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
December 9th, 2023
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.
Wall St. believes that the Fed can control the economy and our markets. What is currently happening in the real world is secondary to what the Fed can allow to happen in the future and that future will be determined by the Fed's decisions on interest rates. The Street's current focus is on the labor market and measurements of inflation. The most watched statistic of the last two weeks was Friday's jobs report. Hard data on the economy has been persistently weak and bonds rallied a great deal over the last month on the belief that the economy is slowing. The confirmation will come with an increase in the rate of unemployment. Friday's jobs report came in at plus 199,000 new jobs. Close to 50,000 of those jobs were striking workers returning to work and analyst know that future revisions will likely take the number lower over the next two months as shown on the revision graph on the right.
What bothered the bond market was that the Household Survey (left side blue bars) confirmed the stronger than expected jobs report. It also showed more workers who were part time, finding full time jobs. On top of that, the Unemployment Rate (right) fell slightly. Some analysts were predicting a jump to 4% as justification for the Fed beginning an interest rate cutting cycle as soon as March. Friday's data threw cold water on that theory and bonds sold off more than a point.
The JOLTS Job Openings (left) report used to be something only economic nerds followed but with the focus on the labor market it is now widely watched. It showed another drop in job openings plus a revision down in open jobs from previous months. The overall number is still elevated. Given the revisions that were quietly announced, pundits voiced skepticism toward the accuracy of this month's government data. This is especially true since private job postings on major job listing sites seem to be rolling over at a faster rate than the official data (right side).
The Personal Consumption Expenditure Index is another arcane reading on inflation that used to be ignored (left). It continued to moderate which bolsters the argument that the Fed is done raising rates. Within the data is the PCE Core Services Less Shelter Index. Fed watchers believe that this series (right) is important to the Fed. It came in at 3.9%, a new low following its recent peak.
Two other sets of hard data confirmed the slowing trend. Manufacturing in the Dallas area (left) continued to contract and Texas is supposedly one of the economically stronger regions of the country! New Home sales fell. You can see from the mix of green and red lines that one month is down and the next up. I saw the CEO of Toll Brothers interviewed after their earnings announcement. He said that their order book is full and with mortgage rates high relative to where most existing home owners financed their property, buying a new home is the only way to get the house you want. XHB, the home builders ETF hit a hew high for the cycle last week.
A summery of the economic releases from the last two weeks could be - Hard data continues to show a slowing economy but the labor market has yet to confirm the trend. Without some obvious softness in the jobs picture it is unlikely that the Fed will rush to cut the Fed Funds rate in upcoming meetings.
Long time readers know my opinion that the initial sell off from the point labeled "TOP" to point "a" formed a series of overlapping downs and ups that are likely the be the kickoff to a long trading range market. Above are two typical patterns for such a market. The left side graph shows a classic "flat correction" in an up market with a move back to the highs then another nasty collapse to the lows. On the right is a pattern that follows a big up move, a contracting triangle. I don't usually talk about long term patterns because they are like predicting the weather a hundred years from now and making economic policy on it but the NYSE finished the week at what could possibly be the "d' point of this form. If we sell off next week and stop at the lower dashed uptrend line some time later this month then remember this graph. These patterns usually lead to a FINAL rally then a big reversal and that makes it even more important to watch.
Sideways corrections can be a lot more complicated than simple flats or triangles. In 1982 (left) the stock market blasted higher with volume and breadth never before witnessed. It then chopped around for more than a year before an explosive rally in August of 1984. Trading systems using moving averages were whipsawed continually and pundits were predicting higher markets near the tops and crashes near the lows. On the right is the daily pattern following the 1984 late summer explosion to the upside. For five months everyone lost money betting on either side. Guessing the path of a sideways move is difficult.
Last time I said that if this market is any good, the rally had to broaden out with the Equal Weighted S&P 500 catching up to the 7 leaders. It managed to do so a bit over the last 2 week. Bears are watching the five wave decline in the blue rectangle. Their case for another sell off will not look good if prices rise above the starting point for the decline. As of the end of this week they can claim that we just saw a typical correction of the previous sell off with more to come. They also point to the Small Cap stocks like those in the Russell 2000. They had a good run since October but are only partially retracing the last decline. Perma Bears look at my charts of the NYSE Composite and make the case that the Magnificent 7 are distorting what would normally be a bear market pattern. When they run out of steam, the market will crash.
Last week, Google displayed the abilities of its new AI software and it was headline news on all the business channels. AI was once again the talk of Wall St. The stock jumped on the announcement but it was not enough to retrace recent weakness. Microsoft, the other big AI winner also had a soft two weeks.
