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 January 28th, 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.
Two weeks ago, going into the 17th, I thought the stock market would sell off a bit. The Dow Jones Industrials fell 1,394 points over the next three sessions then came roaring back the following week The NASDAQ pulled back for two days then steam rolled higher and the S&P 500, weighted heavily by the top NASDAQ stocks did the same. Here is some of the data that has traders so bullish on stocks.
Industrial Production and Capacity Utilization both fell last month.
Retail sales were down for a second month. Before the numbers, analysts were talking about the resiliency of the consumer and were surprised by the decline. Producer prices eased on a month over month basis. Given the recent weakness in all kinds of statistics the drop was expected. Around 50% of it was due to lower gasoline prices.
Housing starts and applications for building permits both fell again. The median price of Existing Home Sales fell a bit with bears on the sector predicting an acceleration to the down side.
The Conference Board's measure of leading indicators fell sharply, approaching levels seen in previous economic contractions. The raw Durable Goods Orders number came in at plus 5.6%, a decent reading. When orders for new planes from Boeing are stripped out the net is a decline of 0.1%
The Fourth Quarter Domestic Product came in at 2.9%. Within the statistics that make up GDP is a reading of Final Sales to Domestic Purchasers. Consumer spending makes up 70% of economic activity. The number was barely positive. Personal Consumption Expenditures, a measure of prices paid by consumers fell month over month. Inflationary pressures are easing as the economy slows. How many of the ten charts above equate to great news for future corporate earnings?
The red line on the left side chart shows the current slope of the yield curve in Treasury Bills, Notes and Bonds. The short end of the curve rose slightly. The middle maturities fell a bit while the longest duration bonds were flat. The stock market is pricing in continued good times for corporate profits. The bond market is predicting much slower economic activity in 2024. The chart shows the rate paid by the U.S. Treasury to borrow money for five years. A year ago they were able to borrow for 1.4%. This week they paid 3.614%. On shorter term paper the rate went from a fraction of one percent to more than four hundreds times that level. Governments around the world (and consumers) have been able to borrow and spend much more money over the last decade because the interest rate carrying cost was negligible and even negative at times. If rates stay at current levels the increased interest costs will be budget killers. Over the last decade economists wrote extensively about Central Bank interference in sovereign debt markets. In Japan the Bank of Japan owns most of the bonds (loans to the government) issued by their Treasury. In Europe the European Central Bank bought trillions of Euros worth of debt from member countries to keep interest rates from rising. In the U.S. the Fed did the same. Economists worried about who would lend (buy bills, notes and bonds) our government money once the Fed stopped QE that created demand for billions of Dollars worth of bonds every month. Some predicted that once the Fed stopped buying, our bond market would collapse. Over the last month our Treasury borrowed tens of billions of dollars at a time by auctioning off debt instruments of various maturities. On the right are some statistics from last week's 5 year note auction. The green line tracks the percent bought by non-U. S. entities referred to as Indirects. In the last month, foreign money accounted for most of the U.S. debt purchases. Why? Analysts say that our rates are attractive relative to Euro and Yen rates. They also see these purchases as a sign that investors think inflation is coming down and that rates will be lower next year. I worry about another reason for foreign buying. In the mid-1920s when the world was on the gold standard, wealth from Europe flowed into the U.S. in the form of gold. Smart money on the Continent knew that the War to End all Wars was just an intermission and they wanted their gold in a safer geographical area. Martin Armstrong (armstrongeconomics.com) tracks capital flows and its history. He writes that those in the know always move their money before they act. I worry that we are seeing the flow of wealth from escalating conflict in Europe because people in the know are afraid of what is going to happen there next month.
Stock market traders couldn't care less about the bad economic numbers or the possibility of escalating conflict in Europe or elsewhere around the world. On the left is a graph of the daily closing price for the S&P 500 with a 50 day and 200 day moving average. The market cycled from trading well below both to bettering them. If the rally continues the 50 day will cross the 200 day. Traders see this as a very bullish event. Analysts who track the intensity of buying relative to historical trends say that the behavior of the market is typical of bull markets with higher prices six and twelve months later almost every time. The broad recovery is world wide with markets in almost every country cycling from extreme pessimism to positive trends. If you follow these kinds of statistics you ignore bad data on the economy and buy everything. On the right is a graph of the closing price of the S&P 500 and an RSI momentum oscillator. Going into the weekend the market was close to "over bought." During bull markets an over bought reading results in a short consolidation before higher prices. Since the top last year, stocks sold off after high RSI readings. The behavior of stocks over the next couple of weeks will give us some insight into the character of our current market.
