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 November 2nd, 2019
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.
There are different ways to view markets. Many traders use moving averages. In our current stock market these are all pointed higher. Drawing trend lines around current market movement is another tool and cycle analysis yet another. I like to look at momentum oscillators that give "over bought" or "over sold" readings. I also monitor measurements of market sentiment. To the right is a graph from the Sentimentrader.com web site. This site consolidates dozens of sentiment readings on various markets to let subscribers know how loved or un-loved a market is. Current readers know that one reason I could not get pessimistic on stocks this fall is that my charts from Sentimentrader.com were showing excess pessimism among small traders and hedge funds. The well advertised recession did not materialize and a feared October crash turned into a rally. Over the last couple of weeks investors scrambled to get back into the stock market as it trended higher. This chart shows that sentiment reversed from October's pessimistic readings. Going into this weekend a collection of sentiment readings are closing in on record levels of optimism. If you like to buy when they are selling and sell when they are buying then take note. Sentimentrader statistics kept me out of trouble many times over the last few years. Just when my heart pounded with buy or sell emotion a quick view of their charts showed that I am as vulnerable to market mass hysteria as anyone else. This chart is flashing a warning light.
Traders who concentrate on chart patterns alone see the potential for major U.S. averages to be tracing out an un-common "expanding pennant" form. This is an extremely bearish reading of the tea leaves that implies an impending large decline below last December's lows. Given last week's action this seems like an unlikely outcome but the sudden burst of enthusiasm for stocks makes it a possibility.
The NASDAQ 100 wedged into another high. Bears see these kinds of forms as a sign of waning momentum. In the case of NASDAQ and NASDAQ 100 stocks, just a handfull of issues are pushing up the averages while most are being left behind. Bulls will tend to see the graph on the right. The same pattern can be interpreted as a contracting pennant with a slight upward bias. The text book says that a pull back to the lower trend line will be followed by a final burst to new highs then a reversal. Often, the final "e" decline is insprired by some news story that spooks investors. Point "e" on this graph is approximately 400 points lower than Friday's close. If we sell off next week watch the 7,700 level to see if it holds.
Microsoft and Apple are the top two stocks in the NASDAQ 100 and the two most heavily weighted issues in the S&P 500. Apple is #2 in the Dow Jones Industrial Average weighting. Moves in these two stocks are responsible for a lot of the upward surge in major averages over the last year so it is worth checking on the pattern of trading in both issues. Microsoft looks like it made a contracting pennant that often leads to a final burst in the direction of the previous trend then a reversal. So far, the burst sits like an island above the previous trading range. It could be that it will add to its gains. A break below the "e" point on the graph will have every money manager with a charting program whispering about a major top. Apple is very interesting. For years the earnings releases were way above expectations but investors always suspected that I Phones were a fad facing increasing competition and expected sales to falter along with the share price. Last week Apple's earnings were decent but not the block buster results of past cycles. Despite this, investors finally became true believers at new highs. This fits the sentiment readings shown in the first graph above.
It could be that some of the surge in Apple is caused by the problems with Boeing. Boeing is the top weighted stock in the Dow Jones Industrial Average. If you want your portfolio to keep up with the movement of the Dow Jones Industrial Average you have to have the stocks with the heaviest weighting in the index but Boeing's problems with its airplane are all over the news and the graph has a shelf of trading a bit below the current price. It looks like just a bit of more bad news could set off another selling spree that would have everyone who bought over the last 18 months sitting on a loss and looking for a point to get out. It could be that big money is buying extra Apple to make up for avoiding Boeing.
A Wall Street mantra is that the consumer is doing well and keeping the U.S. economy humming. Last week's reading of employment make this theory sound good but it is important to remember that employment is a lagging indicator. They hire near the top and fire near the bottom. On the left is XRT, the SPDR retail ETF. On the right is JETS, an ETF that tracks airline stocks. Both have similar patterns with a broad shelf of support. A break to the down side by either would be worrisome.
If we are looking for a crack in the consumer's behavior then watching the two biggest retail stocks is important. Despite the surge to new highs in major averages Amazon remains stubbornly below its all time high. While not a pure play on retail it gets enough of its revenue from selling stuff to be an important indicator. Wal-Mart Stores is more of a pure play. In past issues we highlighted the fourth wave contracting pennant form similar to Microsoft's above that should lead to a final burst then reversal. In the last month Wal-Mart began to roll over a bit. Some restaurant earnings such as those from McDonald's are also hinting at a consumer softening so watch Wal-Mart for confirmation.
Both graphs show the Dow Jones Industrial Average. The right side chart adds the percent gain or decline in the U.S. Dollar index to the daily bar chart. Lately the Dollar sold off which means that the adjusted prices are not as positive as the nominal readings. Our economy and markets are partly fueled by international flows of funds. These investors look for a currency block with a favorable environment for investment then deploy into various assets within that currency block. Note the blue line on the right side graph. As with the NASDAQ 100 it is possible to see this pattern as a contracting pennant with a short pull back before a final surge into a major high.
The Dollar is still within the channel formed by the last year's trading but is approaching the bottom. The Trump election unleashed a pent up torrent of wealth into the U.S. economy. The losing party, unable to accept the election results is determined to overturn them. Opposition candidates are promising to institute economic policies that killed domestic and foreign investment and job growth wherever tried in the past. It is no wonder that hot money is worried. If the Dollar breaks below its trading channel we could see a sell off in stocks based less on domestic fundamentals and more on international shifts in investment preferences based on fears of future political trends in the U.S.
