Market Chaos - Across the Board

As suggested in the last posting, the market was in the process of topping.  I had anticipated a three-week test of the high but prices continued to overshoot for one more week before collapsing.  What has occurred since has shown some fundamental weaknesses in the system - and that is, too much debt.

Hardly any market instruments were spared any pain.  Stocks tanked while bonds soared, but then experienced extreme volatility.  Gold, considered to be the ultimate safe haven also gave up gains that took the metal past $1,700.  In my stock universe, 163 stocks declined while only 3 advanced.  83 stocks were below a -2 standard deviation on a 20-week average.  Statistically, there is only a 2.5% chance that a -2 reading may occur, in a normal environment.

Of the three stocks that rose, I'll add UPS to this posting.  It may rebound some 12 points from it's current 94 level before meeting serious trendline resistance.

On other positive notes, stocks and gold both held a .328% retracement level, generally indicating overall continued strength in both.  However the weekly stochastic indicators point to lower prices that might continue for some time.

In the SPX weekly price chart, we can also see that an important trendline, a 250 week exponential moving average that offered support in the past, continued to hold.

While that is encouraging, one rule I generally follow is that when markets go to oversold levels on a weekly basis, I look to my Size indicator.  General rule here is to stay with the trend until Size reverses.  As can be seen here, Size is soaring and it may take some time for it to turn.

Another important indicator is the Stochastics.  Here is the 20-week stochastic reading

Rule of thumb here is that one would hold off on buying until stochastics begin rising from oversold levels.  Clearly we are headed down.

And while my Cycle indicator shows that we are at Cycle lows now, the cycle can work its way over many weeks/months before heading higher.

From a value perspective, I was adding SPY and some stock positions at the 250 week average.  My philosophy here is that if you can buy at or below a long term moving average, at worst, at some point you will at least get "regression to the mean" should prices continue lower.  

And while from my perspective, it was an appropriate opportunity for me to deploy some cash, one always has to consider that market wealth has been proven to come from proper asset allocation.  Other factors such as market time, stock selection and other techniques fall short of the benefits of correct asset allocation.  Another thought as markets gyrate is periodic rebalancing, enabling me to sell things at high levels and add money to areas that have underperformed.

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Bonds, while soaring to dizzying heights, later experienced extreme volatility as well perhaps showing signs of lack of market liquidity.    

While I normally look at TLT and use it in my positioning, I am posting here a shot of the 10 year interest rate.  We can see that rates fell below a major support line and fell all the way to 0.66% before rebounding to 0.95%.

At the time rates were plummeting, seemed that the general thought that rates would go to 0.  The Federal Reserve entered the picture adding boatloads of additional liquidity.  While some commentary suggested that money was not going to create a vaccine for the current health threat, there may be other market stresses that are being ignored.  Many factors are causing stresses to the dollar supply and there appears to be a dollar shortage.  While don't have expertise in this area, my readings have shown that stresses in the oil market, as oil has sold off to $30 a barrel, have been one cause of concern.  

The DXY chart shows a big surge of some 3% this past week in the dollar.  But it's important to note that the long term trend is down and like the SPX in my last post, DXY is showing a similar three-week test of the highs, the failure leads to sell offs.  With lower interest rates continuing and massive amounts of liquidity, in my mind, the dollar is worthless.  Yet in the mix of world-wide fiat currencies, it is the "cleanest shirt in the laundry bag" so to speak.  Yet, it remains troubling to go to cash as it appears that the Fed may be "monetizing debt."  One would think that massive inflation is on the horizon.  But how can we protect against this?  I have no clue at this point.

I had, as many others, thought that gold would be the ultimate "safe haven."  

But like everything else, gold took a hit this week.  The only positive is that it held the .318 retracement level.

One concern is that we appear to have completed a 5-wave up leg.  It's clear to see from September 2018 to recently, 5 well defined waves, three up and two down.  Many gold bears contend that this was merely part of a correction with gold destined to drop below 1,000. 

