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 May 8th, 2021
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.
As usual, I will show pictures and graphs found on Zerohedge.com, Sentimentrader.com 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.
Data from last week -
Manufacturing orders in the U.S. moved to a new high last month but the increase was slightly less than expected. The Institute of Supply Management survey results showed that production was down a bit with prices going through the roof. Participants reported problems with delivery times on raw materials and a shortage of labor. Companies are trying to pass on increased costs to their clients. Everything is getting more expensive with more shortages.
Thursday morning's New Claims for Unemployment report came in at 489,000, the lowest in months but the number of people still getting some kind of unemployment payment was still at around 16 million. Everyone was looking for a blow out jobs number on Friday morning with some analysts predicting that more than a million jobs were created in April. The actual number was 266,000. As noted in previous updates, there are help wanted signs everywhere but most people making under $32,000 are getting unemployment benefits that are competitive with their potential earnings. On Friday evening I listened to a local radio talk show discussing the topic. Multiple callers spoke about friends and relatives, mostly younger people, who were waiting until their emergency benefits run out in September to return to the work force. Most believe that the government will extend them or give another big "one time" payment that will allow them to avoid work indefinitely. Employers calling in all said the same thing - They can't get people to come back to work. Most increased their hourly pay to try and compete against government benefits and still, younger people don't want to work.
The graph to the right keeps track of the difference in hard data versus surveys and predictions. The black line going down means that when the report comes out it is not as good as the prediction.
A few weeks ago big banks released their earnings and the details about their operations. Loans on their books to businesses are declining. One of the few places they make money on the lending side is with credit cards. During the pandemic, banks greatly tightened credit standards just when people needed money. Now that everyone thinks things can only get better banks are lowering their credit standards and giving cards to anyone who can breath. Another area where banks are rushing to lend is used cars. The shortage of chips caused a big drop in the production of new cars. Rental car companies and car dealers are scooping up all the recent year used cars that they can get. Consumers are also bidding up the prices of recent model used cars. My experience with banking cycles is that they love to lend near the top and cut off credit at the bottom. On the right is a month by month graph of changes in credit card spending. During the pandemic people were fearful about the future and paid down credit card balances to reduce their monthly cost of living. Now they are spending again.
Last week's big winners were commodities.
On the left is a chart of the last six months of trading in July Corn futures. Chart purists will say that the prices formed a contracting triangle that should be followed by a final surge then a reversal. By the end of last week one could count a five wave formation following the triangle which puts corn at risk of topping. Speculators increased their long positions in corn futures again last week. On the right is a multi decade chart of corn prices so that you can see where Friday's closing price sits relative to other major highs. The only period when prices were higher was amid a terrible drought in the Mid-West. I traveled a great deal in the corn and soybean growing belt that year. Fields were brown and plants dead everywhere. We don't know how this year's growing season will be but prices are way up there already.
Above are six month then decades long charts of soybean prices. As with corn, we are near the drought year highs before the plants are sprouting out of the soil! I wrote in the dates of previous highs hoping for some consistency. The months varied between April and August.
Copper has totally different fundamentals than corn or soybeans but the trading pattern is similar. Over the last couple of weeks the word "inflation" was mentioned everywhere and especially in quarterly earnings reports. Most companies highlighted the increased costs of inputs along with delivery delays. This was followed with mention of price increases to their customers to try and maintain profit margins. Copper has a huge speculative long position. Remember that as an item goes up in price the positive news and opinions about its future higher price get louder and more frequent. Hedge funds can run up the price of copper but a client who is active in the business reminded me that, like everything else, physical copper shipments are financed . Most clients have fixed lines of credit. As copper rises in price, less can be purchased and stored.
The inflation winner is lumber. Every day there are stories about why lumber prices can only go up. A sharp reversal in lumber futures could be the spark for a larger commodities sell off. Copper is more likely to be the catalyst because the open interest in July Lumber futures is only 1,557 contracts. On Friday, only 303 contracts traded. Compare that to 172,252 contracts of open interest and volume of 119,983 copper contracts Friday. Reports claim that the price jump in wood is adding $36,000 to the cost of a new home. Usually, when the price of something goes up there are fewer qualified and willing buyers. Investers in Home Building companies don't see it that way.
Gold rewarded the faithful a bit last week. It is still under performing most of the commodity world. Traders are watching the down trending line drawn off of previous highs. When the terrible unemployment number hit the tape on Friday morning, bonds jumped (interest rates sank) and the Dollar sold off. By late in the day, bonds were below where they started the day but gold held on to most of its gains.
Silver showed some life too and hit its highest price in a month. Traders will be watching the green trend lines for a break one way or the other.
