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 Sept 24th, 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.

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.

Economic Reports -

The Fed raised their target for overnight loans to a range of 3% to 3.25%. The Street thinks that their terminal rate will be a percentage point higher. Chairman Powell says that he is "data dependent." Traders were hoping to see an increase in the weekly unemployment claims number indicating a cooling labor market. This would give the Fed an excuse for slowing down future rate hikes. Instead, Initial Claims fell to 213,000. Continuing claims fell too. Bonds dropped in response. On the right is a graph of weekly claims with no seasonal adjustments. They rose a bit. Energy prices are lower and businesses are reporting that supply chains are not as constricted. Commodities prices are falling. The last piece of the puzzle needed as proof that the economy and inflation are headed lower is the labor market.

Sales of existing homes fell a bit last month. Mortgage rates combined with high prices are keeping many would be buyers out of the market. Retail sales in general are down a bit but the drop off does not yet indicate the recession that everyone is predicting.

Manufacturing rose slightly and Industrial Production fell a bit. Respondents in the latest Purchasing Managers Survey say that business picked up a bit in September following a soft August and that they were able to find additional workers. The bond market keeps looking for bad economic news that will give the Fed a reason to slow down or stop this rate hiking cycle. Aside from the stock market crashing, most reports show an economy that is doing OK.

The Conference Board's set of leading indicators fell into recession readings. The yield curve is inverted which is featured in a chart below. In the past, when shorter term rates rose above longer term rates a recession followed. On the right is the history of inversions and recessions. It took a while for Fed tightening to pull the economy into a recession. These are the Fed's own statistics so all members of the Federal Reserve are aware that the effects of this tightening cycle have a long lead time.

Most assets are trading with short term interest rates. The blue line on the above graphs is the pattern of the 2 Year Treasury Note. Notes and bonds trade inversely to interest rates. When the blue line is going down it means that the interest rate paid on a 2 year note is headed higher. Immediately above and on the right is the pattern of interest rates on a 5 Year Treasury Note along with the rates on other Treasury maturities. The Fed target rate is close to the current yield on 3 month T Bills. History shows that the Fed raises or lowers toward the 3 month rate set by the market. That is why traders are scouring the news for signs that inflation is moderating. If the Fed is indeed data dependent then "bad news is good news" because it implies that the Fed might pause or raise rates at the next meeting less than 0.75%. In Friday's trading session bonds and notes of all maturities traded lower overnight due to news out of the United Kingdom. During the day they rebounded. The 30 year T Bond closed higher on the day (rates slightly lower) and the 10 year was nearly unchanged from the previous session. Shorter maturities closed lower but not that far below Thursday's closing price. Bulls are hoping that current short term rates already reflect future tightening moves by the Fed and that economic statistics over the next few weeks will show moderating underlying demand in the economy and less price pressure.

The left side graph shows the pattern of trading in a 10 Year T Note over the last twenty years. The lower bonds are, the higher the interest rate is. During the last 2 decades rates on the ten year were higher than they are now. We had recessions but we also had a robust economy for some of those years. At the bottom of the chart is a slow stochastic oscillator. In past cycles, when it reached the bottom of its range bonds were close to a rebound. The right side chart shows the current yield on tens and thirties and the spread between them. Last week the yield on the ten rose above the thirty, inverting this pair. Since last spring, rates on these longer duration instruments are in a range of only one percent. Short dated paper rose from close to zero toward 4%. Bond analysts say that longer dated bonds are anticipating a recession and much lower future inflation.

The last update mentioned the pattern from 1987 as something to watch. Highs and lows in both years are similar. In 1987 stocks rallied the last week of September then collapsed into the famous 1987 crash. An article in Sentimentrader.com showed the typical pattern in mid-term election years. Stocks tended to sell off into the end of September then rally into July of the following year! No one is positioned for that to happen.

The Dow Jones Industrial Average broke below it's June low. At that low, sentiment readings hit bearish extremes similar to previous major stock market lows over the decades and the strength of the rally out of the June bottom was similar to previous bull market kick offs. Other market sector measurements are very close to June's inflection point. In the last hour of trading on Friday the Dow Jones rallied more than 400 points and most averages closed near where they opened. The market was still down a lot but bonds of all maturities firmed up during the day. The correlation between shorter term rates and equities (and other things) is strong. Given the big intra-day reversal in bonds to the upside shorts bought back some positions in case there is follow through to the upside by bonds early next week.

