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 February 22nd, 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.
Available Cash: This is our term for the difference between free credit balances in cash and margin accounts and debit balances.
For the last two months this update started with graphs from Sentimentrader.com. All the charts featured statistics showing that investors of every kind are convinced that the stock market is going higher and placed bets to take advantage of the move in record numbers. This chart is not at a record extreme but it is close. In Wall Street brokerage accounts investors are very heavily leveraged to the point where they owe more on their positions than the cash they hold. This is another indication that most traders have thrown caution to the wind and are all in on this market.
Since 1982 every period of bad news turned out to be a buying opportunity including the 1987 crash and 9/11. Investors are confident that buying into bad news means future profits. In previous incidents stocks sold off and buying took place after a good correction. In our current market investors bought the high as 10% of the world's population was locked down. They anticipate a quick return to normal. The question is; when is bad news actually Bad News? We will find out over the coming months.
Until Thursday, traders were merrily buying U.S. Stocks. In the mean time, wealth was fleeing from Asia and Europe into the U.S. Dollar. From Asia because of the virus. From Europe because they sell lots of things in Asia and those sales are coming to a halt. People are worried that the ECB will debase the Euro in an effort to keep the economy from imploding. Chinese car sales declined 92% from a year ago the first two weeks of February. Stock market investors were whistling past the grave yard as other markets showed signs of panic. On Friday the Dollar backed off a bit. It is too early to know if it is the start of a short term technical correction for the Dollar or something bigger. Wealth flees problems such as wars and pandemics. On the right is a long term chart of how many Japanese Yen it takes to buy a Dollar. When it takes more Yen to buy a Dollar it means that the Yen is getting weaker. Last week the price broke above a trend line in place for a few years. One of the most popular trades in the world has been the Yen carry trade. You convert your currency into yen, borrow money at their zero interest rates and buy things such as bonds and stocks. The Yen was relatively stable over the last four years while assets purchased in this trade went up in value. Now with cases of the virus reported in Japan, the Yen got hit. If assets such as stocks and bonds start to roll over then people in this carry trade will suffer a double loss. Their assets will decline in value and when they liquidate then sell their Yen for Dollars or other currencies they will get even less.
The stocks leading the market higher this year were a small group of Tech stocks heavily weighted in the NASDAQ 100. The S&P 500 lagged its performance a bit and the Dow Jones Industrial Average to a greater degree because these stocks have less of a weighting in them. My theory has been that the late 2019 and early 2020 rally was a thrust out of a contracting triangle form as shown on the left side graph by the "a" through "e" red letters. The chart book says that final moves follow such a pattern. I have been waiting for reality to follow art! The right side picture is from the Barchart.com web site and features the action over the last month. Note that there was another small contracting triangle form last week that led to a final burst then reversal. Tech stocks are volatile creatures. In past bull markets they suffered one and two week intense sell offs then rallied back to new highs. It is premature to say that the bull market run is over.
Apple made its high on January 29th and Microsoft on the 11th of this month. These are the two most heavily weighted stocks in any tech oriented index. I would like to think that they finished five wave advances and are now due for major corrections but I thought this in the past and it didn't work out. Some investors will see these two companies as a kind of safe haven play since they are both sitting on massive amounts of cash and have net worths that are greater than the United States Government and most governments around the world. Given the amount of borrowing to support stock market positions, if the selling intensifies, good stocks will sell off irrationally to raise cash.
AlphaBet (GOOGL) and Amazon are two more "never sell" stocks in the NASDAQ 100. Both declined from highs amid Thursday and Friday's stock market weakness. Many internet companies make next to nothing off of an individual transaction and depend on millions of clicks and buys to make a profit. I have been listening to Steve Bannon's War Room, Pandemic pod casts that go into more detail about what is happening with the virus. After listening to it I don't feel like leaving the house, buying or clicking on anything. As with Apple and Microsoft, it is too early to know if these two stocks peaked for the cycle. Many times after a market turns down and stocks take a hit, it is weeks or months before any logic behind the selling appears. Remember, in a world loaded with debt, when cash flow slows, assets are sold to raise money.
Last week's new highs in the S&P 500 and the NASDAQ 100 were not confirmed by the Dow Jones Industrial Average. The Dow closed 577 points off of its intra-day peak from February 12th. The S&P 500 closed below the trading range of the last 7 sessions. There are a lot of technical programs that are based on "swing trading", both on a daily and a weekly level. A "signal" is given when a market closes above or below the previous day's range and the previous week's range of trading. These kinds of programs will see the Dow and S&P 500 as having made a "weekly swing high" this week which will trigger a sell. Again, it is too early to know if this is just a quick correction or if it is the beginning of something major. The graphs with which I began the updates over the last two months show extreme, record breaking optimism toward the stock market in terms of options trading and cash put into stocks. Most of these indicators only saw similar extremes at the year 2000 dot com top. Market history shows that such confidence happens once in a generation and usually at tops that are only understood much later. At the time, buying seemed to be the only logical decision.
