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 August 8th, 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.

The big news of the week was the "jobs number" for July. It showed that the economy added 1.763 million jobs for the month and that the unemployment rate dropped to 10.2%. Part of the drop was due to a decline in the labor participation rate. The average of Street expectations was around 1.4 million so the extra 363,000 was good. Stock index futures initially sold off . "Whisper Numbers" were as high as 2.25 million and even though the number was better than expected the overall unemplyment rate of ten plus percent is at levels previously associated with severe recessions. The data set off a shift in asset class allocation. Interest rates jumped a bit. The Dollar strengthened in response. Recent tech winners sold off while cyclicals and the Russell 2000 outperformed. Over the last few weeks analysts argued that the performance gap between "growth" and "value" was at extreme levels. Growth now refers to the tech giants while value means cyclicals and financials. Wall Street has been itching to shift to value based on an economic recovery. For some reason, Friday's numbers lit the torch. The details of employment sectors are interesting and here they are.

Employment in leisure and hospitality increased by 592,000, accounting for about one-third of the gain in total non-farm employment in July. 
Despite the gains over the last 3 months, employment in food services and drinking places is down by 2.6 million since February.

In July, retail trade added 258,000 jobs. Employment in the industry is 913,000 lower than in February.

Employment in professional and business services increased in July (+170,000) but remains 1.6 million below its February level.  In July, the other services industry added 149,000 jobs, with most of the increase occurring in personal and laundry services (+119,000). Since February, employment in other services is down by 627,000.

In July, health care added 126,000 jobs.  Employment in health care is down by 797,000 since February. In July, employment in social assistance increased by 66,000, with child day care services accounting for most of the gain (+45,000). Employment in social assistance is 460,000 lower than in February.

Employment in transportation and warehousing rose by 38,000 in July, following an increase of 87,000 in June. Despite job gains over the past 2 months, employment in the industry is down by 470,000 since a recent peak in January.

Manufacturing employment increased by 26,000 in July. Although manufacturing has added 623,000 jobs over the past 3 months, employment is 740,000 lower than in February.

Financial activities added 21,000 jobs in July, with most of the gain in real estate and rental and leasing (+15,000). Since February, employment in financial activities is down by 216,000.

In July, construction employment changed little (+20,000), following job gains of 619,000 in May and June combined. However, employment in the industry remains 444,000 below its February level.

Mining continued to shed jobs in July (-7,000), reflecting a loss in support activities for mining (-11,000). Mining has lost 127,000 jobs since a recent peak in January 2019.

Government employment rose by 301,000 in July but is 1.1 million below its February level. 

Overall Job loss since January – 10,094,000

These graphs of the rate on 30 year, ten year and five year (from Barchart.com) U.S. Government paper show the slight shift in rates on Friday. It doesn't seem like much but analysts all over Wall Street thought that last week's numbers indicated some kind of inflection point in interest rates and therefore the bond markets. Part of the implication is that the "real rate," that is the rate paid on our Ten Year Note minus the rate of inflation would no longer be negative. This has implications for the "Dollar is dead" and "gold is the only refuge" argument.

The bump up in rates is a one day event that could be erased next week if economic data going into August shows no follow through to June and July's numbers. Most people know the headline data. I included the details because the recorded job losses are still large. Continuing claims for unemployment are just below 17 million with some studies showing around 32 million receiving some kind of social assistance related to COVID. Last week I read an article talking about the difference between the Wall Street story of economic recovery and what we see walking down the streets of our cities and towns where foot and car traffic is a fraction of "normal" and businesses that were open in January are no longer there. Let's hope the optimists are right, our eyes are wrong and that we are turning a corner.

XLI, the Industrials SPDR rallied all five days. Earlier in the week the ISM and manufacturing reports showed a pickup in activity. Manufacturing was still 10% below January's peak readings but the Street believes it is headed in the right direction. The big tech winners sold off a bit late in the week.

Financials, the other "value" play also rallied as shown by the XLF ETF and Bank of America. Banks are in the business of renting money. The money rental rates are close to zero. If interest rates are on their way higher it has to be good for the lending business. At the same time, these institutions are setting aside reserves for a wave of credit defaults and millions of consumers are on delayed payment plans. There is likely to be another eviction moratorium and some states like mine (Massachusetts) have one in place. That means that landlords across the country will not be able to pay mortgages. You have to believe that we have turned a major corner in the economy to buy financials.

Even though the Dow Jones Industrials have the word Industrial as part of their title some of the top weighted stocks are tech names. It rallied amid the asset allocation shift but was up only 46 points at Friday's close. The Russell 2000 stocks did better. For months analysts talked about industrials, financials and the Russell 2000 being the best performers in a real recovery so this theme is well known by money managers and was embraced last week.

The S&P 500, weighted heavily toward tech managed a small Friday gain while the NASDAQ 100, the biggest winner in the shut down economy sold off a bit. So far it is a one day event in tech while industrials were strong all week.