Palladium rallied out of a contracting triangle and looks like it might have topped for now. On the right is a graph of platinum with the copper price in blue. Lately it tended to go with the copper flow. If copper has a few bad days platinum is likely to suffer the same fate.
To the left is a graph from the Sentimentrader.com website. They looked at previous years that correlate most closely with this year's commodity price pattern and mapped the average in black. Prices tended to consolidate during the summer months. The big exception to this was 1973 when commodities rocketed upward throughout the year. Sentimentrader.com notes that if we don't start to see some kind of consolidation then perhaps we are looking at a 1973 re-play.
DBC is an ETF that mirrors the Reuters CRB Index. It includes a large basket of commodities. DBA is an ETF that is more focused on food prices including meats. The red line on both charts is the yield on a 30 year U.S. Treasury Bond. Note the correlation between the two most of the time and the recent big divergence. Commodity prices are signaling rapid inflation. But yields on T Bonds are lower than they were a few weeks ago! Some analysts say that bonds are right and that we are close to an end of the COVID disruption and stimulus check induced shortages in everything. Bond bears argue that during the inflation of the 1960s and 1970s bond holders were late in realizing that inflation was far greater than the coupon offered on bonds. When reality hit, bond buyers went on strike and interest rates rose sharply to compensate fixed income buyers for the loss of purchasing power over the duration of their bonds. Either way, something is likely to give in the next month: rates jumping or commodities backing off or both.
Above are the paths of interest rates on ten and thirty year government paper for the last four years. If we are about to move toward hyper inflation why aren't yields higher? Fixed income departments at major institutions employ some of the most brilliant math and statistics minds on Wall St. If those of us who go the store twice a week or out to eat once a week can see the big price increases don't these institutional guys see the same thing? The bond bulls will say that the amount of debt in the world is extremely deflationary and in the end it will consume the inflation. Also, wealth from all over the world has been pouring into the U.S. At least our 10 year note pays something. In Europe and Japan it pays nothing.
Last summer, the mega tech stocks blew away industrial names. Now, the latter is having its revenge. The big industrial stocks are the favorites since they are thought to be able to make more money in an inflationary, shortage driven environment. On Thursday afternoon there was a buying panic in the Dow Jones Industrials. After the poor jobs number was reported on Friday, futures on the index sold off a bit but once the market opened, investors decided that the response to all news was "buy" and the Dow finished the day higher, closing right at the upward sloping trend line. Remember, if you like deep chart mysticism, it is possible to see the market in a final, manic surge coming out of an expanding triangle. No one can predict the top tick but you know it is out there. To the right is a month long chart of the industrials overlaid with the copper price. In a way it is all the same trade. I drew in red letters on the Dow with the interpretation being that we saw a contracting triangle and are now in a final up move before a correction. Some bears think it will lead to a once in a generation top.
The preference for real world industrial and consumer things versus tech is illustrated by the recent performance of 3M versus Apple. Apple was last year's winner. It's earnings were fantastic but the stock rose in anticipation of its great future. Money is now shifting to sectors that will benefit from a world wide reopening. The real question is about the sustainability of any stimulus inspired recovery. A couple of updates ago I mentioned my snowblower that I start each winter by putting gasoline directly into the cylinder. The first two times I do it, the machine starts up then dies after the gasoline runs out. The third attempt usually leads to it running on its own. If there are no more stimulus checks can our economic engine run on its own?
To the left is a graph from an article on the Zerohedge.com website talking about the expansion in Central Bank stimulus around the world. They note that there is a strong correlation between the S&P 500 and Central Bank money creation. In the last month Banks pulled back a bit. Canada and a couple of other Central Banks are cutting back on purchases of their sovereign bonds believing that their economies no longer need the support of ultra low interest rates. If world wide stimulus rolls over will stocks follow?
On Friday the S&P 500 manged to close decisively above its mid-April high. The sideways pattern between mid April and Thursday looks suspiciously like a contracting triangle that might be pointing to a major top. On Thursday morning the NASDAQ 100 traded at levels equal to those seen in late January before a partial recovery. Last week, Jeff Bezos, founder of Amazon announced that he sold a couple of billion Dollars worth of Amazon stock. Amazon was one of the only games in town when people were afraid to leave their homes out of fear of catching the virus. If I were him, I would cash in before people realize they can go shopping again and return home alive.
The Russell 2000 Index of small cap stocks could still be making a head and shoulders top. Last week's strength in big industrial stocks did little to change the outlook for the Russell. On the right is VEU, an ETF that tracks stock markets around the world minus the United States. Lately, foreign stock markets lost some ground against the U.S. They are not in bear markets but they traded somewhat sideways while the Dow continued higher. It will be worth watching to see if over seas markets lose their luster.
