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
April 13th, 2024
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.
Every couple of weeks there are economic statistics that get extra attention as their release date approaches and they are the focus of much commentary and predictions. Going into last week they were the Consumer Price Index and Producer Price Index. Stock market bulls were looking for lower inflation numbers. For anyone regularly visiting stores and gas stations it seemed unlikely that this would be the case. The data confirmed what most of us know and that is higher prices for things. Both the raw reading and the "Core" number that subtracts food and energy rose more than expected. Interest rates jumped on the news (bonds prices fell) and hopes for a Fed Funds rate cut in the next few months went out the window. Stocks hit the skids.
Over the last few months, inflation doves talked about the lag between actual rents and mortgage rates and the numbers that the Fed uses. They said that the current numbers are looking better and in coming months the Fed's numbers would reflect it. This month's reading came in at: shelter - 5.65% year over year. rent - 5.68% year over year. Now there are reports that rents are headed higher again in urban areas. In a move that confirmed this, Blackrock bought a company that owns dozens of multi-family rental units in the belief that rents are going higher. There are a number of graphs that measure year over year inflation rates and many look like the Shelter, Rent Inflation chart on the left showing a decline from high levels. While the rate of change might be slowing that does not mean that the prices we have to pay for things are going down. The right side chart shows the steady rise. One of the commentators I heard tried to minimize one of the components driving the CPI which was car insurance cost increases. But every family owns cars and most people don't have a lot of disposable income at the end of the month so any increase means less to spend on other things.
The stock and bond markets closely watched the Producer Price Index which came out a day after the CPI. It is reasoned that inflation shows up first in Producer Prices so it is a preview of CPI a month or two later. It came in at 2.1% year over year which was better than the 2.2% consensus. Then, analysts looked at the different components and found that the government included gasoline prices that were down by 3.6% when in reality they were up 6%! If the real number was used it would have added another 0.4% to Producer Prices, making the job the Biden administration is doing look worse. Later in the day I noticed that none of the financial news networks mentioned the fake gasoline prices. They stuck with the "better than expected" headline PPI numbers.
"Folks, I reduced the deficit!" How many times have you heard Joe Biden say this? If it was Trump or any other Republican the "fact checkers" would be out in force. The March deficit was $236 Billion, $40 Billion more than expected. 236 divided by 31 days in March equals $7.6129 Billion per day. The red dashed line on the right side graph shows the trajectory of this year's deficit compared to recent years. The two that were worse were during COVID. If the economy is great, as our current administration claims, why do we need to run a deficit of over $7.6 Billion per day? In my last update I featured a chart showing the relationship between government deficits and profit margins. The commentator who wrote the article from which the graph was from said that over time, profit margins are a function of consumer and government spending. Recent statistics show that consumers are pulling back on spending while the government increases it to keep the economy looking good. What happens to profit margins if the government can't borrow $7 billion a day?
The theory behind borrowing is that with the additional money you can generate more wealth in the future to cover the interest payments and repay the principal. Our leaders are always talking about government "investments." Using this word makes it sound like there will be a future payback to current borrowing. On the left is a yearly average of Federal Government tax receipts. After the Trump tax cuts the economy expanded and tax receipts hit records. Lately it subsided a bit. In the mean time, the borrowing chickens are coming home to roost. The right side chart shows the growth of interest expenses on the Federal deficit (red) relative to military spending and Social Security. It is just a question of time before the world balks at lending the U.S. money, especially for longer dated debt. On Wednesday there was a 10 year note auction that didn't go well. The bid to cover ratio fell to 2.335, below the average of 2.49. Foreign money bought 61.8% of the paper, below the average of 65.9%. Start watching stock market sectors that are most dependent on government spending such as healthcare. The most vulnerable parts (which seems untouchable right now) are subsidies for green initiatives. You can read just how much these are costing you, the tax payer and compare that to the benefits here - https://www.zerohedge.com/political/biggest-corporate-welfare-scam-all-time
Manufacturing data for last month showed a slight uptick but Factory Orders (right) fell. Last week, one of my favorite economists, Mohamed A. El-Erian was on Bloomberg. Often, he has a different take on things. The previous guest talked about how strong the economy is. Mohamed contradicted him. He said that if you listened to corporate earnings reports last fall, CEOs were talking about how strong the economy was while economists were worried about a recession. Lately, as more economists are talking about how great the economy is, business leaders are growing more and more cautious because they see demand for their products and services declining.
Last week's big winners were gold and silver!
