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 25th, 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.

For the last couple of months optimism toward the stock market increased with some measurements approaching record levels. To the right is a graph from Sentimentrader.com. The blue line measures the number of opening buy transactions in call options versus put options. Speculators buy call options when they think the market will go up at an accelerating rate. The buy put options when they think it will decline. Last week the measurement reached levels not seen since the top of the dot.com bubble 20 years ago. This is a one in a generation kind of reading.

Last time I also mentioned that the following weekend marked a Martin Armstrong Economic Confidence Model change date and that "things tend to happen" around these dates. Who thought that it would be a virus in China? It reminds me of the last scene in either of the War of the Worlds movies where the aliens are stopped not by the best weapons of man kind but by microbes.

Do markets have to reverse when there is excessive optimism? This one experienced such optimism for two and a half months and kept going but usually when you see a spike in confidence of this type, most of the trading gains from the time period of high optimism are wiped out over the next months or year.

Above are stock market charts from two memorable January peaks. On the left is 1987. As with this year, stocks moved steadily higher from the fall of 1986 into the first weeks of 1987. Optimism reigned and more cautious people were worried about too much belief in higher prices. One day the stock market opened higher and ran up 84 points then reversed and closed lower on the day. It was the equivalent of a 1,000 point swing today. Everyone thought it was a major top. Instead, it was just a one day jolt. You can see what happened. Eventually the gains were wiped out by the October crash of that year. On the right is the January of 2018. The week of Davos marked the top. As with this year, sentiment measures were very elevated. Tax cuts were in place, companies were giving workers raises and everything pointed to a brighter future. The market sold off, wiping out all the gains going back to October. By early next week we will know more about this years action.

The major averages all reversed last week. The Dow Jones Industrial Average hit its high the week before thanks to Boeing. Topping right on an Armstrong turning point is not a good sign. The Russell 2000 never got to new highs. I drew in a blue line on the chart of the NASDAQ 100. Traders will be watching the various up trend lines to see if the market breaks them. They will also be watching the area of the blue line on the NASDAQ 100 for support.

Apple is the emotional leader of this bull market. It actually made new highs on Friday as the rest of the market sold off. It ended the day within the trading range of the last few days. Some portfolio managers might see Apple as a "flight to safety" play thinking that its billions in cash and exceptional products will protect it from a big sell off. If the selling accelerates into next week like the 2018 January, Apple will give in to the malaise. Microsoft is also a leader. It took out the last four days of gains on Friday. On a larger sell off traders will be watching the 158 zone for support.

What else looks vulnerable in a correction aside from technology? Two of the SPDR ETFs look ripe for a pull back. Both XLP and XLY show contracting triangle forms followed by spurts to new highs. Usually these kinds of patterns are near market tops.

On the left is TLT, an ETF that tracks longer dated (20 year plus) Treasury Bonds. From its high in August it traced out a back and forth pattern. Recently Treasury Bonds got a bid that grew stronger as the Dow Jones then the other indicies topped. Last week December's Leading Indicators were published and they came out slightly negative, something that bond buyers like. On the right is LQD, an ETF that tracks longer dated corporate bonds. Investors are piling into these securities despite the current low returns. Whenever I see wealth concentrated in a certain sector and especially in a sub-set of that sector I worry that it is on an unsustainable trajectory.

JNK is an ETF that tracks "high yield' or Junk Bonds. The last update noted that Credit Default Swaps on Junk Bonds, a form of insurance against default, were at record lows reflecting extreme confidence in the economic future of the issuers of these bonds. Weakness in the stock market burst the bubble for now. On the right is XLU an ETF that tracks the utilities sector. Investors buy utilities for dividend yield and as the price goes up, current yield for new buyers goes down. Like LQD, investors can't get enough of these stocks. Have you ever seen a chart like the one of XLU that was not headed for major trouble?

Let's look at another potential pattern for stocks going forward. Above I show the Dow Jones Industrial Average as having completed a five wave pattern, indicating that it's up move is over. Along with it are two January correction scenarios, one a quick pull back followed by more up side and the second, the 2018 drubbing that quickly erased months of gains. I just looked at The Drudge Report. It looks like the virus is spreading so I am leaning more toward a 2018 kind of scenario.