And now the competition in AI chips has begin. AMD came out with their own AI chip to challenge NVD IA. Both stocks rallied a bit. Expect more companies to announce in the next few months and for profit margins to compress.
Both the S&P 500 and Dow Jones Industrials continued higher over the last two weeks despite their high momentum oscillator readings. The S&P 500 only gained 1.1% during that time. The Dow did better with investors rotating out of tech and into cyclical names while at the same time, anticipating a slowdown in the economy. All of last week, one of the most spoken phrases on business shows was "soft landing." My experience is that when all the smart people are saying the same thing, expect something different.
For the most part, stocks traded sideways last week. Here are the short term patterns of many of the widely followed indicies.
On the left is the Dow Jones Industrial Average and on the right, the Dow Jones Composite which is made from the Industrials, Transports and Utilities. The Industrials finished the week well but the broader market made little headway in the last five sessions.
On the left is the S&P 500 and on the right, RSP, an ETF of the equal weighted S&P 500. Late week's performance by the Magnificent 7 helped the regular S&P 500 finish at its highs while the equal weighted measurement traded sideways.
On the left is the NASDAQ 100 and on the right the Russell 2000 index of small cap stocks which include a lot of regional banks. Early in the week there was a lot of talk about money rotating out of tech and into cyclicals. Late in the week it was all about AI and tech again. The Russell 2000 graph is interesting because the trading within the yellow box looks like it traced out a contracting triangle pattern which is usually followed by a final surge higher then a reversal. If reality follows art then we should be close to a top.
On the left is an update of the yield curve showing the current yield on various maturities of U.S. debt. Over the last month, longer dated rates dropped as measurements of inflation tapered and investors assumed that the Fed will have to cut the Fed Funds rate next year to save the economy from a recession. It is odd that cyclical stocks are among the best performers while bond market participants are cheering the likelihood of a recession. On the right is TLT, an ETF that tracks longer dated U.S. Government Bonds. You will often see a chart of TLT when commentators talk about "the bond market." So far, despite all the excitement, the up move of the last 6 weeks is minor compared to the sell off over the last three years and similar to other short lived bounces.
Stocks hit a low in October of 2022 after interest rates surged higher and it looked like borrowing costs would crush the economy. The two charts above show the current rates on ten and thirty year government bonds. We finished the week back at those October of 2022 panic levels with analysts encouraging us all to buy stocks because rates are coming down. Rates rose on Friday when the unemployment numbers failed to show thousands thrown out of work which Wall Street wanted.
Two weeks ago, momentum readings on the Dollar Index were near the low end of their range so a bounce was likely and we got it. The currencies most weighted against the Dollar are the Euro and then the Yen. The real drama is with the Yen because of the interest rate policy of the Bank of Japan. Most central banks raised interest rates over the last few years to fight inflation and are only now pausing or cutting. The Bank of Japan kept rates close to zero and bought most of the government dept to keep them there. As the interest rate differential between Japan and the U.S. rose, they Yen declined in value. The right side graph shows how many Yen it takes to buy one Dollar. Billions of hedge fund Dollars are betting that the Bank of Japan is about to change their policy and let rates rise a bit. They are shorting Japanese Government bonds and buying Yen against the Dollar. Traders are sure that the Bank of Japan is about to crack. One has to ask: If they did not allow rates to rise when inflation was going up around the world, why will they do so when inflation is coming down? The Japan play is one of the world's biggest wagers right now. If Japan caves, the Yen will strengthen (go down on the chart above) and the Dollar Index will sell off, making commodities look better.
Will that be good for gold? Not necessarily. One of the most popular trades over the last couple of years was to buy gold in Yen. If the Bank of Japan allows rates to rise, hedge funds will reverse this trade and sell gold so at first it could have a negative impact on the price of the metal. You can see from the chart that over the last couple of weeks, gold, priced in Yen fell a bit. The trading between the red lines formed one of those contracting triangle patterns, about which I constantly write, that usually lead to a final burst then reversal.