Those of us who follow gold and silver also watch inflation adjusted interest rates and the U.S. Dollar. The left side graph shows gold and inflation adjusted rates in blue. The scale for the blue line is inverted so that when rates go higher the blue line goes down. The thinking behind the inversion is to show the correlation between the two, making it easy to see how gold usually mirrors what are referred to as "real" rates. On the right side graph the red line shows the path of the U.S. Dollar Index and again, the scale on the red line is inverted so that when the Dollar is stronger, the line goes down. The Dollar's direction and real rates are related because higher real rates in the U.S. relative to other currencies makes the Dollar more attractive. Gold ignored both real rates and the Dollar. Gold fans say that gold is "telling us" that something is breaking. That "something" could be war or our unsustainable deficit and interest payments on that debt or a nation adrift whose leaders are focused on the weather 100 years from now.
On the left is a chart of the weekly closing price of gold in NY with a simple RSI momentum oscillator. RSI readings above 0.80 are not that common and were near short term tops in the past. It could "be different this time" but if you were thinking of emptying your safe of the cash you have been hoarding and heading down to your local coin shop, know that buying when the weekly RSI is this high comes with more risk. Bulls will say that we made the classic breakout pattern with gold consolidating around the previous highs on the fourth attempt before blasting upward. The right side chart shows the last month's action along with a subjective labeling of the pattern. It could be that we finished a five wave up move following the breakout and will now correct the initial move. Bears will say that we simply saw a short covering episode and that the gravity from elevated real interest rates and a strong Dollar will pull prices down as they always have. Bulls will look for the breakout level to hold on any correction and prepare for more upside. Friday's trading action definitely looked like a short squeeze. If you bought near the top you ended the day down $90.
I rarely get feedback from readers. When I get negative feedback it is for two reasons. The first is that a liberal reader is bothered by one of my Unneeded Commentary sections. The second is that I am sometimes negative toward silver. For some reason this metal has a very emotional and almost religious following despite having disappointed its fans repeatedly. On the left is a graph of the weekly closing price of silver in NY, a 1 year moving average of the price and an oscillator (blue) showing the difference between its price and the one year moving average. Red ovals mark high points on the oscillator. We finished the week at the upper end. Bulls will say that we are in one of the dramatic up move phases where silver will catch up to gold and make new highs. On the right is a more cautious interpretation of the price action. It could be that silver is making a classic flat correction before breaking out to the upside. This would imply another dramatic and punishing sell-off before the big move up.
I started working for a Wall St. firm in 1980 and focused on commodities and options. Gold and silver had just finished spectacular runs to the upside but no one knew that it would take decades for them to repeat their performance, especially on an inflation adjusted basis. Silver is far below its inflation adjusted high from that era. Since then I have witnessed a number of rallies and failures. Near the peak of the rallies, analysts posted articles about "what gold is telling us." Others wrote complicated pieces analyzing inventories of physical gold versus outstanding gold loans and derivative positions, concluding that obligations to deliver physical were much greater than supply which would create a "super squeeze" to the upside. Immediately following the 1980 top there were multiple writers talking about Central Bank manipulation. So, when I see these kinds of articles I file them in the "indicating a possible high in the metals" file. David Stockman was writing articles in the late 80s on the coming disaster from our expanding deficit and continues to do so. Is it different this time? I think it is but I am still going to respect the oscillators and patterns. Some Central Banks are big buyers of gold, especially China. The U.S. weaponized Dollars in sanctioning Russia. If we seize Russian assets to fund Ukraine it will point even more Central Banks toward gold as opposed to buying U.S. debt obligations and as you can see from the above graphs of our ballooning deficit, we desperately need buyers. But, keep in mind that Central Banks have been terrible at timing highs and lows in most things just like ordinary investors. They decided to sell gold in the 1990s in the high $200 range and are now jumping on board at all time highs.
Above are charts of platinum and palladium with 200 day moving averages in red. Many trading programs consider a 200 day moving average to be the line between bull or bear markets. They look to buy when an item is above it. Does it always work? No. You can see from the platinum chart that it moved back and forth over the last few years. Palladium is still $50 below its 200 day as of Friday's close.
In past eras, when gold rallied, traders bought platinum and palladium too. Directly to the left is a chart of the weekly closing spot price of platinum in NY and the spread between platinum and gold in red. The green dashed line shows the point when they are equal in price which last happened more than a decade ago. Lately, platinum ignored gold but my guess is that this is a function of traders' fixation on stocks and bonds and ignorance of commodities. If the gold and silver rally continues it will be human nature to look for more interesting and complicated ways of trading the move. Eventually, the platinum/gold spread trade will come back in fashion. It could be as simple as this - You are at the club and by now, everyone is talking about their gold and silver positions. You then get to say, "I have a platinum/gold spread trade on." Wow. You are THE MAN! (or THE WOMAN!).
