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 Oct. 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 - 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.

Sometimes themes grab the attention and money of investors. The current belief is that sooner or later a large stimulus bill will pump additional billions or trillions of Dollars into the U.S. Economy as the virus cases decline and states that were closed pre-election open up post-election. With all the money floating around, the economy will jump, earnings will recover and cyclical stocks will outperform tech. On the left is a graph showing the theory of how interest rates interact with stocks. The Fed loosens in a recession as rates fall due to the economy slowing. As it starts to recover they stop easing. Credit demand pushes interest rates higher but it doesn't matter because corporate profits are rising faster than interest rates so stocks go up. At some point, the Fed tightens and interest rates increase to a level that begins to choke off economic activity and the cycle repeats. The yellow rectangle shows where proponents of this view think we are now. On the right is a Deutsche Bank chart that appeared in investment sites last week. It shows the average stock market pattern during close U.S. election years. The theme of this picture and other articles is that the market is going higher no matter who wins!

If the cycle timing is right then Russell 2000 stocks should start to outperform last year's winners such as NASDAQ 100 issues.

3M will do better than Alphabet (GOOGL).

The world of out doors "things' such as heavy machinery made by Caterpillar will be better than the "click" and virtual indoor world of Microsoft.

Investors already placed their bets on this cycle shift as you can see from the charts of the potentially winning stocks. Copper and other base metals rebounded on hopes that a recovering world will resume building things. Copper miner Freeport is closing in on a 400% gain! Note the sideways patterns in both copper and FCX. It fits the text book look of a correction in a down market. The ideal path would be for both to exceed the previous top before stalling out. To the right is a graph from Sentimentrader.com showing their Copper Optics measurement. It is a proprietary gage of sentiment toward copper. Note that it is in the range of previous peaks in the price of the metal. This does not mean that copper has to decline. It just tells us that current buyers are late in the game and that their odds of making money are limited.

Two charts from last week's update showed the buildup of positions by futures traders on the Ten Year T Note and the Thirty Year Treasury Bond. They were in opposite directions with speculators betting big on Ten Year rates going down and Thirty Year rates moving up. The positioning of these trades were most likely from "spreaders" betting on a steepening of the yield curve. As can be seen by the left side chart of the rates on Tens and Thirties, rates on both issues move up last week but the Thirty year rate moved up faster than the Ten year rate as shown by the green line that tracks the difference between the two. Bond traders long the Ten Year lost money but they made up for that by being short the Thirty Year so the trade posted a net gain. The right side chart shows the positioning of hedgers in the Thirty Year who take the opposite position of the specs. The number of contracts in this trade are at an extreme! A huge crowd is in on this bet which warns of a violent reversal if things don't pan out as expected. What is the current expectation? A Biden victory with the Democrats taking over the Senate and passing a huge stimulus package. A Trump win with the Senate staying in Republican hands would cause an unwind.

Investors in companies that offer sub-prime lending think that the worst is over. Recent bank earnings statements showed them setting aside less money for bad loans. If these big banks are saying that the future is better than it must be true - right? Some analysts are still warning that millions of accounts are in forbearance, a condition that allows consumers to make no payments while interest is added on to their principal. Lenders can report these loans as "current." Once the grace period is over the losses will have to be recognized. For now, no one cares.

A couple of weeks ago the Dow Jones Industrials and the S&P 500 crossed above the line that tipped the odds toward higher prices in the future. My theory was that we were likely to see a trading range before another up move. The right side graph from the Barchart.com web site shows the last month's action. My favored pattern would be another dip down toward the lower red line completing a set of three zig-zags of decreasing amplitude right before the election then another surge higher.

The hottest segment of the market this fall was the Transport sector. Last week some of the stocks pulled back a bit. Union Pacific's earnings and outlook were good but not as good as expected. FedEx went straight up over the last couple of months and was due for a rest. To the right is the Dow Jones Transportation Average on a Barchart.com graph. Note the expanding set of moves between the red lines. Sometimes this kind of form will lead to a final surge in price that caps the advance. A break of the low from a few weeks ago would negate the pattern. If you see a post-election surge to new highs in this index remember the pattern form and its potential to be a major peak.

In past updates I wrote about the record breaking surge in cargoes from Asia landing at West Coast ports, the shortage of container carrying rail to move it East and the shortage of container carrying trucks to do the same. Last week I read another article claiming that it continued into October with predictions of a record braking month at the Port of Los Angeles. Over the last month, Dept of Energy statistics show a draw-down of distillate stocks from U.S. inventories. This probably reflects the increase in diesel use. Inventories are still 19% above the five year average for this time of year but that is down from 23% a few weeks ago.

Currency traders sell uncertainty and they did so over the last six months. It is not that the Euro Zone or Japan are doing that much better than the U.S. In fact, virus infections and death rates are climbing in Europe. The U.S. elections are the reason and it offers a stark difference in policy. Trump is pro-business. He believes that employment is the most important ingredient in a successful society. His policies lower the costs of hiring workers and promote domestic business expansion. The Democrats see social science theories as more important with economic policy being formed from theoretical positions on global warming, race theory and getting even with "the rich" who already pay most of the taxes in the U.S. The top 10% of earners pay 70% now. With widely published polls showing Biden leading it is no wonder that the Dollar is weak. The red line on the Euro graph shows a level that if exceeded will indicate a high probability of the Euro moving higher against the Dollar. A contested U.S. election will only increase the uncertainty surrounding the future and weaken the Dollar. Under Trump, the U.S. was one of the few places in the world where it was OK for the fastest runner to win the prize and keep most of it. That would change with a Democrat victory.

