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 July 30th, 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 Data -
GDP fell 0.9% making it two quarters in a row in which the U.S. economy contracted. In all of my lifetime, two quarters of negative GDP was the definition of a recession. After the number was released an army of government and Wall Street spokespeople hit the news shows explaining that this long used definition of a recession is no longer applicable or at least not to be used when Democrats are running things. The next day the PCE deflater came in at 6.8. That was higher than analysts were hoping for because the current bullish narrative is that inflation peaked. Markets ignored the data and hoped the future will be better.
Purchasing managers surveys from around the world are trending lower. The left side graph from an article found on the Zerohedge.com website shows that in past cycles when surveys indicated a slow down in business it correlated nicely with lower GDP readings in the U.S. After the negative GDP number, defenders of the economy were quick to talk about strong employment statistics. Critics noted that in past slow downs, employment lagged the direction of the economy with firms hiring into the start of the recession only to lay people off a few months later. June job listings, while still good were fewer than in the previous month.
Durable Goods orders increased. Most analysts were looking for a flat to slightly declining number so the positive print was good news. When analysts delved into the data they found that defense spending to support Ukraine was the driver behind the up-tick. Without that, the number would have been flat to down.
Two weeks ago my best guess for stocks was that we were in for a bear market rally. Most of the updates over the last couple of months included graphs like the left side chart showing extreme pessimism by investment advisors and options traders. These kinds of charts are watched by everyone so big money managers and hedge fund guys were looking for some kind of catalyst as an excuse to buy. They know that previous similar readings led to economic recoveries even if the current news was terrible so "buying blind" with no sign of an improving economy was the smart thing to do. After the Fed raised the overnight lending rate by 0.75 basis points, Chairman Powell said that from here on in, their decisions would depend on month by month data. Analysts looking at data similar to the economic numbers shown above immediately came to the conclusion that based on the terrible data, the Fed is very close to a "pivot." I put the word pivot in quotations because it has become the buzz word on The Street for the most predicted end of a Fed tightening cycle that I have seen in my life. Over the last few years, one of the biggest Wall Street theories has been, that stock prices are a function of Fed tightening and loosening. Earnings, dividends and the economy are secondary and in a way don't matter. The assumption is that Fed policy runs the stock market up and down. My guess is that this theory will be severely challenged in the coming years. Bonds reacted instantly. Rates dropped across the curve with the shorter end that had been pricing in future months of aggressive rate hikes, backing off more than longer rates. On the right is a graph showing the current yield on 30 year Treasury Bonds, 10 year Treasury Notes and the spread between them in green. Rates on both fell but the tens fell more than the thirties resulting in a steepening of the yield curve. Traders seem to be forgetting that the Fed will purchase fewer and fewer bonds, notes and bills issued by our Treasury over the next year as part of their Quantitative Tightening. Treasury auctions have been going very well lately because the war in Europe is causing capital flight into the Dollar and our Treasury debt. When that money runs out, who will step up and buy the billions of Dollars worth of debt that our Fed is no longer monetizing?
Bulls are thinking that the bottom is in on the market and it is off to the races for another run to new highs. The S&P chart on the right has the red and green lines I drew on the graph in June showing a potential zig zag type upward correction in a down market. Traders are watching the area near the red 4 on the graph to see if stocks can break above it.
The left side chart shows the weekly closing price of the S&P 500, its 40 week moving average and the difference between the two in purple. At the June low the market was stretched to the down side as shown by the red arrow. Six weeks later and it is in somewhat oversold territory but out of its extreme level. On the right is the daily closing price of the S&P 500 with a 50 day moving average (purple) and a 200 day (red.) It is above the 50 but below the 200, sort of a no man's land. A move above the 200 day will be confirmation of a change of trend .
Small-Cap stocks did very well last week pushing the Russell 2000 toward its June high. The reliable tech stocks, Apple, Microsoft, Google (Alphabet) and Amazon all rallied a bit. Earnings for Microsoft and Google were somewhat disappointing. Amazon did better than expected and Apple did slightly better than expected. Traders snapped up the shares of Amazon and Apple. Many other companies had poor earnings and even worse guidance for the future but traders only care about the most heavily weighted stocks in the major indexes. Good news was bought and bad news ignored. Thrusts to the upside like this have follow through in coming weeks most of the time, however, we saw similar action late in 2021 leading to a market top!
