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 June 18th, 2022
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, 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 -
Nine days ago the markets were apprehensive about the Consumer Price Index and Producer Price Index numbers. Bulls were hoping that the latest readings would show inflation moderating a bit in May, bolstering the argument that peak inflation is behind us and that the Fed does not need to raise rates rapidly to cool off the economy. The CPI number was hotter than expected. The PPI reading showed some moderation but was over shadowed by CPI. Analysts who had been predicting a 0.50% increase in the Fed Funds rate grew more pessimistic and raised their guess to 0.75%. Some argued for a full percentage point. Within the PPI number, the component that accounted for 40% of the gain was energy. When PPI is higher than CPI (as is the case now), the theory is that companies are not able to pass along cost increases to consumers so profits are lower.
Retail sales were slightly higher in Dollar terms but when inflation is taken into account they were down a bit and this was the third month in a row! Past updates showed an explosion in credit card spending. Bears argue that the consumer is tapped out and using credit to buy essentials. Jobless claims were up a bit with the four week moving average on the rise. A number of big tech firms announced layoffs.
Two graphs from REDFIN show the unfolding problems in the housing market. With mortgage rates rising the average monthly payment is much higher making today's home prices unaffordable. The right side graph tracks homes for sale where the seller is dropping the asking price. In many markets houses are still in high demand and moving quickly relative to previous years. The Econimica blog spot just posted an update showing the demographics of housing state by state. You can find it at econimica.blogspot.com. It shows that in a number of states, population is flat, job growth is stalling out at levels lower than 2019 levels but home prices are much higher. Their conclusion is that these markets are in trouble.
Above are two graphs from a Bank of America analyst posted on the Zerohedge.com website. Their global survey of fund managers shows extreme pessimism regarding future economic growth. Their Bull/Bear reading is also at a negative extreme. In past cycles low readings coincided with stock market bottoms.
Above are two S&P 500 graphs. The left side chart has markings suggesting that we are finishing a typical A,B,C correction in a bull market. Proponents of this will point to the extreme bearishness shown in the Bank of America graphs as evidence that stocks are sold out and ready to reverse. The right side graph has a more bearish interpretation. If the trend is now down in stocks, they should decline in a five wave move. We saw 1 and 2. We just finished the first wave of a much larger sell off. If this reading of the charts is correct then stocks should re-trace a portion of the recent sell off before resuming their decline. A typical re-tracement area would be the June highs with a rally that lasts into mid July.
The left side picture shows a more bearish interpretation of the moves. Under this scenario the market is in the middle of a much stronger melt down and any "over sold" bounce will be minor and last just a couple of weeks before an even more intense bout of selling. On the right is 3M, a very large company composed of dozens of smaller firms making all kinds of things. I consider it a bell weather stock for world-wide economic activity. It also looks like it finished a five wave down move with some kind of relief rally in the cards.
Mid-cap stocks continued their stair step lower. Until that pattern is broken, assume that the trend is down. On the right is the NASDAQ 100 which could also be ready for a bounce. Note that some previous low points were between the 20th and the 24th of the month. Monday will be June 20th.
It is also possible to count a finished five wave decline in the Russell 2000. This implies some kind of bounce to follow. On the right is a graph from the Sentimentrader.com website showing that hedgers added to their long futures position on the Russell 2000. In past cycles, high long positions were followed by lows much of (but not all of) the time.
A handful of companies control the destiny of the major averages. Both Apple and Microsoft show a decline, upward correction and another decline. Bulls will say that both companies are finishing a,b,c corrections in a bull market similar to the S&P 500 graph above that sports the same interpretation. If we get a meaningful rebound in both then another sell off phase it will tilt the odds toward a much more negative view of stocks.
AlphaBet and Amazon already wiped out a good chunk of shareholder value. Both could get an "over sold" bounce but the patterns don't look as ambiguous as Apple and Microsoft.
Last time I warned that the fragility of consumers would be bad for sub-prime lenders. Stocks in this group hit the skids.