On the left is a daily graph of gold prices spanning the last 12 years. The larger pattern is still better counted as an initial sell off into 2015 followed by an up leg, a contracting pennant then a burst up into point "C." The implication of the lettering is that the rebound following 2015 is an upward correction that will be followed by another declining phase. The distance of travel from the "low" to point "A" would be equaled by the distance between "B" to "C" at $1,591. The high was on September 4th. Since then prices traded sideways with plenty of reasons to believe that it will break out in either direction. I am hoping for one more poke toward that $1,591 target.
On the left is a chart of gold with the price adjusted by the percent gain or loss in the U.S. Dollar Index. If gold goes up a quarter of a percent but the Dollar drops by half a percent then the bar for that day will be lower. So far the price range fits nicely into a contracting wedge. Again, I favor a break to the up side and with the channel lines converging, next week should confirm or refute my theory. XAU is a popular index of gold and silver mining shares. Investors who follow this group are stuck in a similar trading range. If gold breaks to the upside and moves toward the upper fifteen hundreds it is likely to get a lot of publicity on the financial networks with lots of buying in mining shares.
If we get a burst up in the precious metals it is important to remember that $1,591 target!! I will consider it to be a potential ending move. Above are two more pictures from the Sentimentrader.com web site. They show the positioning of "commercials" in the gold and silver futures market. They are the opposite of "speculators" who tend to be wrong at market turning points. These charts show that speculators are loaded up on gold and silver contracts believing that they will jump much higher. This lessens the probability of a big upward move in gold and silver.
I don't want to be disrespectful to fans of silver but it is my experience that they tend to be most enthusiastic at major highs in precious metals. If we get the above mentioned pop in gold then I would expect an over sized surge in silver, possibly toward $21. There are millions of people who own the metal at higher prices. They have been telling themselves that eventually it will get back above their purchase price and that they will hang onto it. It will take only a few days of talk about prices above $20 to shake some of this metal back onto the market.
If Palladium were a stock that I owned I would look at that parabolic rally and take my profits. I thought the same at $1,550! Palladium is a very thin market with not a lot of players. My guess is that the current round of speculative buying will end with a large plunge and that we are close to that point. Platinum is trading back up into the mid nine hundreds. On the right is another graph from the Sentimentrader.com website. As with gold and silver, hedgers are increasingly short platinum while speculators load up on futures contracts. In past cycles this type of buying did not end well.
I watch the energy sector closely because it is so out of favor with shares in large oil producers shunned for political purposes. My worry is that if we are about to have a bout of stock market weakness then crude oil and energy shares will also take a hit. Crude has a shelf of support in the low fifties but softness in stocks will put fear in the hearts of oil buyers regarding future strength in the economy world wide. Oil company shares are very beaten down so I don't know who is left to sell. Changes in market leadership often take place during selling streaks. I am going to watch for this in the energy sector.
Last time I mentioned coffee favorably. It caught a bid this week. It did similar things in the past then faded. Chart fans will note the inverse "head and shoulders" pattern and take this as a sign of a good bottom. DBA, the agricultural ETF has coffee as one of its components and rallied above $16.
"New York Fed Adds $104.583 Billion to Markets" - Wall Street Journal.
A month ago I mentioned the tightness in the Repo Market. This is overnight lending between banks. I am an avid reader of Martin Armstrong at ArmstrongEconomics.com. He consults with Central Banks, large banks and big money manager all over the world. He says that what we are seeing is a reluctance of banks to lend to each other based on the fear of European banks defaulting. He also says that this is the beginning of the end for the belief that the Fed can keep interest rates low. Remember, this was the first sign of stress in the credit markets in 2007. When it first emerged this year, Fed spokespeople said it was a temporary condition caused by short term issues in the credit markets. Two months later it is still an issue and growing. To the left is TLT, an ETF that tracks longer dated U.S. government debt obligations. As recently as August, investors around the world were willing to buy long term U.S. bonds with a return below 2%. Between Europe and Japan there are 17 trillion dollars worth of negative interest rate bonds in the market with the only big buyers being the European Central Bank and the Bank of Japan. It is just a question of time before the economic world wakes up and rejects these bonds and our current low returns in the U.S. Past credit market problems led to wholesale selling of assets in general. Watch the Repo Market news. It is the biggest story in the financial world. There might be lots of money around but if institutions are afraid to lend, rates will go up.
Strategy for the next two weeks - Chart patterns are suggesting that we are near some kind of upward inflection point in the markets. While patterns can be fickle and very subjective I respect them enough to begin trading from the short side for now. The price action in Apple is key to the major market measurements because of its weighting Its current pattern looks more like short term tops I saw in the past then the beginning of a sustained move. Over the last two months, sentiment readings, care of Sentimentrader.com kept me from getting bearish on stocks. Those readings are now in gear with the possibility of a high in equities. I like the prospects for another pop in gold and silver but will wait until gold crosses above trend lines, especially on my Dollar Adjusted graph. Democrats are unlikely to succeed in impeaching the President or eroding his support among us happily employed people but they could cause a sell off in the Dollar and a temporary shift in capital that will hurt our markets and retirement portfolios.
Best of Luck,
DBE