On the left is a five year graph of copper prices with a slow stochastic oscillator below. Commodities got a lot of mention over the last couple of weeks in the financial press. I started emphasizing grains in 1919 and 1920 and commodities in general last summer when long term cycles turned up on the group. If the mainstream media is jumping on board does that mean the rally is over? Hopefully we get just a correction. Often, a sentiment cycle follows the five wave upward move with a wave 1 up getting popular right before a pull back wave 2. Then the beginning of a wave three, larger rally pulls in the big money. A wave 4 correction has those who missed the big move looking to buy and a final wave five sucks in the last Dollar while those who bought earlier start to head toward the exits amid predictions of much higher prices that accompany a top. One thing I watch is the stock market and copper (right side) and commodities in general. A big pullback in stocks will dampen the appetite for industrial metals. Traders will assume that a sell-off in stocks means a slowing economy with less demand for energy and industrial metals.
Above are DBC, an ETF that tracks a broad basket of Commodities and DBB, one that focuses on Base Metals. Until last week, analysts were complaining that a real up move in gold is usually confirmed by an upward trend change in commodities in general and especially industrial metals. With both crossing above their 200 day moving averages the evidence for something going on in the world of commodities (and gold) builds. We need more than a few days above the average to change minds.
I just read that Iran hijacked a ship in the Strait of Hormuz. All week long energy traders were on edge anticipating an attack on Israel. On Friday, reports said that it would happen over the weekend and include over 100 ballistic missiles and dozens of drones. Despite almost certain military action in the Middle East, domestic crude oil, gasoline and heating oil prices are trading below highs hit after Russia's invasion of Ukraine. Oil stored in the U.S., aside from the Strategic Reserve is at around 2% below the five year average for this time of the year. Gasoline is 3% below and distillates are 5% below so there is no crisis here. The biggest worry about energy is from Democrats who see high pump prices as bad for their reelection. Ukraine is knocking out some Russian refinery capacity with drone attacks. This does not decrease the amount of crude oil on the market but it can affect the prices for gasoline and distillates. So far, gasoline prices are rising into summer driving season as they usually do and heating oil prices, the proxy for distillates such as diesel and jet kerosene, is near pre-Russian invasion levels. If these markets are sending a message, the moral of it is that the world's economy is a lot weaker than most analysts think it is!
As with gold and silver, the energy markets opened strongly on Friday with panic buying. May crude oil futures hit $87.67 then closed at $85.57, $2 below the high just like gold and silver that also hit the skids in the afternoon. If nothing happens over the weekend we could see more weakness next week. The slow stochastic oscillator on gasoline is at the high of its range so you could see some profit taking hit that market.
On the left is XLE, the big energy ETF, dominated by Exxon-Mobil, Chevron and a few others that drill, produce and refine. On the right is CRAK, an ETF focused on oil refineries. Note that the slow stochastic oscillator on both is way up there. I drew in pink ovals at a couple of the previous price ranges when the oscillator was this high. If the bombing starts anything can happen but the prices of energy patch companies are discounting possible destruction of oil fields and refining capacity in the Middle East and Russia. On Friday afternoon, both ETFs saw dramatic sell offs relative to their earlier prices. If nothing happens by Monday morning, you could see more downside follow through.
The green line on the upper left side chart shows interest rates on various U.S. Debt securities. The whole curve moved higher after the Consumer Price Index numbers on Wednesday which killed any hopes for a near term rate cut. The upper right graph shows the path of 10 and 30 year rates and we are solidly above levels that sparked panic stock market selling in the fall of 2022.
To the left is TLT, the most popular ETF tracking longer dated Treasury paper. The duration represented is around 26 years. If you ignore the news and only look at the charts you would see a good up move off of October's lows and a typical correction of that first move off the bottom. Given the negativity surrounding bonds and crushed expectations I would not be surprised to see them rally next week!
What would war do to interest rates? Inflation always goes up during periods of war. Supply chains are cut and all industrial materials used for weapons are hoarded. The Fed could try and freeze short term rates but if they did, our Dollar would collapse. Rates on U.S. obligations that traded freely would rise with investors demanding a higher payout to compensate them for inflation and the risk of us losing and the bonds becoming worthless.
Above and to the left is the U.S. Dollar Index. It spiked to the upside after the CPI report and the jump in short term interest rates. The Euro hit the skids and the Yen has been in the toilet for a while as the Bank of Japan holds on to uncompetitive short term interest rates. Worries over war also help the Dollar because we are an ocean away from where the fighting is likely to happen.