By the end of last week and after the Fed's 0.75% announcement, investors were beginning to discount a recession or worse. TLT is an ETF that tracks longer dated bonds. The theory is that the world economy is going to slow down drastically and that it is just a question of time before deflation and more QE programs return. That is positive for longer dated government paper. Chart wise, a case can be made that bonds just finished a series of moves where an intervening counter-trend up move is likely. A rally into early August would fit the pattern. On the right above is AGG, an ETF that tracks your typical bond fund. Investors with balanced portfolios between bonds and stocks got hit on both ends. If my reading of the charts is right, some relief should be coming on the bond side.
The junk bond sell off accelerated last week. Fed watchers say that the one thing that will stop the Fed from raising rates is chaos in the credit markets. The sign of this is a spike in the rate differential between Treasury Bonds and junk bonds. The spread is rising but it is doing so in a somewhat orderly way with no sign of panic so far. Junk bonds tend to follow stocks. If stocks are close to a relief rally then JNK is likely to bounce too.
The most visible component of rising prices is energy and this makes sense because the cost of oil and its products, gasoline, heating oil, diesel fuel and jet kerosene are components in the price of all goods and services. I mentioned above that 40% of the rise in the Producer Price Index was attributed to energy costs. Late last week, crude sold off as traders began to worry about a world wide recession that will reduce demand. Over the last few months I read dozens of articles pointing out the "structural" imbalance between oil supply and demand and the same for gasoline and diesel. The implication being that energy prices have to go much higher and that the imbalance will not be resolved by an increase in production but by a depression. During that time of maximum higher price prediction, oil failed to rally above its March high! I think those articles are right and that any correction will be temporary. I am watching for one of the patterns above. The left side chart looks for a pull back toward $80 amid extreme fear of a slowing economy. The right side graph is more dangerous with oil tracing out a spring board pattern for a big spike in prices.
Last week, I saw more TV spots about high gas prices than in any previous week, just as those prices topped for now. On the right is an update on the seasonal tendency for gasoline. In many years, the price pattern goes against its seasonality but it is something to keep in mind.
Among industry groups, energy was the only thing that made money this year so money mangers loaded up on the shares. This made them very vulnerable. Early buyers have lots of profits and were quick to sell on the weakness in the energy complex. On the right is a simple RSI momentum oscillator on XLE, the big energy ETF. It is already approaching over sold readings. Corrections typically have three legs to them, a down, up, down kind of form. I will wait for the second down leg before getting into the group again.
DBC (left) tracks a basket of commodities. It traded down to its trend-line late last week. There were a lot of articles about a new commodities super cycle over the last year as prices rose. Late in the week, as stocks cratered, commodities traders realized that if the world wide economy heads south, nothing is safe. DBB tracks a basket of base metals which sensed the economic slow down before the rest of the complex. Everyone is watching stocks so if stocks bounce, courage may return to commodities traders.
CORN tracks corn prices and WEAT is an ETF that does the same for wheat. Both recently sold off a bit. My worry is that food prices will eventually continue higher even if the the economy turns down.
These two graphs from the Sentimentrader.com website show that both corn and soybeans usually top out around now. It is all about the weather in growing areas from now into the fall. Last week, I was watching Bloomberg very early in the morning before the other financial channels start their market coverage. A young lady from Bloomberg was interviewing a commodities crop price analyst from Robo Bank She asked him what could be done to lower food prices. He mentioned the shortage in edible oils that is behind the run up in soybeans and palm oil and said that this could be stopped in its tracks. The skeptical interviewer asked how. His response was that if we stopped converting soybean oil into "green" biodiesel and burning food as fuel, the market would go back to a surplus and prices would fall. He said the same is true for the diversion of corn for ethanol production. The look on the interviewer's face was classic. She was stunned that someone would even suggest that these costly "green" conversions of food into energy had any negative impact what so ever.