My Cycle chart offers no guidance other than that price is headed lower.  There are no other examples of the steep falling off of a cliff that we see in this chart.  One has to go with the Stochastics that are headed down in a more well-defined cycle.

As everything is going down, the general thought is deflation.  That is the worst news for the Fed, governments and corporations as the key way to get out of debt is to inflate it away.  This is not happening.  One can expect the Fed to be pumping more and more money into the system.  And while that should bode well for precious metals, there has been little logic to the metals market.  

A big cause of this deflation is OIL!

Oil prices dropped significantly as Russia and Saudi Arabia disagreed on production cuts.  Some have commented that some intent might have been to try to destroy the US Shale Oil industry which relies on higher prices to survive.  

Years ago, I had thought that the shale industry would be toast as they needed prices from $80 - $100 to survive.  Yet news of massive debt defaults in the industry never crossed my desk.  It had been mentioned that the industry gained efficiencies and in the end, Zombie, debt-ridden corporations can ride things out indefinitely when interest rates are near 0% and the government is intent on maintaining the industry.  I have heard that President Trump is taking advantage of the low oil prices to fill up the strategic reserves.  While I don't intend to be political, Kudos to the president for taking this action.  I recall when President Bush was adding to the strategic reserves, it was when oil was at $140 a barrel.  

Similarly, oil stocks have been "clubbed . . ."  You probably know how the rest of that cliché goes.

I had been buying some oil stocks in this decline.  Timing wasn't exactly spot on but seeing what I had considered to be quality companies going for well under what I had hoped to buy them at previously prompted me to take action.  

When I ran a derivatives department years ago, I mandated that my traders NEVER short oil.  Just too explosive a market to play with in my mind.  For the long term, it seemed like a good value proposition.  On the environmental front, I expect that companies will gravitate to clean energy as many have already been doing.  I don't think that the oil industry will go away.

Finally, on my stocks list, I mentioned that only three stocks were up in my universe.  

I took a look at UPS.  Don't know the fundamentals but I assume cargo continues to fly.

Looks to me that a bounce to the trendline could be possible.  Beyond that, one has to see how this market shake-out proceeds.

It rebounded nicely on Friday rising nearly 10% to close the week out with a slight gain.  Still at these levels, it appears to yield better than 4% on the dividend front.  Suppose that trying to buy dividends is also dicey (I had bought some OXY last week - ouch!!)  But what else can we do?  I don't have any answers.

In the end, the key is to stay diversified.  Again, our wealth is not accumulated due to market timing or stock selection, but asset allocation.  I'll try to dig up my presentations on this and add it to the blog site.  I'll also plan to add the risk assessment questionnaire to help you determine your risk, along with model portfolios based on your risk level.

Jobs Data Delights All

STOCKS SURGE

The Bureau of Labor Statistics (BLS) reported employment gains far exceeding even the most bullish expectations Friday.  Preliminary numbers indicate that payroll employment increased by 287,000 in June.  US stocks climbed to highs on the news with the Standard and Poors 500 index closing at 2,129.90.

BONDS SURGE

US Bonds surged to all time highs Friday on BLS reports that the number of unemployed individuals in the US increased by 347,000.  The Unemployment Rate advanced 0.2% to 4.9%.

The 30 Year Bond Yield Index (TYX) closed at 21.10 (2.11%).  Levels not seen before.  Exchange Traded Fund (ETF) TLT, an easy way to trade bonds on the stock market, closed at an all time high of 143.60.

PRECIOUS METALS HIT MULTI-YEAR HIGHS

Not to be left out of the party, precious metals, although they sold off initially when the employment news was released, quickly reversed and closed at multi-year highs.

SLV, one of the ways to trade silver on the stock market,  ended the week at 19.22, up $0.48 or 2.6%.


All in all, most things did well with the exception of European and Latin American stocks and commodities (not including precious metals).