Gold and silver traded sideways again last week. Earlier in the year, fans of the metals pointed to interest rate charts showing real rates as negative. This meant that the interest you earned from shorter dated government paper was less than the theoretical rate of inflation. The correlation between this gap and gold prices was clear. Now that interest rates are rising that gap is less and gold is stalling. Last week the metal closed just above $1900. A break of the dashed blue line on a closing basis will not look good. Silver is making a similar pattern.

Gold and silver mining shares are in the same boat with Newmont back to levels seen in April. XAU, an index of precious metals mining companies closed right on a short term up trend line last week. If this were a normal stock I would be looking for a sell off to follow.

Platinum closed the week higher, just below $900 per ounce while palladium was slightly lower. To the right is a an update of a Sentimentrader graph showing the positioning of hedgers in commodities in general. They have huge short positions with the opposite side taken by speculators. The specs are loading up on commodities, believing that demand for everything is about to explode. This is part of the theory of where we are in the economic cycle shown above. The "crowd" is making huge bets in stocks, commodities and the bond market on this idea. If you are a contrarian then you are staying away from commodities, looking for a top in interest rates and think that any post-election surge in stocks will be a chance to sell!

Regular readers know that I like the energy sector. It was down in the first few sessions of last week and I bought XLE. On Thursday there was a sudden rotation into energy stocks and financials based on the "get into value and out of growth" theme. XLE rallied over a point and even higher early in the morning on Friday. I sold most of it because of the over sized one day move. I will most likely buy it back on a pull back.

I am still holding off buying my other favorite, DBA, the ETF that tracks crops and meats. On the right is an update of the Sentimentrader.com graph showing the positioning of futures players in agricultural commodities. The hedgers added to their shorts meaning that the speculators loaded up on longs again last week. In past cycles this was not a good time to join them. I am making one exception to that. I bought into rice futures. To the right is a long term chart of rough rice prices from the Barchart.com web site. The focus for traders has been soybeans, wheat and corn. Rice is a staple of millions of peoples' diet around the world. If there are going to be food shortages in the future then rice will be a beneficiary. It is thinly traded for now which is a good sign. Sometimes when no one is talking about a commodity and it is flying under the radar it is the best time to ease into positions.

The purple line on the left side chart shows the difference between the weekly closing of the S&P 500 and its 40 week moving average. The reading is among the highest in the last 20 years. On the right is Sentimentrader's options speculation index that tracks bullish bets in the stock market. Is this a time to load up on stocks or to be cautious?

DBE

Last week I was talking to my neighbor who has a daughter at the University of Michigan. She was worried about her getting the virus. I told her that I don't blame her for being worried but the mortality rate in her daughter's demographic is lower than the rate for the seasonal flu. She was surprised to hear that and I could tell that she didn't believe me. She and her husband are hard core Democrats and are on board with thinking they are a mask away from death. Above and to the left are the numbers from an article on the Sentimentrader.com website. My wife and I are both 66 and we were very sick in December with symptoms that were later identified as COVID 19. We believe we have immunity. We were thinking of going out to eat tonight then my wife read that one of our local restaurants shut down earlier this week because two of the wait staff tested positive. A neighboring town has a lot of cases and one adjacent is now a "red zone." We decided to go out anyway. On the right is a graph of the Russell 2000 from the Barchart.com web site. It could be making a contracting triangle form that will lead to a final, manic burst higher then a major reversal. To match the text book form, prices would have to pull back toward the lower red line one more time before the election. Suppose Trump wins. Will there be another huge up move in the market? Between October of 2014 and the last election day in 2016 stocks traded sideways. There was a buildup of cash in bank accounts because confidence was so low that no one wanted to put the money to work. Apple was trading at 27.5 on a split adjusted basis. Caterpillar was at $83.75, roughly half of where it closed on Friday. Debt at all levels is much higher than it was in 2016 making the whole system more fragile. Expectations about the future of the stock market were low at the time. The Options Speculation Index above was near the green line. It is far above the red one now. The Russell 2000 and the Dow Jones Transportation Index could be making topping patterns. I would see a post election price surge as a possible top.

Strategy this week -

Stocks - I will keep any position small except for XLE, the energy ETF. If the Russell 2000 and other market averages pull back this week I will buy a normal sized position in XLE going into the election. Other than that I will sit on the sidelines.

Gold and Silver - The patterns look like prices are more likely to decline than rally but going into the election I will just watch.

Bonds - The crowd is piled into the "buy the short end, sell the Thirty Year" trade. Something is likely to happen to cause a reversal where the Thirty Year rallies.

Agriculture - Except for rice I will sit and watch.

Dollar - The charts look like the decline is not finished.

Best of luck,

DBE