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 Jan 16th, 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.
Some hard data.
First, the good news. Industrial Production and Manufacturing were up in the U.S. last month. The rate of gain is less than last summer's big bounce but up is up! The dark blue lines on both of the above pictures (found in Zerohedge.com articles) show that the levels are still below pre-COVID readings while headed in the right direction. The blue lines also show that both sets of data were trending down before the virus hit, something not often mentioned.
To the left is a graph comparing Industrial Production to the stock market. Stocks are front running a much bigger recovery.
Now the dark side. New claims for unemployment benefits jumped to 965,000 last week amid new restrictions. NY Governor Cuomo and Chicago Mayor Lori Lightfoot both pushed for reopening. For months, critics of the shut downs opined that as soon as Joe Biden was assured the Presidency blue state politicians would push to reopen. The Governor and Mayor confirmed this last week.
In last week's update my strategy was "caution." Extremely high emotions sew the seeds for reversals. The stock market sold off a bit and made a marginal "weekly swing high." This happens when stocks decline below the range of the last five days of trading. There are many trading systems that watch for this pattern so it is worth noting. It happened in the recent past and proved to be a one day event with prices quickly recovering. Traders will be watching next week's action for confirmation of a short term top or a rejection of lower prices.
The NASDAQ 100 also took out the range of the previous five day's worth of trading before recovering a bit. The Russell 2000 small cap index, one of the leaders of the speculative frenzy closed the week well above its five day range. Remember, there are different ways of looking at markets. If you emphasize sentiment measurements you see readings that have you selling everything. If you follow analysts who track market breadth and momentum you note the "over bought" condition of the market but see it as mid way toward higher prices with any pull back being temporary. If you follow traditional fundamental analysis you read that stocks are at the extreme upper end of historical valuation and that future long term gains are likely to be muted. In 2019 there were a couple of web postings that showed items and asked viewers to ask what color they were. Some saw blue and others brown. This is where we are with stocks.
Two other leaders of the speculative charge are copper and soybeans. Copper is back to mid December prices and topped with the S&P 500. Soybeans continued higher last week as did other grains. Speculative funds continue to load up on grains with exports strong and reductions in crop estimates in S America. Last year I predicted higher prices for agricultural items but did not think they would jump so rapidly. The weather disruptions I anticipated were due to solar cycle history with most of the problems happening a few years from now. If this is the first quarter of the game, what will happen during the next three?
January 8th was a turning point for Bitcoin and Tesla too. Note the size of recent bars in Bitcoin as prices ran up and down thousands of Dollars intra-day. In some past commodity markets, an increase in the daily range after a big run up preceded a top. Last week I read numerous articles proposing much higher future prices for Crypto Currencies and Bitcoin in particular. Predictions of much higher prices following parabolic moves were a warning in past markets. Tesla finished the week without hitting a new high! A break of $800 will make the faithful nervous.
Crude Oil joined the party in January as traders focused on a future world wide reopening while ignoring current shutdowns. When Saudi Arabia announced a 1 million barrel per day cut in production it was just what the market wanted to hear. The blue line on the Oil chart is the Russell 2000 Index. One could make the argument that crude oil prices are caught up in the same emotional storm that is driving stocks. The danger is that if the stock market corrects, oil is likely to follow as it did on Friday. Exxon had an amazing week. Last August, the big tech companies surged because of gamma exposure. A unit of Softbank and retail traders bought thousands of out of the money call options on the stocks. Market makers in these options were forced to buy the underlying stocks to hedge, creating a positive feedback loop. The same thing happened with Exxon last week. For some reason, retail options traders focused on Exxon and bought thousands of call options on the stock forcing market makers to buy the underlying. As the price surged, analysts raised their target price for the company and shorts scrambled to cover. The high for the stock was 51.08 before it tumbled on Friday closing at 47.89. Early Friday the SEC announced an investigation into the value of Exxon's Permian Basin reserves. A "whistle blower" claims that the company intentionally misled investors by overstating their worth. Gamma exposure works both ways. When a stock moves higher, options dealers have to hedge by buying. If it sells off they remove their hedges by selling the stock, adding to the down side pressure.
Options activity is extremely tilted toward buying call options, a bullish strategy. Last week numerous articles mentioned big volume in penny stock trading and added it to the list of speculative extremes. The right side graph from Sentimentrader.com shows that while it is high relative to the last five years it is well below activity from 15 years in the past.