This all comes as no surprise.  As mentioned last week, the jobs number didn't really matter.  Central banks, unable to get any kind of inflation going, are desperate to stimulate the economies and continue to print more and more currencies in an effort to do so.  It's not really working but the extra added juice sure does some good stuff to the markets.

For a few years now, I've been accumulating physical gold and silver even as I watched prices fall, seemingly forever.  It's not easy for most people to look at physical things like precious metal bullion coins and not think of them in terms of their worth in dollars.  The trick in the understanding is to realize that since 2008/2009, the Federal Reserve has increased the money they have created from around $800 billion to over $4 trillion, nearly a five time increase.  Local banks, through the fractional reserve system, create additional multiples of this amount.  When you understand how much new money has been created and then consider that there is absolutely nothing that backs this currency, a prudent person would be thinking "I've got to turn this worthless currency into a hard asset as soon as I can."


A CHART TO THINK UPON

As I am always talking about gold and silver to people, the one thing I hear all the time is, what good is it?  You can't eat it.  They can't conceive that the US Dollar could be as vulnerable to devaluation as the Russian Ruble or the Mexican Peso.  The truth is, any paper currency is only worth what others accept it to be worth.  If a dollar crisis were to occur, something similar to what continues to be happening in Greece, one needs some form of money to transact daily business with.  Who knows how it can or will play out.

Throughout much of civilization, silver has been used as a currency and perhaps someday, it will again.  If it were today, and the stock market was priced in silver, this is how it would look.

So while the stock market may be going up and even making new all time highs, remember, when we are looking at price charts of the market, it is soaring based on purchases made with paper money that has no real value.  It was created from nothing, with no assets backing it up and is being used in unlimited quantities to keep pushing stock prices higher.  But the stock market, when priced in terms of something that has an intrinsic value, like silver, is in a Bear Market.


BONDS (TLT) PRICED IN GOLD (GLD)

Looking at bonds in terms of gold, this is breaking down as well.

Don't let surging markets influence your buying decisions, Central Bankers can create the illusion they wish to create.  If we do our homework, we can catch a glimpse of reality.

Market Rebounds

Stock markets surged this week, recovering from oversold conditions.  Silver and gold backed off from recent gains. 

Markets seem to still be under the whim of Central Banks, their actions and statements.  Many experts believe that the world-wide economy is nearing or actually in recession.  While the job reports continue to reflect increasing employment, doubt lingers regarding the quality of these jobs as well as seasonal adjustments, which add or subtract from the real numbers based on historical factors.

It's easy though to be convinced that economies are terrible and the markets have nowhere to go but down.  I, for one, have been seeing signs of deterioration all the way back to 2005 when pundits cheered the weakening economy since it led to lower interest rates and home refinancing and wealth harvesting was all the rage. 

This long term chart illustrates the 10 year interest rate.  Yes, over the past 10 years and actually, much much longer, interest rates have been falling.  These falling rates have added to market momentum but how much lower can rates fall?  And more than that, what do falling rates actually reflect? 

I left the financial planning/money management industry years ago when it was clear that markets were being manipulated and that there seemed to be no real place for individual investors in these markets.  Most cheered as they viewed their quarterly investment reports seeing that everything was going up.  But that means just one thing to me, and that's the flip side of this.  When things start falling, everything will be falling.  There will be no place to hide.  It's not rational that both stocks and bonds rally to their highs at the same time.  A strong economy will reflect high stock market prices but also, the demand for money will increase, causing interest rates to rise and bond prices to fall. 

When we see both investment areas at their highs, one has to ask, which market is telling the truth?  In the past, the sheer size of the bond market would prove that the bond market is the true indicator of what is happening.  Low interest rates and high bond prices reflect just one thing, weak economies and a lack of demand for money.

