest rate paid on a 30 year bond. Why is this working? My reason for doing it was primarily chart pattern based but it also included sentiment. Going into early January there were constant warnings about higher interest rates and a collapse of the bond market and a government debt "death spiral." I could not argue against the logic of any of these articles but when sentiment is so one-sided it often signals an inflection point in a market, even if it is only temporary. Another reason is the graph directly to the left. It tracks actual inflation data relative to analysts predictions. Lately, inflation rates flattened out to the 2 to 3% range, slightly better than analysts projections. If inflation is going to be stuck below 3% and tariffs are being thrown around that have historically slowed growth then a current yield of 4.54 percent in a 30 year government bond gives a 2% real return.
With stocks selling at high valuations and uncertainty about the future, a 2% real return sounds OK.
Gold was the star of the week, hitting new highs in terms of Dollars on Friday then selling off. The top two graphs show gold denominated in Dollars, the left side one with arrows pointing to 21 day cycle lows as theorized by Cyclesman.com. The upper right chart shows the daily closing price and a simple RSI momentum oscillator below. The oscillator is approaching over bought levels, high enough to discourage me from chasing this rally. The two lower charts might be more illustrative of what is happening with gold. The left side graph shows gold priced in Euros and the right one adds the percent gain or loss in the Dollar Index to the price of spot gold in NY. Both formed contracting triangle patterns and are now thrusting upward. These are usually ending formations so I am cautious going into this weekend.
On the left is a chart of the daily closing price of spot gold in NY and the Dollar Index, inverted so that when the red line goes down, the Dollar is getting stronger. Over time, a strong Dollar results in lower commodity prices, including gold and silver. Lately the opposite happened. My theory is that institutions and individuals in non-Dollar based currencies are using gold to hedge the risk of a collapse in their domestic currencies. When I go to bed at night, gold is often trading at around the same price where it closed in NY. By early morning it is higher so much of the action is overnight. Regular readers know that I think the Dollar just finished an upward correction and will now decline. The right side graph shows the recent action in the Dollar Index. From its recent high it sold off in a classic five waves, three down and two counter moves. This tilts the odds towards another sell off following an upward correction of the first five down. So, gold buyers trying to hedge a stronger Dollar might be unwinding those trades over the next few weeks. The high on April Gold Futures was $2,862.90, mid-day on Friday. Later in the day they were trading at $2,827.
Silver generated a little excitement but is now down $0.45 on the day. It didn't even make it to recent highs that touch the dashed upper red line. A break of the lower red dashed line will mean that most people who bought over the last 7 months are sitting on a loss. On the right is a graph of Newmont, the big gold mining company and gold. You can see how hard it is to be a fan of mining company shares. Record gold prices didn't generate the profits that shareholders expected.
Palladium and Platinum crossed above their 200 day moving averages late in the week. Both are off their highs of the day near the close. On Thursday it was if someone rang a bell with metals and other commodities leaping higher. Gold and silver were the most visible but funds bought other things too, such as grains. Will this be the kickoff to higher prices or is it the last bit of exuberance before another sell off? We will know early next week.
By Saturday we will know what is happening with tariffs and if they will include oil from Canada and Mexico. We import 3.9 million barrels of oil per day from Canada. It is our biggest non-domestic source of oil. Most of it is nasty stuff that sells at around a $13 discount to WTI prices as of today. Oil refineries, especially those in the upper Midwest spent billions of Dollars over the last two decades to modify their processes so that they could run Canadian Crudes.
Crude Oil finished the week in the middle of its trading range. It has a seasonal tendency to be weak into the first week of February then rally into the spring. The large integrated oil companies (XLE) sold off today over the tariff uncertainty and Chevron's earnings which were hurt by refining margins.
Marathon Petroleum is one of the larger domestic oil refining companies. It hit the skids Friday on worries over tariffs as did other refining based companies. We will see what Saturday brings!
Two weeks ago I was worried that the market was setting up for a sell off. I wanted to see the action over the next few sessions before I did anything. The Dow Jones Industrials managed to rally back to its previous high. Today's close was 510 points below the intra-day high and the index finished down on the day. The S&P 500 also opened much higher then closed down on the day, 60 points off its peak. You can blame it on tariff jitters but where were those jitters at 9:30 Friday morning when investors threw billions in cash at the stock market when it opened?
Other market measurements fell short of the previous top. The NASDAQ 100 and Russell 2000 didn't come near all time highs before this afternoon's blood bath. The NYSE Composite came close. Yesterday I heard an analyst say that Mid-Cap stocks were on fire and would be the place to invest in 2025. When I checked the chart of MDY, an ETF that follows the group, I was surprised that they only took back part of the sell off.