It takes a lot of selling to drive a slow stochastic oscillator on a two year S&P 500 chart to the bottom of its range. Most of the time this takes place close to a rebound. The yellow rectangle marks a period when the oscillator held near its low and stocks continued to decline. On the right is a Sentimentrader.com chart showing the result of polling of members of the American Association of Individual Investors. Previous bearish peaks were close to market lows.

Two more Sentimentrader.com graphs show that big institutions are positioned for a market crash by buying Put options that make money when stocks decline and by selling short a record amount of stock index futures with entities listed as "hedgers" taking the opposite side of the trade. This kind of behavior marked lows in past markets. Bears will correctly say that all of this data was accumulated during the bull market that started in the 1980s. Between 2009 and 2021 there were periods when all the sentiment type indicators were at levels where stocks topped in past cycles but they kept going up anyway because the Fed was pumping more money into the system. Now, they are draining liquidity. There might be some short term, violent relief rallies but the trend will remain down.

Above and to the left is the trading pattern of the Euro with that of a 2 year T Note. The ECB is beginning a cycle of tightening. In Europe it isn't all about interest rates. Russia was Europe's biggest trading partner and this included oil and natural gas. Boycotting Russian goods to support Ukraine has been a disaster. On top of that, the Greens in Europe don't want liquefied natural gas or nuclear energy. They would rather freeze and starve this winter, declaring themselves as martyrs in the new Global Warming faith. On the right is a chart of how many Japanese Yen it takes to buy one Dollar and the 2 year T Note. Last week when it hit 145 the Bank of Japan intervened in the market by buying Yen and selling Dollars. One of the worries of bond traders is that Japan is the largest holder of US Treasury paper and they are likely dumping these to raise cash to protect the Yen. The Bank of Japan is buying nearly all of the bonds that the Japanese treasury is issuing to keep the government functioning. Like us, they run a huge deficit and have to borrow heavily to cover costs. In previous years they thought they could do this forever (just like we think) but now, with other Central Banks raising rates no one wants negative yielding Japanese paper. Monthly inflation readings in Japan were flat until recently and have begun to rise. Traders are betting that it is just a question of time before their Central Bank is forced to raise rates.

The U.S. Dollar Index is rising as the two biggest currencies in its weighting decline. Aside from interest rate differentials there is a big fear factor in its up move. We are an ocean away from Russia and China. We have domestic sources of hydrocarbons and a Central Bank that says they are determined to slow inflation. Analysts who pay attention to sentiment readings say we are at peak bullish sentiment on the Dollar and chart fans note that it traded up to a trend line late last week from where it pulled back in past cycles.

The strength of the Dollar correlates nicely to Gold's decline. In true periods of panic both gold and the Dollar can rally but it is not happening now. On the right is a long term chart of gold with a slow stochastic oscillator below. In previous years, if you only bought when the oscillator was near the low end of its range you would have done well. The red rectangle shows a period of time when gold remained oversold and fell farther so nothing is 100%.

The chart on the left is a normal gold bar chart. I was hoping that it would hold above the July lows but it didn't. On the right is the same set of prices with the daily gain or loss in the Dollar Index added. This chart highlights the effect of the strengthening Dollar where the recent decline in nominal terms is mostly because the price measuring rod for gold, the Dollar keeps getting longer. Another thing to remember is that many countries around the world in non-Dollar currencies own gold. They can sell their gold and quickly raise Dollars to buy food or repay Dollar denominated loans or defend their currency. The fact that gold works as a liquid store of wealth can go against its price at times.October is usually a rough month for gold and silver.

When gold sells off, usually silver does even worse! But this time around silver is bucking the trend. The right side chart shows the recent trading action and includes the 2 year T Note pattern. On Friday, the metal gave in to the spike in interest rates and the massive sell off in most markets but held near a previous pull back low. October is usually one of the weakest times of the year for silver and everyone knows it. Why is it hanging in there?

Last weekend, a Zerohedge.com article included these two graphs. The London Bullion Market is the biggest trading hub in the world for precious metals and their vaults hold millions of ounces of the metals. Most of the big silver ETFs that back their shares with physical silver house their silver in approved LBMA warehouses. Those ounces are in gray. The green area shows inventories of silver aside from ETF holdings and they are dropping. It is the same with COMEX (USA) stockpiles. Physical silver is in great demand. Analysts say that demand in India is a major factor. India has a tradition of gold and silver ownership. A few years ago, the government canceled their currency and replaced it with a new version. Corruption is rampant in India and many people were holding cash outside of the banking system. When the old currency was canceled people had to go to the bank with their old bank notes and replace them with the new. If they showed up with huge amounts of cash they were flagged just as we would be in the United States. I don't know for sure but my theory is that people are trading currency for silver as protection against a future government move. That could be a lesson for all of us.