A few days ago Wal-Mart announced its earnings and guidance. The numbers were bad and the guidance was worse. They stocked up on lots of clothes, shoes and other things that were in great demand when consumers were getting free government money. Now their inventories are bloated and worst of all, consumers are spending less and going for cheaper goods. The stock fell $10. Wal-Mart announced this after McDonald's reported that their customers were buying cheaper items, unable to afford the more expensive combo meals. This dovetailed with reports that people are buying lots of things on credit cards to make up for shortfalls due to inflation. The savings rate is way down. By Friday's close, all was forgiven. The stock closed just above 32 despite the company's management warning share holders that their customers are spending less in their stores. It seemed that the worse the news, the more investors wanted to buy. On the good news side, Exxon-Mobil made billions of Dollars. Everyone knew that they were going to make billions but recently, traders were convinced that a recession would curtail energy demand.
In Exxon's earnings package was the graph above, a frightening warning. Investment to locate and extract oil and gas deposits is falling behind the level to ensure continuity of supply! This is something that energy bulls have been yelling about for years! Gail Tverberg, in her blog Our Finite World documents the correlation between cheap energy, energy consumption per capita and economic growth and prosperity on a regular basis. She highlights that intermittent, replaceable energy sources such as windmills and solar depend on cheap fossil fuel for their production, transportation, installation and maintenance and even with massive government subsidies only account for around 4% of the world's energy production. Contrast the chart of crude oil on the right with recent stock market expectations. Traders sold crude, gasoline and heating oil in the middle of a shortage because they are afraid the recession/depression the world is about to enter is so disastrous that energy demand will decline. If this is true then how can you buy shares of Wal-Mart, Apple and Amazon? In the week ending July 22nd, crude oil inventories, aside from the Strategic Reserve fell 4.5 million barrels. Keep in mind that this decline was with the government releasing a million barrels per day from the Strategic reserve. Non-government crude inventories are around 6% below the five year average for this time of the year. Gasoline inventories fell 3.3 million barrels and are around 4% below the five year average. Distillate inventories which include heating oil and diesel fuel fell 0.8 million barrels and are sitting at an amazing 23% below the five year average for this time of the year. Usually, this is inventory building season with heating oil dealers filling tanks for winter demand! Again, how can you price in a bad recession in oil and buy stocks?
Past updates mentioned that oil refineries were raking in the cash but investors were still selling them. Last week they bought amid great energy patch earnings releases. Some investors who are in the "recession" camp think we saw peak earnings last quarter. Given the shortages in gasoline and heating oil, these companies are likely to make lots of money even if margins shrink a bit from last quarter's extremes.
Japan refused to raise interest rates. The Bank of Japan has been buying most of the government's debt for years in an effort to keep interest rates at zero. When other countries started raising rates there was capital flight from the Yen into the Dollar. Rates in the U.S. hit their peak right around the period when the Dollar Index hit its high. When our rates backed off more last week traders covered some shorts in the Yen and it rose from 135 to the dollar to 133. The Euro rose slightly also. The Euro and Yen are the two most heavily weighted currencies in the Dollar Index so it pulled back a bit. When chart wonks see a parabolic rise like the one in the Dollar chart, they automatically think it has to end in a collapse. They could be right but Europe is in big trouble with Russia cutting natural gas and Europe's own leaders caught up in Green Utopian fantasies that have them cutting food production to change the weather a degree a hundred years from now. We all know what is happening between China and Taiwan and also how much the Chinese hate Japan. If you had won the Mega-millions jackpot is there another currency in which you would put your wealth? We have our Greens here in the U.S. too, strangling fossil fuel production and trying to limit farming but they could be one or two elections away from being out the door with drill, drill drill and grow, grow, grow back in favor.
Two weeks ago I was looking for a gold and silver summer rally. They sold off a bit more then popped to the upside as the Dollar backed off a bit. Sentimentrader.com had gold, silver and platinum as three of the most unfavored commodities prior to the bounce. Silver tends to rally into early August then stall. Gold has a seasonally strong time of the year into the fall. Gold rallied after touching a support area for the third time. There is an old traders' saying that double bottoms are meant to hold. Triple bottoms are meant to be broken. Cyclesman.com, a subscription that I like has a weekly cycle low for gold due in October. This warns me that both metals could have a nice bounce but are likely to show more weakness into the fall.
Futures players who identify themselves as "hedgers," that is entities that deal in the physical metal and put on futures positions to balance buys and sells of the metals, have long positions. They are not as extreme as in some past cycles but they are large enough to fuel more upside action. On a very short term basis, the metals seem to go up and down with the stock market on many days.