Wealth flowing into the Dollar found a home in the bond market. On the left is a graph showing the current yields on U.S. 30 Year Treasury Bonds and 10 Year Treasury Notes on a day by day basis. The flight to safety was so severe over the last couple of weeks that buyers drove yields to record lows on the 30 and close to record levels on the 10. Most probably, this kind of fear demonstrated in the Dollar and Bonds helped stock investors to wake up to the reality of increased risk in the investment world. On the right is a graph of TLT, an ETF that tracks longer dated U.S. Treasury Bonds with the day to day increase or decrease in the value of the U.S. Dollar Index added. This chart shows you the real return, including currency risk for non-Dollar investors in our bond market. Because the Dollar and bonds have been going up lately, non-Dollar investors made out very well despite the current yield on bonds hitting 5,000 year lows. In safer European Bond markets and in Japan, the yield is negative so our paltry current returns look good.
On the left is JNK, an ETF that tracks the Junk Bond market. Many investors and institutions put their money into these lower grade bets because the yield is higher than in AAA corporate and government bonds. Junk bonds usually trade in tandem with stocks and also get a boost if interest rates in general decline. Lately, JNK is not doing as well. I take this as a warning. The logic behind buying bonds is that if economies around the world are slowing down due to the virus then we are likely going to have deflation so interest rates will be lower. Also, governments will do everything in their power to keep rates low so buy bonds. The opposing argument goes something like this: The world is already highly in debt, especially China. Any interruption to cash flow will result in bankruptcy and existing debt will become worthless. If governments come to the rescue they will do so by borrowing and lending even more money, creating more debt and making the pay back even harder while reducing cash flow to stay in business. If owning debt is becoming riskier, shouldn't the rate on that debt increase? On the right us XLU, an ETF that tracks the stock price of utilities. Lately there was panic buying and an almost vertical price move. The higher the purchase price, the less the current dividend yield from the purchase. When have you seen market action like this work out well?
Our stock market was calm until Thursday but currency markets were in panic mode. This update led with a chart of the Dollar Index. The other side of this trade is a decline in the two big non-Dollar markets, the Euro and Yen. The Euro declined day after day until Friday's session. The number of Yen needed to buy a Dollar spiked last week after a bad economic report and news of virus cases in Japan. People who track market correlations say that the most consistent reason why gold goes up is a weak Dollar. Lately, this relationship inversed. Both the Dollar and gold increased in value as wealth wanted out of other currencies. One could argue that another reason for gold to go higher is a stock market plunge but gold's recent advance took place along side a stock market rally. Sentiment toward the Dollar and against the Euro hit extremes last week before Friday's reversal. It is likely that we will see a bounce in other currencies against the Dollar. Given the recent correlation this could also produce a pull back in gold.
The longer term pattern in gold looks like a rally in a down market with an up, contracting triangle then a thrust to current levels. On the right is a graph from the Sentimentrader.com web site showing the positioning of gold futures traders. There are record short positions by "commercials," companies that deal in gold. The other side of these trades is held by speculators and trend following funds. Previous extremes were short term tops in gold. Is it "different this time?" That is unlikely.
The shorter term patterns in both gold and gold and silver mining stocks (XAU Index) look like contracting triangles, forms frequently followed by a final thrust and reversal. Final spikes in commodities tend to be extreme so guessing the end point is impossible. Time wise we should be close.
On the left is a chart of the daily price of gold in NY with the daily percent change in the value of the U.S. Dollar Index added. This shows what gold is doing outside of the Dollar world. It has a close correlation to the price of gold in Euros. Last week the non-Dollar price exceeded 2011's peak as wealth fled other currencies. On the right is a graph of the weekly closing price of gold in NY and a simple RSI momentum oscillator below in red. The reading poked above .80 for the 16th time in the last 21 years. Most of the previous plus .80 pops were close to short term peaks in the metal.
The army of the silver faithful has to be disappointed with its lack of vigor. So far, it failed to exceed its first bounce from early 2016's lows. While gold hit a new high for the cycle, silver didn't even get to January's top tick. If I am correct in thinking that gold is close to a short term peak then silver could be in trouble. As with gold, speculators hold big long positions in the futures market.
Does anyone really know what is going on with Palladium? No. It is a speculator's dream. Both these graphs are from the Barchart.com site. On the left is the manic trading since late November. On the right is action over the last month. It looks like the metal formed a contracting triangle. If it were a stock I would watch for a final burst and reversal but it is a commodity and a very thinly traded commodity. Typical daily trading volumes are three to five thousand contracts. On Friday, March Treasury Bond futures traded 653,631 contracts. Small orders for palladium make for big moves. Lately, some of the intra-day ranges were more than $100 an ounce! If the world economy is slowing down and prices for industrial metals are declining then one would think that palladium use should also be less. Remember, I thought it was expensive $1,000 ago.