The Dollar pulled back a bit last week after the ECB talked about ending their QE and letting rates rise. Lots of chart fans have been looking for a correction after the big up move. Wealth is flowing into the U.S. because of instability elsewhere just like it did in the 1920s. The bank of Japan has been buying up its own debt like our Fed was doing except the BOJ bought a much larger percent in an effort to suppress interest rates in Japan. With other Central Banks raising rates, making their paper more attractive, private money is leaving the Yen. Speculators are placing huge bets against the Bank of Japan by selling short Japanese Ten Year bonds and shorting the Yen. It is a financial drama on a huge scale. Late last week, the BOJ said they would continue their bond buying program. Traders thought that the Yen would fall in response (go up more on this chart) but it didn't. If the Bank allows rates to rise then the trillions in bonds that they own will go down in price making for huge losses. Japanese pension funds are also obligated to own a certain percentage of their bonds so if the Bank caves on rates, the losses will be catastrophic. Analysts say that this a test case for most Central Banks that have been buying their own debt with money created out of nothing and that Europe is next then eventually the U.S.
We long suffering gold fans are still hoping that the metal is consolidating before a move higher. To those criticizing the metal for not "doing something" amid all the turmoil our excuse is that if you look at the chart, gold already "did something." My constant worry with gold is that it has value in itself, its best attribute. Because of this, unstable governments that can no longer borrow at low rates will be tempted to sell gold reserves to raise money. In a sovereign debt crisis, one wants to own gold because you cannot trust fiat money but printers of that money might dump gold onto the market causing temporary spikes down. The Sunday night massacre at the "a" point on the chart might have been just such an event. Silver is obviously weaker and closing in on a gap around $20.50 which could act as a magnet. Hard currency proponents argue that "silver is money too!" If something is very true, you don't have to try so hard to convince people. Silver has an industrial use side and right now, investors are more afraid of a depression than a Dollar melt down.
Platinum continues to do little. In the past it was believed that there was a relationship between the price of gold and platinum. A higher gold price was a sign of financial stress while a dominant platinum price was the sign of robust economic activity. Lately there seems to be less correlation between the two.
Palladium finished the week near the bottom of its recent trading range and at levels seen in October of 2019. Cars and their attached catalytic converters don't sell well in a recession. On the right is an updated chart of the the palladium futures positioning of entities identifying themselves as hedgers. They are buying up more and more palladium futures contracts, behavior seen at past market lows. If my business depended on this metal which comes from Russia and S Africa, I would be buying some physical metal every month! Users worry that the price could fall farther but these companies buy equipment of all types that rapidly loses value. Why be worried about palladium which could rocket higher in price overnight if there are strikes in S Africa?
On the left is a chart of the weekly closing price of the S&P 500, its 40 week moving average and the difference between the two in purple. We are near the spike low of the 2020 sell off. That is enough of a deviation to tell traders to avoid being aggressively short the market for now even if they are convinced that things are headed to hell. The right side graph shows the price of gold then a day by day comparison between the percentage gain or loss in gold and the S&P 500. The brick red line goes up when gold does better than the stock market. It is somewhat misleading because it does not include dividends on stocks so it overstates gold's gains. With stocks tanking and gold trading sideways, the metal is the winner.
Best Guesses -
Stocks - Every financial network has constant pessimistic reports. Near the market top, all the news and predictions were optimistic. Were they right then? I am looking for a bounce that lasts a couple of weeks at a minimum. Martin Armstrong puts out a blog that is free at ArmstrongEconomics.com. I subscribe to his other writings. His computer program tracks all kinds of cycles and capital flows and has an envious track record. More than a decade ago it predicted a third party candidate in 2016, the up-tick of the cycle of war in 2014 (that will only get worse in the next few years) and a pandemic cycle for 2020 - 2022. His computer had last week as a closing low week for stocks. We shall see. It also warns of possible military action in the late July, August period. Let's hope it is wrong.
Bonds - Hedge funds and portfolio managers dumped bonds this spring. They are under invested relative to their historical patterns. Bonds rallied Thursday and Friday and my guess is that worries about a recession will result in a healthy rebound into August.
Gold and Silver - I am still hoping for gold to briefly challenge $1,900 but my favored long term scenario is shown above, a trading range market for now.
Commodities including oil - Commodities look ready for a breather and that could be part of the stock and bond rebound story. I expect oil and crop items to eventually go higher.
Unneeded Commentary –
Drops of dye in water, weather, Constantine and the separation of church and state.