This chart shows the daily price of TLT, an ETF that allows the investor to trade the 20 year bond.  Observe what happened last week when the market was falling.  Bond prices surged even though they are already at very high price levels.  The spike we see shows that the US bond is the global catch-all of money. 

The upward trend of this instrument, to me, reflects either a flight to safety as many expect the stock markets to continue to decline, or a reversal of central bank policies and either a hold on the Federal Reserve raising interest rates any further, or the Fed eventually moving to Negative Interest Rates, similar to what other central banks around the world have been doing.  Bonds rise when interest rates fall.

So, where does this all put us with the stock market?  First of all, let's look at the long term chart.

Price continues to fall however at the end of last month, it appeared that we tested and held a previous low level.  The stochastics indicator, at the bottom of the chart, shows momentum is moving to the downside.  I've noted in the past that each time we touch the 40-month moving average, the moving average in this chart, the market has held support and rallied.  So for the long term, I still believe that it is prudent to buy at or below this trend line. 

Should SPY end the month up, it will appear that we have formed a monthly base.  That would be fairly compelling to be invested in this market.  I would also be looking at my various indicators to add support to this call.

On the weekly chart, we see support holding at the trendline, however, it appears that we are merely bouncing with some very strong resistance coming in a few points higher.

This chart, which illustrates momentum, is still rising.  The rule remains, as the momentum increases, stay with the trend, which on the weekly basis, remains down.  So this is a negative and a reason to be cautious.

On the daily chart, one could expect that prices will move to the neckline shown, a couple of points higher than the current level.  This will be important resistance.  On the surface, I would expect prices to fall from that level but how far it will fall is anyone's guess.  I'd still go with the 40 month moving average as support.

If you notice the 20-day moving average, it is now moving higher.  We will have to watch this more closely to identify a change in trend.

We identified, early on, this change in momentum.  I underlined the successful three day test of the low on the moving average change chart.  Yes, that was a significant turning point marker.  The average change in the moving average trend is up and breaking into positive territory. 

In summary, we need to see what happens at the 195 level, if that level provides strong resistance or not.  Then we see how price moves against the 20 day moving average, whether that will now provide support.  While next weekend doesn't quite market the end of the month, there will be just one more day left, Feb 29.  The monthly view may shed more light on where we will be moving for the long term.

And of course, watch for jaw-boning by the Fed or other central bankers, to get the game going again. 

Market Climb Continues

SPY continued it's upward climb this week despite a much stronger than expected Non Farm Payroll report that showed upwards of 270,000 jobs added to the labor force last month.  SPY closed at 210.04, up 2.11 (1%) on the week. 

Precious Metals collapsed nearly 5% on the news while TLT, a proxy for the long term bond, fell more than 3%.

SPY weekly price continues to ride the four week moving average higher, so it's hard to see a case for any downside correction at the moment. 

Over the past several weeks, we've been watching the weekly line chart and noticed that it was facing resistance at the head and shoulders neckline.  This neckline was breeched this week and now we are at a slightly higher resistance level, the line connecting weekly high closes.  As market patterns generally mirror up and down moves, it's not inconceivable to believe that should price break through this resistance line, it could rally to the 230 level.

At the moment though, I don't see this breakout as likely.

As mentioned previously, volatility, while still at high levels, has reversed and continues to weaken. 

Also, the weekly rate of change moving average chart continues to hold at the 0 line showing that the moving average has stopped advancing.

This shows me that on the weekly data, the market, while continuing to eke out small weekly gains, is losing steam. 

For me, the biggest kicker is the view of the monthly chart.

I always like to look for the three period test pattern.  September's monthly close was at 191.61.  We advanced in October and should we maintain current levels throughout November, it will be a perfect setup for a December test of the 191.61 low.  That would coincide well with a possible Federal Reserve Rate Hike, which is now becoming more widely expected.

My best guess is that a rate hike would be crushing for the markets, even a token hike. 

Currently, I have no positions in the market but will be looking for an opportunity to position myself for next month's potential three month test of the low.