Over the last two weeks the world learned about DeepSeek, a Chinese AI with open source software that turns AI from an expensive specialty tool into a commodity product and doesn't require the most sophisticated, expensive Nvidia chips. In the last six months I wrote that time is not a friend to any new technology. History tells us that innovation is quickly copied, and improved. Competition results and the profit margin that the first to market companies factored into their future investment returns disappears. A decade ago, economic cycle theorists were pointing to the mid 2020s as the years when a new revolutionary technology would appear, driving productivity and profitability the way that steam engines, railroads, automobiles. radios, TVs, the Internet, WIFI and cell phones did in the past. Nvidia's $30,000 chips were the key to this new world. For the quarter ending in October of last year their profit margin was 55.69%. It didn't make sense that both Nvidia and their handful of MAG7 customers who were paying these margins were favored by investors. So, what now? A large piece of the world's wealth is parked in Nvidia, Microsoft, Google, Meta, Amazon, Oracle, Taiwan Semi, Apple and a handful of other chip manufacturers trying to get their products into the AI world. Microsoft spent an estimated 31 Billion Dollars on Nvidia chips. The red arrows point to the price of its shares before and after DeepSeek. With over 7 billion shares outstanding your are looking at 203 billion Dollars lost.
On Monday, the 27th, after a weekend of DeepSeek news, tech hit the skids. I thought, "What would I do if I were an investment advisor at a big Wall St. firm and my clients were loaded up with these stocks due to my recommendations?" I would attack DeepSeek and try and disqualify it as a viable option and question the narrative around its creation. I would assure my clients that, yes, we do need the most expensive chips and that Open AI and other domestic brands will be better. Then I would use the China = danger argument while downplaying the fact that DeepSeek can run on some U.S. based servers. By week's end this is exactly what happened and on Friday there were multiple stories claiming that DeepSeek used Nvidia chips that were smuggled through Singapore into China and that the creators grabbed the data from Open AI. Another allegation was that the Chinese government poured billions into the project, similar to Microsoft's expenditures. Some, or all of this might be true but that doesn't change the fact that our tech oligarchs were planning on charging a premium price for their technology and now it is available for pennies on the Dollar. We might be looking at a grief cycle kind of thing with companies in the AI sphere. We got the shock of DeepSeek. Later in the week we had the denial phase but looking at Microsoft and NVIDIA, denial didn't help that much. Next is a slow acceptance and working out of what comes next. At this point, I don't think anyone really knows how things will shake out but the future will not be as profitable as investors assumed two weeks ago. In a way, this is karma for Microsoft. In the 1990s there wee multiple innovate software companies that came up with new programs that we call Apps today. Within months, an updated version of Microsoft Windows would be released that included a free version of the software that the smaller company was selling and the small company would go out of business. In other cases they just bought the company to get the rights to the program. See - https://www.youtube.com/watch?v=eAeVOoTXt8o
Best Guesses -
Stock Market - On Friday, the Dow Jones Industrials made a new high then closed below the three previous day's of trading. This is not a good look. If we come to an agreement with Canada and Mexico over the weekend and tariff's are avoided then you could see a relief rally. If it happens I will likely sell into it by buying a small position in an inverse ETF on the Index. Other than that I will collect interest in some bonds and money market funds. Who knows how the DeepSeek AI shock will work out over time and we are headed into unchartered waters with tariff's thrown back and forth. Government spending, the backbone of last year's transfer of wealth to big corporations is about to be cut. What is good for Ameica might not be good for corporate profits.
Bonds - So far, the bond trade is working out. I am sticking with it for now.
Dollar -I think the top is in for now. We might not see an acceleration to the downside until late Feb.
Gold and Silver - To the left is a long term chart of the weekly closing price of the Dow Jones Industrials and spot gold in NY. Those of us who like gold and silver think we are diversifying by putting some wealth into gold rather than the stock market and at times this might be true. Over the last few decades it was mostly the same trade. Martin Armstrong (armstrongeconomics.com) would say that you are looking at a cyclical move from public assets (Government debt instruments) into private assets as faith in governments in general declines. I agree but nothing goes straight up. For the next two weeks I am looking for a pullback.
Other commodities - Tariffs? No Tariffs? No one knows how things are going to work out over the next few weeks. I will err on the side of caution.
Question: Where is my global warming?
https://www.zerohedge.com/weather/lower-48-polar-blast-coldest-1994-global-warming-alarmists-go-silent
Best of luck,
DBE