In early January I included a five year graph of Apple with a slow stochastic oscillator as shown above in the updated version. At the time, the oscillator was at the bottom of its range. I wrote that in past cycles this marked a low for the stock. Apple has the largest weighting in the S&P 500 (7.4%) and a number of other market measurements so its price action has an oversized effect on most stock market metrics. On the right is a two year chart of the same data. The recent dramatic surge moved the stochastic oscillator from deeply over sold to over bought on the two year chart. Note that during the June 2022 run up , the oscillator stayed glued to its upper boundary while the stock continued higher so not all high readings result in a pull back.
In the last update I included graphs of a couple of meme stocks. They came to life in early January. In the past, the market pulled back after echo booms of the original meme craze. That was one of the reasons I expected a sell off going into January 17th. Last week, another echo boom, gamma driven rallies returned. In 2020 and 2021 the volume of stock options trading exploded with traders buying billions of Dollars worth of out of the money call options on favorites. This forced dealers in these options to buy a percent of the underlying stock to hedge their exposure. In previous eras this would not move the market much but because of the huge volumes, the hedging buys were large enough to move the shares higher. When they moved higher toward the strike prices of heavily purchased options, the dealers had to increase their purchases of the underlying shares in what became a positive feedback loop unrelated to any economic fundamental in the underlying security. This strategy was focused on a small group of mega tech companies with Tesla being one of the favorites. Last week we saw the same thing. Above and to the left is a two year graph of Tesla with a slow stochastic oscillator which is at the upper end of its boundary. On the right is a one month chart of the stock with an RSI momentum oscillator. On Friday the stock gained 17.63 points or 11%. Earlier in the week it reported results for the last quarter that were not great but also not as bad as the Street's estimates. One commentator said that volume in Tesla options accounts for around 7% of the total volume of stock options traded on a daily basis. There was no fundamental news to account for an 11% one day gain. Other FANG stocks saw similar action but some of those gains were given back in the last hour of trading. Tesla has a 2.4% weighting in the S&P 500
Last week, Discover Financial, owners of the Discover Credit Card and American Express both issued financial results for the fourth quarter. Discover lends money at high rates to less credit worthy borrowers. They increased their anticipated write off rate to 3.9% based on expected delinquencies. The stock sold off on the news but recovered later in the week as optimism towards everything rose . In past updates I included pictures showing the surge in credit card borrowing, increasing interest rates, the drop in savings and decline in inflation adjusted income for most Americans. The combination of those four factors should result in higher rates of non-payments for credit card issuers and a general slow down in consumer spending. The stock market is ignoring it and predicting better times ahead.
American Express had great results. I use an Am Ex card for my travel expenses as do many business people. If you read their comments you found that they are also worried about the economy. Their revenues and profits were higher because they issued a lot of new cards last year. They are seeing their spend per card decrease in some areas such as spending for advertising on Facebook and Google by small businesses. They are raising their standards for new cards, excluding would be card applicants who were able to qualify for cards last year and they are also raising their loss reserves as are most financial institutions. In the last update I mentioned that Goldman Sachs was likely to report disappointing results partly due to their move into credit card lending. It proved to be an accurate prediction.
The NASDAQ 100 was January's big winner because of its 11.8% weighting in both Apple and Microsoft. Tesla has a 3.24% chunk of the index. It still lags the Dow Jones Industrial Average that includes more basic industry and materials stocks. There is a general belief that "re-shoring" will be the macro trend over the next five years with big money spent on plant, equipment and the infrastructure surrounding it.
Mid-Cap and Small-Cap measurements broke their trends of lower highs.
To the left is a daily bar chart of the NYSE Composite that includes all stocks traded on the NYSE. From the June lows it is possible to label the up, down, up pattern as a text book 3,3,5 upward correction in a bear market that is finishing with another sell off to follow. This pattern features an a,b,c up, an a,b,c down to the previous lows or slightly below the original low then a five wave rally that typically exceeds the first a,b,c high. Given the Street's extreme bullish outlook and the emergence of meme stocks a couple of weeks ago and gamma induced price spikes last week, along with short term over bought conditions it is something to watch for next week. A sell off below the "4" point would be the first warning that something is wrong.