The discussion among Friday's analysts was mostly about "what to buy now." The theory is that if the Apples and Microsofts of the world can just trade sideways while some of the cyclical laggards rebound the major averages will blow through their previous highs. On the left is a graph of the S&P 500, its 40 week moving average and the difference between the index and its moving average in purple. It is at its third highest reading in the last 20 years. This does not mean that it can't go higher. It is just a reminder to investors that despite the 10% plus unemployment rate, equities are well loved and highly valued. On the right is a graph of the CNN Fear Greed Proxy from the Sentimentrader.com web site. High readings in this oscillator happen close to market peaks and low readings were good times to buy in the past. Again, can a market that is already stretched stretch some more? Yes, but if you are a long term investor looking for a good time to buy and noting last week's better numbers, this graph shows you that from a timing perspective you are entering a crowded trade.

Other sentiment readings are mixed as shown by these two pictures from the Sentimentrader.com web site. The left side shows the futures positioning of hedgers in stock index futures with the other side being take by speculators. The hedgers are extremely long the futures which tells you that the specs and fund managers are very short. In most past cycles this meant higher prices. There is one glaring anomaly and that was the period right before the 2008 financial crash. Note that it was the second most extreme reading aside from the current level. On the right is their ROBO (retail only buy to open) Put to Call ratio. It shows small traders buying huge amounts of Call options relative to Put options. Call options are a bet on higher prices and Put options are bets on lower prices. In past cycles this kind of speculative activity always marked short term tops. Is it "different this time?"

XHB is an ETF that tracks the home building industry. When things fell apart this spring I thought my house would be worth less. First the virus then the government sanctioned violence in major cities caused flight from them. Many companies realized that letting their workers do their jobs remotely also reduced their need to rent expensive office space so work from home is more acceptable. In my suburb of Boston homes are snapped up quickly. Homebuilder sentiment is close to levels seen at previous peaks. On the right is a graph found on the Zerohedge.com website. It is a survey of banks reporting that they are tightening their lending standards. In previous updates I expressed amazement at bond investors who are willing to lend billions to corporations and governments. After all, if consumers and the economy are shaky shouldn't lenders be more cautions? In the banking sector common sense is prevailing. If you are seeking a bank loan it will be tougher to qualify or they will charge you more to offset the risk they are taking. You might ask, how, during a period of high unemployment, are so many people able to buy extremely high priced real estate? Another Zerohedge.com article noted that the average income of people applying for mortgages is $93,000. The group most effected by virus shutdowns are workers who had incomes under $35,000 before it hit. In the unemployment numbers above for instance note that 2.6 million people are still out of work in leisure and hospitality. These are not just uneducated workers. I and many of my fellow liberal arts graduates started out in restaurants when we got out of college until we could figure out how to make our way into better jobs. During any economic down turn and period of higher unemployment it is easy to convince the unemployed that "the system" will never work for them. During the recessionary periods of the latter 19th century Marxism was very popular among the unemployed. The $600 special unemployment benefit greatly helped a lot of people but because it was more than millions were making from work it allows modern Marxists to promise that this is what life will be like if you only let them destroy the current "unfair" system and let them allocate wealth produced from the economy. What they don't mention is that Marxism destroys that wealth. We are in dangerous times.

Here are two stocks to watch next week with both these graphs from the Barchart.com website. Two stories about Apple were making the rounds last week. The first was that it was now 7% of the S&P 500 and the other was that it was worth more than 90% of the Russell 2000 index. The last five wave advance featured a contracting triangle in the fourth wave position. These patterns are usually followed by a final exuberant burst and reversal. If reality follows art then we are in the beginning stages of that reversal. Bulls say that any weakness in Apple will be made up by cyclicals and financials that will now take over leadership. It could be, but Apple's unbelievable rally accounted for a major percent of the up-move in the major averages. As long as Apple was going up it was safe to buy the rest of the world. If it is headed down it will have a big impact on the averages. On the right is TESLA, a speculator's dream. From its peak it also made a series of down and up moves similar to Apple's 4th wave. This could imply a final burst higher similar to Apple's blow out high. It is my experience that sometimes these forms, instead of leading to a final peak, just roll over and head down. When they do, they lead to a waterfall decline with wide gaps between the bid and the asked price as the market is flooded by sellers. I will be watching both stocks next week.

Going into last week sentiment measure on the Dollar were at levels seen near lows in the Dollar Index in past cycles. On the right is one of them from the Sentimentrader.com web site showing the futures positioning of hedgers who take the opposite side of speculators who are extremely short Dollar Index Futures. Early in the week there was a brief short covering rally then an attempt to push the Dollar to new lows. Friday's job numbers and the bond market sell off that followed were enough to spark a late week rally. Given the over-sold and much hated attitude toward the Dollar it is likely to go higher.

On the left is a shorter term graph of Gold futures from the Barchart.com web site. Friday's early buyers got slammed when interest rates and the Dollar headed up a bit. As can be seen by the daily chart of spot gold prices, the setback took out two days of upward trading, forming a "daily swing high" on gold and a short term reversal pattern. Bears will say this is climactic action while bulls look for only a temporary set back.