After the weak jobs report the Dollar hit the skids. In the last few weeks I read more articles about how the Dollar is being trashed by the Fed along with references to the German hyper inflation than I have since 2008. My chart mysticism says that Friday's decline should be part of a longer sideways movement before another drop. The graph on the right shows the path of the Dollar Index since its low in 2008 when multiple books were released declaring the Dollar dead. In one of Monty Python's movies the action takes place amid the plague as one of the actors goes through the streets with a cart yelling, "Bring out your dead. Bring out your dead!" Other actors put a supposedly dead man into the cart but he wakes up and objects, "But I am not dead yet!" The guy with the cart hits him over the head then resumes his call to bring out your dead. Jerome Powell seems determined to kill the Dollar even if, when you look at the chart, it is not dead yet. Two weeks ago, James Bullard, one of the non-voting Fed governors talked about frothy markets and the Fed's need to do something about it. Last week Janet Yellin said something similar. Stocks tanked both times after their messages hit the tape and the Dollar popped for a few minutes. Everyone knows that we are witnessing liquidity driven markets and that as soon as there is even the hint of pulling away the punch bowl, selling will hit all markets except the Dollar which will rally. Is that a house built on a strong foundation or one on sand?
Over the last year many researchers put forth data and graphs showing that mask wearing, social distancing and closing down business did not result in fewer COVID mortalities. Here is another one found in an article on the Zerohedge.com website. It plots states' level of restrictions on the vertical axis and deaths per million on the horizontal axis. If anything the more restricted states were worse off. The article includes similar graphs tracking mask compliance and the progress of COVID. There is no correlation. This is somewhat frightening. We all like to think that there is "something we can do" to keep from getting sick. Politicians in particular want to be seen as protecting people from danger plus they tend to be people who dream of a crisis frightening enough that all ears and eyes are turning to them for a solution. As time goes on it is more and more evident that all the stuff we were told to do was useless. But if a more deadly strain emerges we will all go back to doing things that didn't work last year and will fail to save us the next time around. It is just human nature and arrogance to believe our actions can affect all outcomes.
Plan for next week -
Stocks - Here are three ways to think about stocks. 1. Internal strength and participation. 2. Valuation using traditional measurements like price to sales, price to earnings etc. 3. Sentiment readings such as options activity and asset allocation. By the first set of measurements our stock market is almost perfect. In April, nearly every sector did well and a high percentage of S&P 500 stocks are trading above their 200 day moving averages. This kind of momentum led to higher prices six months and year later almost every time. 2. But most of those bursts in positive momentum came right after a major bear market crushing when price earnings ratios and other measurements of market valuation were very low. Even after last spring's sell off, the various valuation ratios did not move to levels that were considered cheap in past cycles. Now, even after last quarter's earning the market is very expensive. The kind of all-in buying that is triggering positive momentum signals is happening when the market is extremely expensive! 3. Sentiment readings of any type are at levels seen at past market tops. In previous cycles there were the equivalent of Dogecoin and zombie companies that were embraced. It happened close to major tops. In 1989, right before the Japanese stock market hit its all time peak, I read an article about Japanese executives preferring ice cubes in their drinks that were from ice cores drilled in the Arctic, hundreds of feet below the surface. These ultra expensive ice cubes were said to taste better since they were formed thousands of years ago. At the time it was thought that Japan would take over the world and that their stock market could only go higher. Money from all over the world was flowing into the Yen. It was said that the real estate under the Tokyo central post office was was worth more than all the real estate in Canada. When I read about the ice cubes I thought, "This is signaling THE TOP." Their market reversed a month or two later. Today I read an article on the Zerohedge.com website about wealthy business people here in the United States paying tens of thousands of Dollar for "Trophy Trees." In some cases they are having them flown in from around the world to plant near their houses or in their arboretums. It sounds like ice cube time to me. I am looking for a top.
Bonds - Either commodities come down or interest rates are headed much higher (bond market much lower.) Did you know that the Treasury plans to borrow 465 billion Dollars in the second quarter of this year and 1.3 trillion Dollars in the second half of the year. The article I read saw this as positive because it appears that their needs are leveling off for now. With the prices of everything climbing rapidly, who is going to lend our government that much money at current rates?
Gold and Silver - They have to move a bit higher to convince me that the rally is real and they need to do it in the face of higher interest rates as they did in the late 70s.
Other commodities - The summer months have a track record of poor returns in commodities. If, instead, they keep going higher I will become a believer in the "super cycle" theory. Shorter term, I am looking for tops. I get a weekly newsletter from The Plastics Exchange. Within it are price graphs of the most used plastics prices. As with everything else they went vertical last year. A couple of weeks ago they turned slightly lower. Plastics are used in everything and are a very sensitive barometer of activity. They might be leading other "things."
Dollar - I am sticking with my trading range theory. If I am correct then we are close to a rally phase.
Best of Luck
DBE