Picture five identical glasses in a row filled with water up to the same level. In the first glass put one drop of red dye. In the second glass, two, the third three drops, the fourth, four drops and the fifth, five drops. Think of the red hue in each as a level of religious commitment. In Christian terms, a glass one believer is OK with the idea that there is a God who on some level runs things or at least sets things in motion. A drop one person prays when someone they love is in danger and sees Jesus’s teachings as a good thing. A five drop person thinks that they are surrounded by a heaven and hell sponsored host with every decision they make having Eternal consequences and every thought part of a test of Good or Evil. It is illustrated in Bunyan’s Pilgrim’s Progress in a scene where Christian’s widow dreams that as she sleeps, two beings are at the foot of her bed arguing over her soul. For five droppers, salvation through proper faith is everything. We read that many in the early Church were like this and welcomed death. Their focus was on an eternity with God as opposed to a few miserable temporary years on earth. One drop people are not going to risk themselves or their kids to defend a creed. Five drop people look forward to martyrdom.
Most of us are two or three drop people in whatever metaphysics we espouse. We see that historically, fanaticism led to slaughter, no matter what the core faith or secular theme (communism for instance) and find a way to take our beliefs seriously without killing our neighbors to Save them.
Aside from traditional religions, one can find four and five drop people in other areas. I have friends whose lives are caught up in politics. No matter where the conversation starts they steer it toward elections and politicians and programs. I live in a liberal area of the country. Many of my neighbors had Bush derangement syndrome then an even worse case of Trump derangement syndrome. You couldn’t talk with them for more than three minutes without the invectives and accusations spewing forth. If you disagreed, their faces turned red and the personal insults followed.
It is worth each of us examining our own thought processes to see how we spend most of our thought lives and how concentrated they are on our religious or political beliefs and if we separate those around us into a thumbs up or thumbs down category relative to those beliefs.
Christmas is nearly six months away. Every year, as it approaches there are always legal challenges against Christian symbols displayed in public spaces. People who are four or five drop atheists cannot tolerate their counterparts of faith, even the two drop variety. An interesting part of Christian history is that Christianity made slow headway in the Roman world until the early three hundreds. Emperor Diocletian who persecuted Christians retired and left the Empire in the hands of two Emperors and two successors. They started fighting each other immediately. One of them, Constantine, defeated another, Maxentius at the Battle of Milvian Bridge on Oct. 28th 312. The night before the battle he supposedly had a vision where the Christian God encouraged him to put Christian symbols on his troops’ shields and on banners, telling him that “In My name you will win!” The details are much disputed but he used the symbols and won the battle. In the Roman world, Gods were supposed to deliver victory and when the Christian God proved a winner, Constantine took note as did others. Christianity was illegal at the time. In 313 Constantine issued the Edict of Milan, decriminalizing Christianity. He went on to defeat all rivals then rebuilt Constantinople as a Christian city and the capitol of the Empire. He made Christian Bishops paid legal officials of the government. They received huge sums of money to build churches and distribute alms to those who converted. The construction employed hundreds of thousands directly and indirectly with those who won contracts and their employees having to embrace the new religion. Bishops were granted the power to decide disputes and legal cases of all kinds. If your case was in front of a Christian Bishop, were you more or less likely to profess faith? Towns that declared their conversion were granted favorable tax and trade status. Some pagan temples were converted to churches. The size and presence of new Christian buildings in major cities throughout the Eastern Empire directed the population toward the new faith. Over the next two decades, the absolute power of Constantine and the wealth of the Empire converted much of the Eastern Empire.
Constantine did not outlaw pagan religions. In 391, Emperor Theodosius the Frist did and he turned loose monks who attacked and killed pagan priests.