It could also be that the pattern drawn in to the left on the NASDAQ 100 will play out. Sentiment extremes this year are close to those of the 2000 dot.com bubble market. In 2000 the Dow Jones Industrial Average hit its peak the week of January 14th, a similar time frame to this year's top. The NASDAQ Composite did not hit its final top until the week of March 10th. Note the a,b,c,d,e pattern between green dashed lines. I have found that often, when a market is moving higher out of one of these patterns, if forms five waves with the fourth wave being a smaller version of the previous contracting form. The five wave form language comes from R.N. Elliott who wrote extensively about stock market patterns. One of his guidelines is that most often, in a five wave move, the third wave will be the largest and most intense. The fifth will pull the last holdout in before a major top and usually will sport weaker internal statistics such as the slope of the move and the number of stocks advancing versus declining. For most large portfolios, the top of the third wave is when their value is the highest. A sell off below point 1 which was at the end of November, would tip the scales toward a larger decline right away.

When there is panic in the air investors buy gold. Over the last month the bears could not get it below $1,540. On Friday I noticed that downward surges in stocks coincided with upward pushes in gold. Clearly, gold traders are thinking that what is bad for stocks and the economy has to be good for gold. As long as either the January 2018 or the alternative shown above for a coming wave 4 in the NASDAQ play out, gold should get a bid next week.

On the left is a picture from the Sentimentrader.com web site. It shows the positioning of hedgers in the gold futures market. They are at record short levels on gold futures with the other side, the buy side owned by speculators. In the past you did not want to be a buyer when the positioning was this way. It was always in the range of a major high in the metal. On the right is NUGT, a leveraged ETF on gold and silver mining stocks. Buyers of these equities were burned in past cycles and are showing a reluctance to follow the metal. If gold opens higher next week there could be a new generation of investors who will discover these stocks and give them a pop. Remember, the gold rally is likely to end at the same time as a low in stocks.

If stocks sell off and gold rallies, will silver follow gold or will investors be more worried about its industrial demand and stick with gold? For five years the net movement has been small relative to its previous highs. Fans of the metal say that it is "bottoming." One investor's bottoming is another investors "consolidating before another drop." Gold is a better panic metal than silver.

Palladium continued its parabolic run but stalled along with the stock market last week. On some days the difference between the high and low in palladium futures was more than $100 an ounce. My head trader (at Sabin Metal Corp., a major player in the physical market for platinum and palladium) told me that at times, large dealers are declining to make a market in the metal because of the volatility. Without the liquidity provided by major players, small orders can push the price up or down in large gaps. It is my experience that when a market has a big run and the intra-day trading range expands greatly, you are close to a top. Also, palladium seems to be greatly influenced by the stock market. If stocks slide a bit, this metal could sell off a lot! On the right is a chart from Sentimentrader.com showing the positioning of hedgers in the platinum futures market. As with gold they are at record short levels. On the other side are commodity funds and speculators. In past markets when there was such positioning it was time to sell.

DBA is an ETF that tracks a basket of agricultural commodities. Long time readers will remember that last spring I started writing about the coming solar minimum and bad crop growing weather around the world. At the time, hedgers were accumulating futures contracts on corn, beans, coffee etc. A few months ago the talk about the coming solar minimum, colder weather and NASA graphs showing the predicted cycle hit the main stream press. The China deal came through with a promise of future purchases of American crops. Speculators bought into agriculture and crops. On the right is another Sentimentrader graph showing the current positioning of hedgers in agricultural futures. The flipped from last summer and now hold large short positions, the opposite of speculators. With 57 million people in China under quarantine, buying U.S. crops is not going to be the most pressing priority. I will buy DBA again on a significant pull back.

Two parting thoughts - In the press they say that business are shutting down in China to avoid the spread of the virus. Part of the Starbucks story is its popularity in China. If the virus is spotted in a neighborhood near you are you going to stand in line with people around you coughing and blowing their noses for a $5 specialty coffee? How about sitting on an airplane for a few hours in cramped conditions with everyone wearing virus masks? Oil took a hit last week like many commodities with investors worried about the viral disruption to economic growth an energy demand. Energy stocks also sold off. The sentiment toward energy stocks has been extremely negative for months and many of the big names are selling at discounts to their traditional value because institutions have given in to environmental pressure groups. My guess is that we are weeks away from a great buying point for this sector and their high dividend paying shares.

Strategy for the next two weeks - I feel very badly for what they are going through in China. Let's hope they can stop the spread of this bug. If there is panic selling in the U.S. next week I expect the decline to be quick as in the 2018 market. If the pattern is a wave 4 as in the big NASDAQ 100 graph then the first leg down will be the largest and the quickest. The decline could be finished within a week or two. Gold and bonds will be the winners but my guess is that their gains will be reversed, especially with gold since speculators and funds are loaded up on gold futures contracts. A low in stocks could be a major high in the precious metals. Bonds are in the same shape. Investors are piling into corporate bonds and utility stocks in a panic type way. Usually this signals a pending top.

Hold on to your hat! The next two weeks will be active.

Best of Luck

DBE