Apple didn't really join the New Year's party celebrated by the rest of the market. Prices are back to late August levels. The same for Amazon. Chart gazers are hoping that the sideways back and forth action in Amazon is a spring board for a final huge thrust higher. A break of the lower trend line will throw cold water on the theory. The retail sales report for December included a decline in on-line purchases. Last week I was listening to a local evening radio talk show. Numerous callers said they were switching to ordering things directly from the manufacturer and skipping Amazon because of Amazon's taking down of Parler. Twitter and Facebook's stock price are both down following their censorship of conservative media and communication. We will have to see what happens with Amazon.
Traders know that currency trends often reverse around the New Year. The Dollar rallied last week with speculators holding huge short positions. We could get a pop in the Dollar driven by short covering alone! On the right is a daily chart of the Dollar Index. My suspicion is that we just saw wave three of a five wave sequence to the down side. Wave 2 was a sharp upward jump so wave four could be more of a sideways, complicated move taking most of the next month. A rally above 92 would be evidence that a larger bottom is in on the Dollar.
Gold sold off a bit more last week with other markets stealing all the attention in the reflation trade. Small speculators are holding large positions in gold futures. In past cycles this led to more weakness. Traders will be watching a trend line drawn off of previous lows. Last week Christine Legarde started a campaign against Bitcoin. Her focus was on money laundering but all Central Bankers know that they cannot afford to lose control of their currencies and allow alternatives to which they have no access. Crypto currencies can be regulated as can all financial markets. When they come down on Cryptos, gold will again be the alternative.
Silver followed gold and is sitting in the middle of its price range of the last six months. As with gold, fans will note that the sideways pull backs in both metals are common for something that rose so quickly. A break of the "b" point will turn the tide to the down side.
Shares of companies that mine gold and silver continue to trade sideways. It is amazing how things change as far as what is important to traders. In the late 70s the weekly money supply statistics were the most watched bit of data. As M1 increased gold soared and bonds crashed because traders were certain hyper inflation was around the corner. A few years later we had deflation. In 2010 if President Obama announced a 1.9 trillion stimulus program gold would have been up double digits. If the weekly jobless claims number came in at 965,000 the stock market would have opened hundreds of points lower. Anyone looking at history objectively would have to come to the conclusion that we tend to focus and trade off of and draw conclusions from information which in hind sight, was meaningless. Today it is all about the promise of Stimulus and the Fed's ability to keep the party going. Given the history of past theories based on the flavor theory of the day one has to doubt that Stimulus will work out the way most believe and that the Fed's ability to control markets is a temporary thing at best.
Palladium was a big winner in 2019 and part of 2020. Prices are where they were a year ago. They followed the stock market somewhat but failed to take out the previous highs. If stocks sell off, palladium will probably do the same. On the right is a graph of platinum futures with the Russell 2000 in blue. It looks like platinum traders are taking their cue from the stock market too!
Above are TLT, the ETF that tracks longer dated U.S. government bonds and TYX, the index that tracks the implied current yield on those bonds. The charts are mirror opposites. Based only on chart patterns I drew in the red lines. The last sell off looked like a final thrust from a contracting triangle (opposite for TYX). If reality conforms to art there should be a rally with the green horizontal lines showing potential stopping points. Even if bonds do rally, please remember that this market is supported by the Fed buying $4 Billion per day to keep it from tanking. Also keep in mind that despite this huge source of demand T bonds recently hit the skids for 7 days. That tells me that market forces can overwhelm the Fed and everyone knows it.
Why would bonds rally? The most obvious reason is a stock market sell off. There is a huge speculative short position on T Bond futures that if unwound would add a tail wind to a rally. To the right is a graph from Sentimentrader showing options activity in 10 year T Notes. Recently traders loaded up with put options, convinced that Notes are headed lower (rates higher). In past cycles such confidence was punished!
On the left is a weekly chart of the Dow Jones Industrial Average. It is my theory that this market formed an expanding triangle which leads to a final manic rally then a reversal. Any print above the "d" could be the top. There is no predicting the ending point. Sentiment and valuation measurements say it could be now. Momentum statistics say we are mid way through and that after a correction the spike to new highs will resume. On the right is XLI, the big SPDR ETF tracking a basket of industrial stocks. It made a similar pattern from early August into late October then surged higher. Support is in the area of the yellow rectangle. Bulls are hoping that our equity markets are at the equivalent of the XLI Nov. 9 point and that any set back is temporary. From time to time I mention a service to which I subscribe, Cyclesman.com. It tracks regularly occurring inflection points in markets. It has a weekly cycle low due in late February, early March. I also note that in some previous years, markets that topped shortly after the beginning of the new year sold off into that same time period.