On the left is a six month chart of the Dow Jones Industrial Average. We closed last week at levels last seen in late January so everyone who bought a Dow Jones Index fund over the last two months is sitting on a loss. There are a lot of trading programs that use "swing" logic. A daily closing below the range of the previous day's trading makes a "daily swing high." A weekly close below the previous week's range forms a weekly swing high and a monthly close that is below the range of trading of the previous month makes a monthly swing high. Traders pay more attention to weekly and monthly swings. We have a couple of weeks to go but if we close the month at or below current levels we will easily form a monthly swing high and many trend following systems will tilt toward the down side. Note that the slow stochastic oscillator closed at the bottom of its range. Normally,one would expect a bounce but some of the nastiest sell offs took place when the market was "over sold" and didn't respond to over sold conditions. Most of the time (but not all the time) when stocks have a bad Friday they hit lower lows sometime early the next week. The right side chart shows the S&P 500, the world's most widely watched index. The oscillator is down there so there is reason for "buy the dip" traders who made money lately by buying any market weakness to give it a shot early next week. The red and green lines are popular moving averages that trend followers watch. The red is a 20 day, the upper green a 50 day and the lower green a 100 day. Bulls will argue that "the market" held its 50 day moving average and they will keep up the bullish drum beat until we fall below the 100 day then say their prayers hoping that the 200 day (not shown) holds.
On the left is the NASDAQ 100. It is not as over sold as the other averages and closed at its 50 day moving average. Recently, more NASDAQ Composite issues have been closing at 52 week lows so the broader reading of NASDAQ shares is more and more top heavy with fewer names participating. In past cycles this did not worked out well. On the right is the Russell 2000 small cap index. Over the last month I heard many pundits say that small caps were the place to invest now that the economy is recovering. The Russell closed at levels last seen in the middle of December. The oscillator is at the low end of its range, increasing the probability of a bounce. Note that we hit the 100 day moving average. A rally that fails and then falls below the average will have trend followers turning negative, especially if we take out the last three months range while doing so.
On the left is AIQ, an ETF that tracks companies involved in Artificial Intelligence. The red line is a running five day average of trading volume. On the right is SMH, an ETF that follows the chip sector along with a similar volume line. Old time analysts claimed that volume of trading was the fuel for stocks to rally. If this is true then fuel is dwindling in both ETFs. In the past I wrote that every country is funding more chip factories. Over the last two weeks our government announced big giveaways to Intel and Taiwan Semiconductor to build capacity. Samsung announced an expansion of their proposed factory. In a few years the world will be floating in chips and no one will be making any money. Then they will ask governments to subsidize them because they are strategic industries.
In the past I wrote that our markets were really all about NVDIA and Bitcoin, the two speculative bets of our time. NVDIA (left) looks like it made a five wave down move. If you are a fan of wave counting you look for an upward correction of the five down taking the stock back to the "4" level then another sell off. On the right is a graph of April Bitcoin futures. It looks like a sell off from recent highs, a sideways consolidation and the start of another selling phase.
Above are two basic industry stocks, Fastenal, a maker of nuts and bolts and JB Hunt, a big trucking firm. Over the last month Wall St. told us that we were in for a "no landing" and that the economy is only getting stronger. Investors bought cyclicals and manufacturing sectors. In the mean time, the Dow Jones Industrials did not do that well and last week, many of these companies hit the skids. Remember my comments above about the interview with Mohamed A. El-Erian. Company spokespeople are telling you that the economy, going into the second quarter is not as good as Wall St. is predicting. Remember, these are the same Wall St. people who were telling you that we would see 6 rate cuts in 2024 as inflation disappeared.
Best Guesses -
Stock Market -Last time I was looking for a sell off and we got it. If the market doesn't respond to "over sold" conditions by Tuesday then things will look bad. I suspect we will get a bounce but one that runs out of steam after a few days then breaks Friday's lows will discourage the buy the dip crowd and we could see some real damage going into May.
Bonds - Bonds are oversold and disliked enough for a bounce but it should just be temporary. War always brings inflation and higher interest rates as lending to anyone becomes more risky.
Dollar - We got the upside I was looking for. Now I anticipate a week or two of selling.
Gold and Silver - We got the obvious "breakout" in gold and good pop in silver. It looks like we finished a five up in gold. The text book perfect pattern would be for a pull back toward the breakout level followed by a strong rally. Silver could be making a less bullish pattern as shown by the weekly A,B,C graph above. Question: so what happens when a market "breaks out" from a long consolidation, spikes higher then falls apart, sell off below the breakout level and everyone loses money? Answer: The guys who raved about the breakout and told you to buy at any price because "this is only going higher," politely call it a "false breakout" then go about their business predicting other moves and collecting your subscription fee. It is at that point that you realize that most analyst (me included) are really telling you that "it could go up or it could go down." And you didn't need an analyst or a subscription to know that.
Other commodities -Over the last month we saw some upside action in things that have not looked good for a while. If recent lows hold then I am looking for more upside. Food is my favorite.
It is 1:40 Eastern Time on Saturday. No war - so far. If bombs start falling all predictions will be useless.
DBE