On the left is a 20 year graph of an S&P Commodities Index. When commodities surged in the mid 2000s everyone thought it was the beginning of a new upward cycle in commodities similar to the period of the 1970s. The subsequent fall in prices was dramatic with losses in hedge funds driving many out of business. The up move out of 2020's lows sparked more calls for a new commodity cycle. Most articles in favor of this theory show graphs of declining investment in natural resources over the last decade relative to other areas in the economy with the inference that this sets up future supply problems. Yellow rectangles on the graph highlight lows in the monthly bars around lows in the slow stochastic oscillator below. The up move out of 2020 formed a five wave advance. The red dashed line marks a probable area of support. Over the last couple of weeks, the majority of commodities hit lows for the year. Contrarians will say that this is the time to buy. The guys at Sentimentrader.com point out that in past cycles, this kind of behavior led to lower prices over the next few months. On the right is a graph of the S&P 500 grain index and a slow stochastic oscillator below. Most commodity graphs have a similar pattern showing a big up move in 2020 and a partial retracement into this winter. Longer term cycle analysts say that the cycle for commodities is bottoming and that we are in a 15 year period when they should out perform stocks.
On the left is a ten year chart of corn prices and a slow stochastic oscillator below which is pressed on its lower boundaries. As with commodities in general, corn rallied and is now giving a good portion of it back. Corn usually goes up between now and early spring. The blue line is the price pattern for Archer Daniels Midland, a major processor of corn and soybeans. It trends with corn prices. On the right is a weekly bar chart of soybean prices which has the same pattern. We are in an El Nino weather pattern year. In past similar periods there were pockets of drought in Midwest corn and bean growing areas in the summer.
Crude Oil prices are the most widely watched commodity. On the left is a chart of West Texas Intermediate going back to 1998 as China was beginning to ramp up demand. We are in the middle of the range of the last couple of decades. In October, analysts were focused on future demand, predicting a 3 million barrel per day world-wide deficit. That proved to be a temporary high. Now, they are worried about an abundance of supply despite war raging close to some of the world's largest deposits. And then there is China which is doing everything to turn their economy around. Oil analysts are constantly wrong about future prices. On the right is a graph of the weekly closing price and an RSI momentum oscillator below. Even if you know nothing about the fundamentals of crude, you can see that your best odds of making money are waiting until the oscillator is on the low side of its range before buying. We are getting close.
On the left is a Sentimentrader.com graph showing the typical seasonal price pattern for Crude. Gasoline has almost the same path. The next few weeks usually show an upward bias then lows into the first 5 to 6 weeks of the new year. On the right is a daily bar chart of XLE, the big energy company ETF. It formed one of those contracting patterns that traders are hoping are like the one in the Yen chart above, leading to a big pop to the up side. We are right on the trend line this weekend so if it is going to happen, now is the time. When these patterns fail and prices fall below the lower red line, the follow through to the down side is often dramatic since everyone with a charting program is watching the same red lines, placing bets on an upside move. If it doesn't happen, big money tires to exit all at once.
Holy S__t! What was that? Overnight on Sunday the 3rd, gold and silver spiked higher so if you were long, you had a good night's sleep, dreaming of what you were going to buy with your profits once gold got to $2,500 and silver hit $50 again. You woke up on Monday to find that prices reversed overnight and then our favorite metals tanked into Friday. Going into that weekend all the stars were aligned for higher gold and silver prices. November through February are the best months to own precious metals. The Dollar looked iffy. Interest rates were declining. Bombs and rockets were flying. But it didn't work out. Two weeks ago I was cautious on the metals. Enthusiasm for them was similar to other topping periods and silver was out performing gold, a sign of an impending top in recent cycles. The Sunday night high was most likely made by large coin and bullion dealers who hedge their physical inventory by selling short gold and silver futures. They continue selling metals to consumers over the weekend when the futures market is closed. Given the hype around metals, they probably sold a lot of gold and silver on Saturday and Sunday then lifted their hedges (bought futures) on the ounces they sold when electronic trading opened on Sunday night, placing big orders into a relatively illiquid market. Resting stop loss buy orders were hit, amplifying the move.
So what now? Everyone was anticipating the pattern on the left with gold bursting through recent tops for the fourth time and exploding higher. The next 18 week cycle low is not due until Feb 2nd. (Cyclesman.com) which leaves plenty of time for breakout action. The same graph on the right is labeled differently and is just as valid from a chart wonk perspective. It could be that gold is making a large "flat correction" in a bull market, an A,B,C that needs one more declining phase that gets everyone bearish before the big move up.
On a short term basis, next week is the timing band for one of the Cyclesman.com 21 trading day lows. There is a big Consumer Price Index reading coming out mid-week and that could be the inflection point. If the rally following the low fails to take out the recent high then the theory is that the next cycle low will move lower than this coming week's low and the next bottom might also be the 18 week low at the beginning of February. On the right is a chart showing the path of gold and XAU, an index of gold and silver mining company shares. The guys at Sentimentrader.com wrote that the spread between gold prices and mining stocks reached an extreme level and that in past cycles, mining stocks did well over the next year almost every time.