COVID update for the week.
You wouldn't know it by watching TV but this graph came out last week and appeared in an article on the Zerohedge.com web site. Hospitalizations for COVID 19 are flattening out and declining in the North East and Mid West. Hopefully this bug is burning itself out. Last week another headline said that world wide deaths attributed to COVID reached 2 million. The Hong Kong flu of 1968 - 69 is thought to have killed up to 4 million. There were no shut downs and Woodstock, a super spreader event if ever there was one happened without thoughts of restrictions, social distancing or masks.
Strategy for this week -
Stocks - Friday ended on a sour note. At the intra day lows prices on some of the big indices made weekly swing highs. A continuation of the sell off on Tuesday will have me looking for a larger correction, possibly into late February.
Bonds - The tea leaves point to a rally. My guess is that it will be the last one before the guano hits the fan. I don't think that President Biden will have calm in the interest rate markets. Sometimes things happen together and we see causality. Central Banks have been very active in the bond markets during a period of low interest rates. We see these two things and have come to believe that one causes the other. I drive a lot on business trips. Sometimes I drive for hours with another car or truck behind me, sometimes passing me then I pass them. It would be easy to believe that I am being followed. Then we come up to an exit and they turn off. My guess is that 2021 is the year when bonds take their exit down and all the belief in Central Banks and stimulus goes the way of the attention paid to M1 in 1998.
Gold and Silver - No strong feeling on direction.
Dollar - likely to trade higher on a short term basis but I am looking for a sideways trading range before a final low this spring.
Agricultural Commodities - Too over bought to buy and too frightening to sell short.
Watch Bitcoin, the tip of the speculative spear and Tesla which is next.
Unneeded Commentary -
It is good to see that human nature does not change over time despite elites thinking they can legislate it away.
Example A) In The Old Testament in the Books of Kings and Chronicles we read that when a new king made their way to power they slaughtered the families and loyal followers of the camp they defeated. It was similar in Rome during the Imperial period. Not only were relatives and supporters murdered but successful generals on the frontier, who did a good job for the previous Emperor were often given the choice of suicide or being murdered. The movie Gladiator had this in its plot. Years ago I read a book on European Middle Age history and it was the same. New Kings and Queens frequently killed relatives including children. In the Soviet Union when a new dictator took over, close supporters of the previous guy often disappeared and it has been the same in China as factions change. In China, the word disappear is now a verb as in " she was disappeared" a nice way to say she was likely murdered. There is a video from Iraq when Saddam Hussein took over. It is from a large meeting with Saddam on the stage. The hundreds of seats are full with government officials. One after another they rise and yell out their loyalty to Saddam just as the soldiers are coming to grab them, take them outside and murder them. Last week, in my comments I wrote a hopeful note about meeting with my neighbor and reconciliation. Instead, it is human nature as usual and the purge continues.
Example B) If you read Roman history you find out that "Donatives" were a part of succession and also used to bolster the popularity of sitting Emperors. "Donatives" refers to bonus money promised to the soldiers who guarded Rome in return for loyalty to the new Emperor. If you didn't offer enough you could find yourself chopped to bits with the army supporting someone who promised more. At other times, Emperors declared weeks of "games." Often included in these celebratory times were parades where the Emperor rode through the streets followed by people throwing coins into the crowd, what we might call "direct payment" today. We have EBT cards so no need for parades. The gold came from government coffers. Last week, liberal factions were upset that the $1,400 Donative proposed by incoming President Biden was not enough. People with student loans are looking for a debt forgiveness Donative. Those way behind in rent and mortgage payments want a forgiveness Donative. Companies most impacted by the virus are looking for their own Donative. The Roman government could not create money out of thin air. They had to pay in gold and silver with gold preferred. That money came from conquering and looting ever more distant neighbors and ever higher taxes. Check out the history of John the Cappadocian and taxes under Byzantine Emperor Justinian. If something happens in the credit markets making it too expensive to borrow where will the future Donative money come from? Look in the mirror. Again, it is good to know that the more things change, the more they remain the same.
Quote for the week - "I have a dream that my four little children will one day live in a nation where they will not be judged by the color of their skin, but by the content of their character." - Martin Luther King Jr.
Best of Luck
DBE