Many of my clients are users of platinum. South Africa produces the most platinum and is a major producer of palladium. The ratio of the metals in most ores is 30% to 40% palladium to platinum. In the past, the economics of mining was based on platinum prices since they were always higher than palladium. Now, palladium is making the profits and platinum adds to revenue. Platinum prices are back to levels seen 15 years ago. Speculators are extremely long platinum futures positions. It looks like a recipe for lower prices.
China has a huge presence in Africa. I read that they built mini cities in a number of countries. So far, I am not hearing of cases of the virus in Africa. If it gets a foothold there and spreads to South Africa, all bets are off for platinum and palladium prices. Let's hope it doesn't happen.
Crude Oil (US, not Brent) is in the middle of its trading range of the last five years. Most chart gazers are bearish on the pattern because the rally from the early 2016 lows toward $80 looks more like a correction in a down market. With ten percent of the world's population on lock down, consumption of oil is down. Flight curtailment to China means a glut of jet fuel. There are stories about tankers being turned away because of no place to store more oil. Two weeks ago, the RSI momentum reading on Crude in NY hit a low extreme. We got a brief price bounce that ran out of steam late last week when stock prices fell. The $50 zone acted as support recently. Another sell off that stays below $50 for more than a session or two will hint at lower prices.
XLE and XOP are the two big oil company ETFs. Both are at low points. In the commodity world most profits are a function of the price of the underlying commodity. With oil down and natural gas near its lows the stock prices of companies dealing in these items is down. Last week I read about pressure being put on a major NY bank to stop doing business with any company involved in the hydrocarbon business. Energy is the most out of favor sector of the market. Here is an interesting thought. I don't know if it has any real meaning. When I first got involved in markets back in 1980, energy companies were doing well and were a big part of the capitalization of the S&P 500. Short term interest rates in the U.S. were close to 20%. Forty years later, oil related stocks are close to a low as far as their weighting in the averages and the overnight lending rate is less than 2%. Have we reached an opposite extreme on both?
Writers who are bearish on the stock market and the future of the economy point to the prices being paid for commodities. They ask how is it that the stock market can rocket higher when the prices of basic commodities (DBC) and agricultural items (DBA) are on their lows? The response is that stocks are led by technology and companies helping to make things cheaper and firms that manipulate data. The wealth created around the world in the last 20 years sees these sectors as the future winners. Still, it is difficult to imagine a world driven by mouse clicks and lower prices for "things."
Strategy for the next two weeks: Optimism on stocks has been extreme as buyers believe they are smart in looking past economic disruptions caused by the virus. I will watch the form of any rebound from Friday's lows. If it can't take out the previous high within a week I will look for a more sustained sell off. All kinds of sentiment readings have been at once in a generation highs. That makes stocks more vulnerable.
The text book chart patterns say that gold should be close to a high. We are in a period of elevated emotions so the spike in gold could surpass all expectations. If stocks and the Euro bounce into early next week then, given the speculative build up in the futures market, gold could tumble. Above I show a chart of gold adjusted for changes in the Dollar Index. For many holders of gold around the world it has never been worth more in their native currency than it was going into this weekend. In a world that needs cash, assets are sold to raise it. Selling gold can raise a lot of money right now. The chart to the left shows the weekly high price of gold in NY in U.S. Dollars for the last 40 years, sorted from the lowest price to the highest. Out of 2,095 weeks, last week's high ranks as 2,033. There were only 62 weeks that had a higher price over the last 20 years. That is in the top 97%, not a bad selling range.
I will stay away from the bond market. One set of logic says that the virus will cause a slow down. Central Banks will do everything to keep rates down to head off a recession. Another set of logic says that the world is drowning in debt. Any slow down will cause cash flow to be curtailed with defaults to follow. Even if governments create money and make massive loans, it will result in increased indebtedness and more fragility in the debt market. Is that a reason to lend for 30 years for less than a 2% coupon?
I was doing my pleasure reading last week and of course it was a book on economic history. It mentioned the 1966 top so I decided to check it out. Before he was assassinated, President Kennedy pushed for tax cuts. They passed after his death and were signed into law in February of 1964. Consumers and businesses went on a buying binge. The economy and stock market (which was rallying already in anticipation) surged. Our recent tax cut was also put into place two years ago. Check out the left side graph showing the final months of the 1966 market. It looks surprisingly like this year's Dow Jones Industrial Average. On the right is what followed into the end of the year. Virus or no virus could it be that things are running out of steam following a big tax cut just like the 1966 market?
Best of Luck
DBE