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 15th, 2019
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.
Two weeks ago, worry was increasing in the financial world. Money was flowed into defensive plays such as Bonds and Gold. Pessimism toward stocks was at levels high enough to warn of some kind of low. It happened on the 3rd of June and the rally lasted 8 days. There is a narrative in the investment world that goes something like this - Unemployment is below 4%. The economy is humming along. But, smart money gets out while the getting out is good. With everything at peak readings there is only one way to go and that is down. The China trade war will eventually catch up to us in the form of higher prices, putting pressure on an already over extended consumer. The Fed will likely lower short term interest rates making our Dollar less attractive as a place to store wealth. Better to sell now and move to defensive assets and things that go up when the Dollar declines like gold. Yes, out best days are over. Time to cash out.
On top of pessimism over equities and the Dollar, Iran had to mine a couple of tankers! This combination of worries was enough to get investors interested in gold. It rallied back to a trend line it touched twice before. The high was early Friday morning. At 8:30 NY time a report on last month's retail sales in the U.S. was stronger than anticipated. It went against the "things have peaked" narrative. Both bonds and gold declined and gold closed near its low for the day. This kind of short term action could mean that the move to defensive investments peaked.
Bulls will point out that often, when a market is moving above a well documented trend line it will trade sideways for a few sessions, trading on both sides of the line before moving higher.
Traders who do not trust gold will see the chart on the left side and point out that last week's thrust up could be the final leg of a corrective pattern in a down market that started in December of 2015. Bulls will think of the graph on the right and say that even if we pull back a bit it will be the finishing touch on a consolidation pattern that leads to a thrust toward $1,500!
On the left is a picture of the daily closing price of gold in NY and a simple RSI momentum oscillator below. On the right is the same thing priced in Euros. Note that the RSI reading is around the .80 area on both charts. In past markets this high a reading tended to occur near short term tops. That does not necessarily mean that the metal cannot go higher. It is telling traders that a good sized move already took place and if you buy, your probability of making money on the up side is limited.
So far, silver is under performing relative to gold. In the last two weeks it got above $15.00 an ounce five times yet failed to close above $15.00 on any day. Two days of closing above $15.00 an ounce would tell me that sellers in this price range are exhausted and a higher range is coming.
My assumption was that palladium made an initial sell off and was correcting before another declining phase. The price pattern following its dip below $1,300 fits nicely into the form of a flat correction in a down market. I labeled the legs of the form in red letters. If reality follows art then we are very close to a resumption of the sell off.
On the left is a weekly graph of copper prices. On the right is a chart of DBB, an ETF that tracks a basket of base metals. These metals saw their glory days when China was putting all its effort into building its infrastructure. Copper in particular rose above $4.00 a pound. I read analysts who write about how smart China was to put a generation of buildings, roads, trains and airports in place. When you look at the prices they paid for commodities you see that they paid top dollar for everything! How smart is that? Since that era, copper and base metals traded sideways. Everyone thinks that the US could be topping out too so they are bearish on base metals. Copper is in the middle of its range and so is DBB. Things can't be that bad.
On the left is TLT, an ETF that tracks longer duration government bonds. On the right is a graph of LQD that follows the corporate bond market. The bond mania is sucking record amounts of wealth into bonds of all types, similar to the irresistibility of dot.com companies in the late 90s. Investors, both professional and amateur are convinced that their money is safe while invested in long term loans to governments and businesses with a current coupon below 3%. I believe that it was Woody Hayes, legendary football coach at Ohio State who said that when you pass the ball, it can have three outcomes and two of them are bad. (Interception by the other team, incompletion for no gain or a completed pass for a gain). Given the 66% odds of something bad happening he preferred to not pass the ball. When you lend money (buy a bond), getting paid your interest and repaid your principal is the best that can happen. Sometimes, if rates drop, the value of your locked in loan can go up and you can sell it for a capital gain. Rates are so low now that it is doubtful that this will happen. In fact, the opposite is likely. Anything else will lose you money - defaults, restructuring, currency devaluation etc. Right now we are in Woody Hayes world where lending money at these low rates has a low probability of ending well.
This chart from the Barchart.com web site shows the last month's trading for September T bond Futures. Positive sentiment is through the roof on Treasury bonds meaning that investors are convinced that longer term interest rates are headed lower and bonds higher. When sentiment becomes this lopsided a market is usually close to a fall. A break of the 153 area that lasts for more than a day will be the first tip off that things are reversing. Flows into bonds were huge over the last two months. It will not take much of a decline to have billions sitting on a loss, setting up for some intense selling. This is a dangerous market.