Crude oil is not that far off of its recent lows. As with stocks, traders who track moving averages and momentum say that the way it rallied since December usually results in higher prices over the next year. It ended on a sour note Friday, hitting $82.48 then closing at 79.42. Over the last two weeks analysts on financial TV consistently predicted higher prices because China is reopening. During that time it traded sideways. Crude Oil inventories in private storage in the U.S. are 3% above the five year average for this time of the year as of a couple of weeks ago. Gasoline is 7% below and distillates are back to 20% below! February is usually a strong month for gasoline prices. With gasoline, diesel, jet kerosene and heating oil doing better than crude, crack spreads which are the difference between the cost of crude and the profit from gasoline and distillates, are widening which benefits oil refining companies. On the right is a graph of the daily closing price of Exxon and WTI Crude. Lately they diverged with Exxon and other majors in the oil patch rallying to new highs while crude sold off. Chevron had blow out earnings last week and analysts expect the same for Exxon. If the great China reopening does not work out and crude oil continues to fall, these stocks could be looking at peak earnings this quarter.
The left side chart tracks the daily performance of gold versus the S&P 500 but it does not include stock dividends so it overstates gold's performance. Over the last couple of months gold did well versus stocks. On the right is a graph of the weekly closing price of gold in NY and an RSI momentum oscillator below. For the last few weeks the oscillator has been above .80. In past cycles this was not a good time to be a buyer.
Gold did little over the last two weeks and silver is trading around levels seen in early December. Bulls will say that both markets are consolidating for another push higher. Given the level of the RSI reading on the weekly graph of gold, any pop up is likely to be short lived and the more probable direction is down.
Over the last two weeks there were numerous articles in the financial press about Saudi Arabia accepting other currencies aside from the Dollar as payment for oil. According to these writers this means the end of the Dollar as the world's reserve currency. At the same time, as detailed above, overseas wealth was panic buying U.S. Treasury obligations. On the left is a chart of the daily closing value of the U.S. Dollar Index and an RSI oscillator below. Over the last five trading sessions the Dollar made little progress on the downside and the oscillator is sitting at the low end of its range. In the past, this was not a good time to be ultra bearish on the Dollar. On the right is a graph showing the recent correlation between a weak Dollar and higher gold prices. If the Dollar recovers it will be a head wind for gold and silver.
Platinum and palladium ended the week on a down note with palladium having one of its worst weeks in a year. Palladium's most visible use is in catalytic converters for cars and car sales are down. On top of that, governments around the world are paying consumers to abandon internal combustion vehicles. Electric cars have no need for catalytic converters. Platinum sold off which is surprising since lately it moved in sync with industrial and materials stocks. One would think that with the China reopening theme playing out in other areas of the market, platinum would do better.
Copper traders believe in the China story and we are in a seasonally strong time of the year for the metal. If oil can't perk up over the next week, copper traders are likely to take some profits, particularly if the stock market pulls back.
Above are two ETFs that track corn and wheat prices. There are media reports of food shortages around the world. So far it is not reflected in corn and wheat prices. Trader sentiment on wheat went from wildly bullish last summer to extremely bearish now. Given the probability of higher intensity fighting in Ukraine and possibly Russia, two major wheat producing countries, the extreme pessimism surrounding wheat prices could be misplaced.
Every Thursday morning the government releases the data on state by state new claims for unemployment. Despite dozens of companies announcing major layoffs, new claims for unemployment are exceedingly low, falling below 200,000 recently while the number for continuing claims is rising. The weekly claims number is often used to support the "soft landing" theory that justifies higher stock market prices. On the left is a graph showing the data from two weeks ago. On the right is last weeks data. Bars on the left side of the graph indicate a drop in claims while bars to the right of the red line are increases. Analysts looking at both weeks point out that New York and then California were big outliers and that these are most likely due to reporting errors that at some time will catch up to reality. An increase in jobless claims will be seen as bearish by analysts worried about economic fundamentals and corporate earnings. Stock market bulls will welcome the layoffs just as they did for several companies last week. They will say that it means a Fed pivot is near and that these companies are improving their bottom lines.
Best Guesses -
Stocks - All the momentum studies and correlations with historical behavior point towards higher prices. Most of the economic data correlates to periods of recession, lower corporate earnings and bear markets. Going into the weekend, the market is somewhat overbought on the oscillators and the return to gamma spikes came near the peak of previous cycles. Better to wait it out for now, especially given the purely "chart mysticism" count on the NYSE Composite.
Bonds - Foreign money is panic buying U.S. debt. If the Dollar perks up, buyers from other currency blocks will have a 2fer where they get a decent yield and gain in exchange rates too. Longer term, the world is cranking up for war which in the past always coincided with higher inflation and deficit spending. It is just a question of time before sovereign debt loses its appeal.
U.S. Dollar - Very oversold and close to a bounce.
Gold and Silver - As much as I love these metals, the high RSI on the weekly chart and the likelihood of a Dollar rally have me staying away from them for now.
Oil and other commodities - The great China reopening story is working for some commodities but not for others. If oil sells off again next week it will be evidence that the China story is more hype than reality.
Best of Luck
DBE