On the left is a graph of the position of silver futures traders who identify as hedgers. On the right is a similar graph that includes gold, platinum and palladium. Usually hedgers are net short markets. Here are two typical sell side transactions that a hedger would do. You are a metals trading house. A silver mine decides to lock in current prices for their next year of production. You buy their anticipated output of silver today and sell short futures on the COMEX or in London. As the company produces the silver and delivers it to your firm, you lift the short sales by delivering the silver against your previous sales. In case two you are a precious metals refining company. Customers are sending in precious metals bearing materials. It might take weeks to purify the metal and have it available for sale but customers want cash now. You pay them by taking ownership of a high percentage of the precious metals contained in the shipment. You lock in the current price by selling short in NY or London and pay the customer with borrowed money. When your refinery produces the refined product and sells it you do so against the short position or you sell to a buyer at today's price and lift your short sale at the same time. Every day, traders in these firms do transactions that cause them to sell short and some that are the opposite where customers are buying precious metals from them for delivery of physical to follow. The two sides of these trades are offset daily with the trading house establishing a net long or short positions in the futures and forwards market. When buy orders are greater than sell orders, it indicates strong underlying demand.

Platinum and palladium are getting knocked around by the stock market like everything else. Futures traders who identify as hedgers have unusually large long positions in these metals which coincided with lows in past cycles. Palladium hits typical seasonal lows in October with Platinum following a bit later in the year. Lease rates on platinum jumped to 10% recently and are now back in the 7% range. Normally they are in the 2% range. Traders are worried about future supply.

Crude Oil hit the skids following the stock market. Traders are convinced the world is heading into a depression. The also have millions of barrels of supply each week from our Strategic Oil Reserve which the Biden administration is using to keep oil prices down until the election. Oil in storage aside from the Strategic Reserve is at levels that are around 2% below the five year average for this time of the year. The right side graph is a close up of recent trading. The pattern within the red lines is typically followed by a thrust down and a reversal. It could be that traders will anticipate the end of Strategic Reserve supplies and start buying again.

Gasoline stockpiles are around 5% below the five year average for this time of the year and distillate supplies are 18% below, an improvement from 23% two weeks ago. Gasoline tends to decline into December. This year both markets will watch crude prices and the weather in the case of Heating Oil.

Natural Gas is still at elevated levels compared to the last few years. It is high because we are supplying Europe to make up for Russian gas. There is grumbling about how much pain U.S. consumers should withstand to aid Europe because they don't want cheap Russian Gas.

Soybeans usually make seasonal lows in early October. So far, they are holding above summer lows. DBA is an ETF that tracks the prices of grains and meats. Every day there are articles on the coming food shortage. So far prices are trading sideways. Let's hope the alarmists are wrong.

Best Guesses -

Stocks and bonds- If we continue to follow the 1987 pattern then a relief rally will come next week. When I read the financial news I see nothing but predictions for disaster. Sentiment readings reflect this and are at levels when the market bounced in the past. Fundamentals look bad but the market is so oversold that you can't short it and it is frightening to be long. Everything is in the hands of the bond market. The bond market rebound on Friday could be an indication that traders see current rates on shorter dated paper as near the terminal rate for Fed hiking in which case a locked in return of 4% is attractive. Watch the one and two year note prices closely. Barchart.com has these on a delayed basis. If we follow the typical mid-term election pattern then time wise, we are close to a low.

Gold and Silver - The seasonal tendencies are negative for October but as with stocks it all depends on interest rates at the shorter end of the curve. The out performance of silver is impressive as are the millions of ounces leaving exchange vaults. Seasonal tendencies were not followed earlier in the year. If rates subside and stocks get a relief rally, gold and silver will follow.

Dollar - Predicting a Dollar top is futile. If short term rates let up a bit then we could see a pull back.

Grains - Corn and Soybeans are due for seasonal lows. Wheat has a different cycle and often rallies into early November.

Oil and products - When inflation first emerged as an issue, energy prices were the most pointed to factor. Those prices are down now but no one cares. The thing to watch is what happens after they stop pre-election raids on the Strategic Reserve.

Things look bad all around. Sentiment reflects it. We could use some good news.

Sunday morning - There are rumors that there is a coup in China and that Xi Jinping is under house arrest. Nothing is confirmed.

Best of Luck

DBE