Two weeks ago the stock market had the "smell" of an approaching low. Most of the commentary was bearish. Small traders were buying a lot of put options, a strategy that seeks to profit from a down market and individual investors were selling their mutual funds by the billions. We got a very healthy bounce starting on the 3rd of June. Defensive sectors led the way. Two are shown above. On the left is XLP, the consumer staples SPDR ETF. On the right is XLU, the utilities one. Most long term investors dream of buying when there is "blood in the streets" and things are selling off irrationally like last December. When you look at these charts, do you see that kind of action now or the opposite?
On the left is a daily chart of the NYSE Composite. The cumulative advance/decline line on the NYSE hit another high last week. This is usually not the kind of stuff you see when stocks are about to tank. I update this chart to remind myself that we are probably in some kind of a trading range market where analysts will be predicting much higher prices when we approach the upper end of the range and a new Great Depression when we get near the low end of the range. On the right is a 5 month chart of the Dow Jones Industrial Average. If you didn't know what stocks were doing and someone showed you charts of gold and the bond market you would guess that the stock market had gone to hell in a hand basket and that there were long lines at the unemployment offices. Instead we are around 900 points away from the all time high and there are help wanted signs everywhere.
Above I mentioned small traders buying put options to take advantage of a sell off. Here is a graph from the Sentimentrader.com web site showing what they are doing now. Even though stocks rallied over the last two weeks, small options speculators are convinced that the bottom is about to fall out and are positioning to profit from it. The blue line tracks their put option buying activity and the black line is the S&P 500. In past markets, when they were loading up on bearish strategies did it work out or did the market ignore them and go higher?
Answer - The market went higher and they lost money.
Sentimentrader.com also reports that long/short hedge funds are near the low end of their historical asset allocation to the stock market.
Above are two graphs of the S&P 500 from the Barchart.com web site. On the left is the last month's action showing the burst higher from June 3rd. On the right is the pattern from last week. The market hit its top price on Tuesday then backed off. The sideways pattern since then is giving few clues about direction. If we break below the range I will expect the 2850 area to be support as shown by the red horizontal line on the monthly chart. If instead, we break to new highs early next week I will treat the short term pattern as a contracting pennant or triangle form. In this case I will watch for a robust move above Tuesday's highs followed by a reversal and a couple of week of lower prices.
Last time I showed the rally in agricultural commodities and noted that higher grain prices were making front page news, a sign that there would likely be a pull back. We got a short term sell off then some higher prices. Sentiment went from "these things will never go up in price again" to "there is a crisis in the corn belt" very quickly. That means that more backing and filling is likely.
DBA is an ETF that tracks a basket of agricultural commodities. It has a chart similar to corn and wheat. I expect some consolidation in DBA also. Coffee got a bounce from very low prices. Anything under $1.00 a pound is very cheap compared to the price history of coffee. Current prices are a bargain.
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Longer term readers will remember that I was bearish on oil from around 64 a barrel. I certainly didn't think it would drop toward 50 so fast. When it was close to 67, analysts were talking about OPEC restricting supply, Libya, Venezuela and Russia. They were telling us to expect 80 dollars a barrel. Now, as we approach 50 they are saying that next month, supplies will swamp demand with lower prices being the result. If they were wrong at 66 why can we trust them now at 52? Obviously, no one know what is going on with the oil market. We do know that it is among the most over sold and unloved commodities and thanks to Sentimentrader.com we know that Heating Oil in particular is thought to be headed in only one direction and that is down. Speculators are loading up on shorts in Heating Oil while Commercials, people in the market who actually deal in physical heating oil, are buying up futures. On the right side is a chart of the typical seasonal pattern in heating oil (again, from Sentimentrader.com). Even though my heart says that oil and its products are going lower, my head tells me that the opposite is likely to take place.
Strategy for the next two weeks: Gold - Sentiment is very bullish and the RSI readings on the daily charts are too high for me to be long. The only thing that would convince me to buy again is if gold traded sideways in a "W" kind of pattern around the downward sloping trend line for a few weeks. That would be a classic form that leads to a break out to the up side. Stocks - Traders who are usually wrong when they load up on positions such as small options buyers, are still very sure that stocks are headed lower. That tells me to play from the long side. If we get a quick rally to the upside of a few hundred points early next week it would be a set up for a larger pull back. If instead, the market declines for the first couple of days I will look to go long stocks again. Bonds - There is a bond mania going on. The Dot.com mania lasted a while but collapsed. Picking the day of the top in bonds is impossible. Identifying the season is easier. Oil - We should be close to a good bounce. If we break $50 on the down side, it could be the set up for a decent rally.
Best of Luck,
DBE