The weekly silver chart on the left shows that the metal is right in the middle of its long trading range. Everyone with a computer has the same red lines drawn around the weekly price. When it poked slightly above it analysts wrote, "Here it is!" kind of stories but the euphoria was short lived with silver fans getting slapped in the face again. The daily chart on the right illustrates the on going zig zag kinds of moves that are chopping up every trend following trading system.
Is there any hope for Palladium? Analysts say that given the low metals prices, mines will likely cut production over the next few years. In the mean time, governments around the world continue subsidizing the manufacture and sales of electric cars that don't use palladium rich catalytic converters. An article in Zerohedge.com quantified the Dollar amount of subsidies for green energy - https://www.zerohedge.com/energy/crippling-economic-costs-green-energy-subsidies
Given the massive deficits of governments around the world these subsidies are unlikely to persist. Electric vehicles are sitting on dealer lots, unsold, except for Teslas. The American Dream has always been to have a tankful of gas and a cooler full of bear in the trunk. The yellow box marks the typical seasonal cycle low period for palladium and we are near the end of that window now with December through February the best months for palladium and platinum. The red vertical lines on the platinum graph mark typical seasonal cycle low points for the metal. If they can't rally over the next couple of months then watch out below for the rest of the year unless social unrest increases in S. Africa which is not a bad bet. In commodities, major lows are made when analysts are predicting a never ending surplus and lower prices.
To the right is a graph of JNK, a popular junk bond ("high yield " in polite company) ETF. In the early days of the stock market blast off of 1982, prices stalled for a week because Argentina and some other countries looked likely to default on their debt. Citi Bank in particular and other major NY banks made big loans at high rates to third world countries over the previous decade. If you took the value of those loans and assumed they were going to zero, the banks were wiped out.
Some of the loans went bad but government entities came to the rescue and the banks were OK. In the late 80s the Savings and Loan Crisis shook financial markets but they survived. The tech bubble followed a bit more than a decade later then 9-11 and the Great Financial Crisis but everything worked out. Rates went to record lows and stocks are near all time highs despite interest rates 400% higher than they were three and a half year ago.
Investors are programed to believe that taking more risk while getting a slightly higher return will always work out. Junk bonds were some of the best things to own from the bottom of the Great Financial Crisis until 2020. Usually they have a trading pattern similar to stocks but this time around they are not rallying with the stock market. The move off of the low in October of 2022 looks like an a,b,c corrective zig zag, implying lower prices to come. The recent stock market surge was accompanied by a firmer market but many of the companies in the junk bond world survived because they could borrow at low rates but now they will have to roll those loans at higher interest rates. Will optimism work this time?
The bond market is schizophrenic. One week it will rally based on future Fed expectations. The next week it will sell off in anticipation of billions of Dollars worth of debt being auctioned off. Next week the government is auctioning off tens of billions of Dollars worth of debt and the results will be closely followed. In the last few years, foreign money bought close to 70% of longer dated issuance. Traders will be watching to see if it is the same this time around or if rates need to rise to attract the money needed to finance our always expanding debt. Junk debt should be particularly sensitive to rate news.
Best Guesses -
Stock Market - The momentum and seasonal pattern guys are all predicting higher prices and when you look at past behavior compared to current trends, their arguments are convincing. Last week, after the Google AI demonstration I saw a number of analysts say that we are entering a new "golden age" of increased productivity (work done without employees) that will lift the entire stock market. Whenever I have heard "golden age" talk in the past it has been time to be cautious, particularity with momentum readings on longer term charts pressing the upper limits. I won't buy until I see things pull back.
Bonds - Bonds rallied more than I thought they would. Hedge funds were caught short and were forced to cover. This week should be a worry week because of the billions that need to be auctioned off. Friday's employment data did not confirm the big slow down narrative. We should pull back some.
Dollar - A lot depends on the Bank of Japan decision. Billions are wagered on them caving. Watch for volatility against the Yen.
Gold and Silver - We should get a mid-week bounce coming into the 21 day cycle lows. If they can't take out the highs of the overnight session of the 3rd then the metals will be set up to sell off again into the late January, early February lows.
Other commodities - We are at the end of the unfavorable seasonal period for commodities. Most charts look bad but they always do near lows. I am watching the grains in particular. We had some good harvests over the last two years with bumper wheat crops in Russia. Next year will be a solar cycle peak with all that energy hitting the earth's atmosphere. I am betting on a poorer growing season. Paradigms appear to be at their strongest near a top. The system of constant borrowing to support government favored industries is likely to have a sudden reversal. That could revive palladium.
Best of Luck,
DBE