Mining stocks are weaker than the metal. XAU is an index of gold and silver mining shares. The red arrow points to its price when gold was last in the same neighborhood. On the right is Newmont, a big gold mining company. When I updated the chart I had to check the numbers three times because in past decades, if gold rallied nearly $100 off of its intra day low, Newmont would have been up ten dollars. Producing gold is extremely energy intensive and the cheap, easy to get deposits are mined out. This is actually good for the gold price. When it gets harder to produce more gold and there is less investment money flowing into new mines it sets gold up for a shortage.
Palladium rallied a bit with gold and platinum had even less of a reaction. Last week I heard an analyst say that major car manufactures were beginning to get shipments of chips and that production would increase. That means more demand for catalytic converters and with it palladium and rhodium. I took my Ford Transit Connect in for routine maintenance last week. The Ford dealer's new car lot was empty.
Just doing charts that anyone can find on the web is no fun. I always like to add some esoterica, something a bit weird that probably has no connection to reality but sounds interesting and sophisticated. Analysts on TV do it all the time and get credited for being deep thinkers. Just for the fun of it I decided to track our current market with the vibrations from 1987. Above and to the left is a chart that tracks the daily highs from after the crash in 1987 and now. They are somewhat similar. Friday's high was the equivalent of where the green arrow is on the right side 1987 post-crash chart. If it follows the script we will pull back into next week then rally later in the month.
If we go back a century to the greatest bull market ever we can see that after the initial decline there was a robust rally as shown on the left side graph. The greatest rate of change was in the first couple of weeks. This was followed by a dip then another rally phase. Thanks to having read Martin Armstrong's month by month history of the era I can tell you that during the rebound, Wall Street and government spokesmen told investors that the worst was over and that the correction has been a healthy pull back that set the stage for a solid advance. During the 1920s wealth flowed into the United States from Europe. Just like now the smart money knew that a war was coming. The head of the New York Fed suppressed interest rates and encouraged European governments to float large bond offering in the U.S. to stimulate their economies. "Internationalism" was the word of the day. Many of those bonds defaulted in the late 1920s and early 30s like Sri Lanka. On the right is what happened after the 106 day snap back rally. 106 days from the June 17th low would be right in the middle of November when mid-term elections take place.
Best Guesses -
Stocks -
Everything rallied last week, from stocks to grains and metals. The chart pattern of the NYSE Composite looks different from other popular indexes. It might be finishing a flat correction and be due for a pull back. The a,b,c form could be the first of a few jabs to the upside that create a more complicated correction before another decline. You cannot see it on this chart but the sideways action around the 14,900 area before the last five days of rallying, formed a contracting triangle, a pattern that usually leads to a final pop then a reversal. I will look at both the 1987 and 1929 patterns for clues. If I am right then we will pull back a bit next week before another leg up. In 1987 the October low was the buying opportunity of a life time. In 1929 the first low was a warning and the subsequent rally was the last opportunity to get out. In the rally leading up to 1929 there were blind trusts where investors poured money into investment vehicles run by successful money managers to acquire future bargains, much like our SPACs. RADIO and automobile stocks were their Apple, Google and Microsoft. Everyone was getting rich on the market. Joe Kennedy got out when a taxi driver was offering him stock tips just like young TikTok and Reddit pundits were listened to last year.
During some previous major bottoms such as March of 2020 and March of 2009 the Fed came to the rescue with massive injections of money and legislation that moved debt in the public sector on to the backs of the tax payer. Now, the Fed is doing the opposite, shrinking its balance sheet while the world prepares for war.
I read Martin Armstrong's blog regularly. A week ago he said that if there is a rally into August and September it will not be from better economic conditions but because of European money fleeing into the U.S. stock market and away from a possible collapse in the European Union.
Bonds - Bonds had a good run over the last month. I think they are going higher into the fall but not straight up. I am holding on to my bond position even if we sell off a bit next week.
Gold and Silver - There should be more rally in the can for both metals but lately they have been influenced indirectly by the stock market. When stocks sell off, the Dollar rallies and the metals pull back. If we get a few session of backing and filling in stocks you could see that dynamic where the Dollar rallies a bit and the metals correct some.
Energy - I am very worried about oil, gasoline and heating oil especially this winter. Even if the economy slows down there are too many other factors including the possibility of more wars around the world including the Middle East. If we see more softness into September I will be a buyer at that time.
President Biden has COVID.
China is threatening to shoot down the airplane carrying our Speaker of the House if she dares visit Taiwan
Russia is cutting gas supplies to Europe.
Best of Luck
DBE