Is Global Warming a State sponsored religion? Most governments around the world are taking steps similar to Constantine to convert their populations. Are there tax breaks for those who act in accordance with Global Warming beliefs? Yes. You get tax credits for buying electric cars and for putting solar panels on your house and for erecting windmills. In some countries there are schemes of carbon credits where those who do not generate carbon can earn them and sell them to those that do. In many fiscal quarters, Tesla’s profits came from selling Green Credits. Is there social and economic pressure to join the Movement? Yes, just look at ESG Investing. That stands for Environmental, Social and Governance. In Europe it is more advanced than in the U.S. Publicly traded companies are all under pressure to be carbon zero by 2050. Activist investors are demanding that firms come up with plans to achieve these goals and create positions for managers who will enforce them. Bankers are fully on board and are reluctant to lend for new projects that expand fossil fuel supplies and related industries. Businesses are assigned “scores” for how well they comply with the implication that they will be cut off from financing in the future if they have a low score. Check out the website for money manager Amundi. Building on our History of Responsible Investing | Amundi US
A couple of weeks ago, when asked about sky high gas prices, President Biden talked about the transition to a green future. Many people cannot afford gasoline to get them to work. Winter is five months away and in my area of the country, many of us use heating oil. Given its current price, millions of people will not be able to afford much else after filling their heating oil tanks. In Christian history we read about Christian soldiers in a “five drop” era, killing heretics. Will people be forced to do without heat this winter for a future Green utopia? Last month I read a quote from a climate activist. She was worried about Europe building plants that could convert LNG into gas because it would allow the continued use of fossil fuel in Europe, distracting people from the real crisis: global warming (as opposed to the war in Ukraine).
Religious conversion happens over time. I am sure that in Constantine’s era, many business owners converted to win contracts from the Bishops who had the Roman purse at their disposal. While their conversion might have been lip service to survive financially, it is likely that their children were steeped in Christianity. Since the 80s, public schools have been pushing Global Warming. These days, brain washed college kids are convinced that the world is doomed because of fossil fuel use. The physics of greenhouse gases is clear. The sun heats up our atmosphere. The heat radiates away from the earth but some of it is trapped in our atmosphere. Water vapor is the most common greenhouse gas. This weekend, where I live, the air will be very dry and without the water vapor, nigh time temperatures will approach the high 30s as heat radiates away. Carbon dioxide stops certain wave lengths of radiation from escaping the atmosphere, being like a winter coat. Methane is even worse. There is scientific theory and then there is religion. The widely adopted models predicting disastrous climate change cannot explain previous periods of warming and cooling. The government’s own data show that powerful hurricanes and tornadoes were more prevalent in the past century than now. Ocean temperatures and levels have been rising for 20,000 years.
You can find the U N and our government’s own statistics on storms, temperatures, floods, droughts, ocean levels and other climate related data in “Unsettled” by Steven E. Koonin who worked in the Obama administration. Based on the physics and evidence he believes that there is a man-made influence on the climate. He also shows that when you look at the data, there is so far no empirical evidence for the catastrophic claims made by Green believers. Given our “drops of dye in glasses” image above, he is a probably a two drop climate person. The problem is that government policy is being run by five drop adherents around the world who are using the same methods that Constantine used to spread Christianity to promote a new metaphysics, Global Warming and to claim a powerful priesthood for themselves.
A famous argument for Christianity is that if it is true and you don’t adopt it, you will burn in hell for eternity whereas if you do adopt it and it turns out to not be true, you haven’t lost much and you might even be better off because you kept yourself away from behaviors that didn’t work out well for most. We hear a similar appeal from the Climate crowd. “What if it is true? We can’t risk that.” Constantine empowered and paid Bishops. Our governments reward priests of the new faith who fly private jets to Climate summits and have huge carbon footprints like John Kerry.
There will always be a certain part of the population who crave “purity” in the sense that they want everything oriented around one simple theme. Divinity schools and other intense religious institutions are full of them. In any movement, “purity” is a moving target that leads to greater extremes with less tolerance of heretics over time. The thinking is that if ”X” is absolute reality, it is dangerous and evil to allow “not X”. Behavioral psychologists tell us that whenever people regularly meet on the basis of religion or some other belief system, the group gradually moves toward the most radical form of that belief. Today, social media allows those with shared views to constantly keep beliefs front and center, acting like group meetings.
Five drop religiosity, when enforced by governments did not work out well in Christianity, Communism, or Islam. Murdering people to Save them was the eventual result. Purity of the cause was more important than the life of the dangerous deviant individual. Will five drop government sponsored Global Warming be any better?
Best of Luck,
DBE