The simple RSI momentum oscillator is at the high end of its range. The last time it was at these levels was in January and it was at the beginning of a larger advance. Many other peak readings in the oscillator were close to topping points in the price of the metal. On the right is a weekly chart of spot gold prices in NY. Note the area in the yellow box. Most of the time when you see a big down move then an up followed by this form, the advance out of it is part of an upward correction, not a new bull market. When I saw this form in the stock market and prices made new highs, often they followed the pattern shown by the red line. An emotional high led to a sharp and deep correction before a final top.

Gold and silver mining shares were winners but they did not have the huge speculative surge that often accompanies a major peak in the metals. That could be an argument for the pull back and one more rally scenario. Silver had a roller coaster day too. I expect it to mirror gold's moves.

Above are two Barchart.com graphs showing palladium and platinum with the path of gold in blue. Both metals tracked gold lately with platinum adhering more closely to gold's quick moves. I expect the same next week.

Above are Barchart.com graphs of Gasoline and Crude Oil. Since early June both commodities traded sideways. One could make the case that gasoline is making the same pattern that Apple's wave 4 made before a final spurt higher. A break of the lower trend line would ruin it. Over the last few weeks there were good draw downs in crude inventories in the United States while production flattened out. The price didn't react much so far. Threats of more shutdowns and restrictions around the world are always looming. If gasoline gets an Apple kind of pop to the upside then crude should also rally. Keep in mind that this kind of contracting form leads to a final peak or a waterfall decline.

CRAK is an ETF that tracks oil refining companies. After its initial rebound it traded sideways over the last couple of months. If gasoline can move higher while crude remains subdued this stock will do better. If the rotation into cyclicals continues past one week then this group will eventually get noticed. XLE is the most popular energy ETF with all the big oil companies included. Fossil Fuel related stocks as a whole are very out of favor not only because of the price of oil but for political reasons. Lately some large banks announced they would no longer lend money for energy exploration and activist hedge funds virtue signal by shunning the group. Still, over time, money and markets win out. If other cyclicals get a bid, energy will too.

I sold my favorite ETF, DBA last week. Corn, wheat and soybean prices all declined last week as crop reports showed good yields and rain is coming to growing areas over the weekend. Corn, an ETF that tracks corn prices moved toward its previous lows as did Weat, an ETF that follows wheat prices but DBA moved higher. It de-linked from the underlying items and should sell off a bit so that I can buy it again.

Strategy for next week -

Stocks - To the right is a chart found on the Zerohedge.com web site. It shows that financial assets are now 6.2 times U.S. GDP. It was included as an argument for why our stock market is grossly over valued. They blame the Fed. for coming to the rescue of the stock market time after time. Stocks have become the number one indicator for confidence in the future. The Fed's job is to keep confidence high so that they can borrow billions of Dollars a week at low rates. On Friday, institutions saw the unemployment numbers as confirmation that the economy will turn around. They sold bonds and bought economically sensitive stocks. Bulls argue that this will fuel the next leg up to new highs in the Dow Jones Industrial Average. Sentiment measures are at bullish extremes and stocks are already expensive. Part of the recent good feeling about things was the $600 a week and now that is gone. The pattern in Apple hints at a sell off. There is a lot of conflicting data! I am keeping some shorts for now.

Gold, Silver and the Dollar - How many web postings did you read over the last few weeks telling you that the Dollar will be worthless and that out of the economic rubble the only ones left standing will be those with gold and silver? These are common themes near Dollar lows and precious metals tops. I am looking for a bounce in the Dollar and a pull back in precious metals. I would like to see gold make the pattern shown in my chart. That would be a sharp sell off followed by one last rally associated with worries about a Democrat win and the flight from the Dollar that would follow.

Bonds - We got one day of good news and higher rates and the world is ready to embrace economic expansion. Interest rates are still close to zero amid an environment where your odds of being repaid are iffy.

Agricultural items - I will buy again on a pull back.

News Update - I write my updates on Saturday morning and wait 24 hours before doing a final edit and posting. On Saturday evening President Trump announced a series of executive orders. The three that the market will note are a payroll tax holiday for workers making under $100,000 per year, extended unemployment benefits of $400 for workers who lost their jobs due to the virus and a federal moratorium on evictions. Critics point out that the moratorium on evictions is a suggestion to Federal agencies to work on the issue. The $400 payments are really $300 from the Federal Government and $100 from states. Many states are broke because tax payments plummeted amid shut downs. They are already running on money that will have to be borrowed. The payroll tax holiday only delays these taxes by doing away with current withholding. The law still requires that they be paid on April 15th of next year. The President says that if he is reelected he will work to do away with them. Democrats are promising legal action against the President's unilateral actions. Writing opinions on the markets on Saturday morning when so much can happen in the next 48 hours is obviously limited to what is known at the time. We shall see how the market digests the news on Monday morning.

Best of Luck

DBE