FROM JULY 21, 2017 Pivotal Events by Bob Hoye
Stock Markets
Preliminary to where we are now on this market, are the “Springboard Buys”. This “model” is designed to provide “Buys” in flat to rising trends. One was on November 3rd, generated by the slump going into the election. Then next one was on the correction into April. This was the base for our outlook for enough speculation to set a high at “around June”. This would be for high-flyers in NY, as well as for the 2 exchanges in Europe and London. Great bubbles as they have occurred in the latter two exchanges, have climaxed in May-June.
The NYSE has had the tendency to conclude great bull markets in September. Has this been a great bull market? Yes, and the one in global bonds has been the greatest bubble in history. Outstanding technical and sentiment readings have been accomplished at about the right time. Indicating the possibility of a significant top has been the Hindenburg signals. Can’t have a big decline without them. We calculate it on the NYSE and considering the possibility of a thrust into September, there could be another Hindenburg. London (EWU) set the highest Weekly RSI in a decade on the rally into mid-May. Europe (FEZ) accomplished a similar overbought into its high in early June. Both have accomplished the first part of the forecast—exuberance into June. The rest depends upon the usual changes in the credit markets to adversity that was likely to begin in June. This will be elaborated below.
Banks have been likely to rally with the initial steepening of the curve. But steepening as it continues could be indicating the end of the financial bubble. The BKX accomplished a big swing in the Daily RSI on the high of 98 two weeks ago. This compares to the high of 99 reached in March. Our interest in this sector is that the banks tend to lead the senior indexes at important highs. Credit conditions are turning away from supportive. Industrial commodities have been positive and could remain so into August.
Currencies
A headline in “The Week” says a lot: “The Most Unproductive Congress in 164 Years”. This is a Leftist site, but the observation could be valid. A majority in Parliament in England or Canada would have provided more consistent support for the leader who won a critical election. The situation compares to Reagan when his reform faced a hostile Democratic majority. It seems that the Republican Party needs to be reformed before the administration can fully attend to corrupt bureaucracies. Swamp-dwellers, on all sides, will fight any change. Indeed, hostility to reform is global.
Realization of systemic obstruction has been extending the decline in the US dollar. This is well after some technical excesses were registered. On the break below 95.5, we noted (June 28) that the next level of support was at the 92 to 93 level. Also, we thought that the Weekly RSI could provide support towards 30. It is now down to 32. The Canadian dollar has continued up to 79.5. There is resistance at the 80 level and the Weekly RSI is a little over 70, which compares with 71 reached with the high at 106 in 2011. Industrial commodities could continue firm into August, supporting the C$.
Credit Markets
It is always fascinating to watch a possible trend change breakout. In this sector, we have been expecting credit spreads to conclude a trend change, likely at “around June”. Spreads reached their best in registering technical excesses in March. Since then, the action was mainly sideways and the First Breakout on the trend change occurred on July 7th . The last time we focused on this was with the turn in 2015, when the First Breakout was in early-July. The Second occurred in the middle of August. The panic in crude oil and spreads climaxed in February 2016. Widening ran from 8.61% to 22.66%. In 2007, the First Breakout was in late-June and the Second was in late-July.
On the worst contraction since the 1930s, spreads widened from 4.15 percent to 44.29 (no typo) percent. In 2000, we kept track of spreads by hand on a page of quotes. In backtracking, the First Breakout occurred in mid-January and the Second in mid-March, right with the peak on the Nasdaq. In looking back, the reversal seems quick. In real time, it was slow (like now). In January 2000, our count on the months of curve inversion suggested speculation could conclude “around March”. The CCC spread widened from 13% to 25% in 2001. This time around, we are now watching for the Second Breakout, which could be associated with the end of the stock bull market. It is worth noting that at cyclical extremes in credit markets, the senior central bank has been unable to prevent the reversals. Without such reversals, central banking and policymaking would have become perfect. The long-sought goal of eliminating the business cycle will have been accomplished. Sigh. Until then, we will continue to watch for change.
The Treasury Curve began its reversal in June and is correcting now. The next phase of steepening could become serious as many players find they are on the wrong side of the curve. Last week, we thought that the long bond needed to base for a week or so before it could rally. The low for the TLT was 122.59 and the “base” was only two trading days. The rally has made it to 124.82, which is above the 50-Day. This is constructive. The 6-Month Bill yield increased from next to zero in 2015 to 1.15% in early July, becoming the most overbought in a decade. It declined to 1.10% last week, finding support at the 50-Day ma. The “bounce” has been to 1.11%. We have been looking for the short-end of the Treasury market to reverse to lower yields. In the past, this indicated speculative demand for funds was beginning to decline. In so many words, the sophisticated at the party are looking for an exit.
In 2007, the breakdown in the Bill yield occurred in early August against the S&P peak in October of that fateful year. The Street was highly confident that a “Fed-cut” would keep the boom going. The 6-Month bill yield plunged from 4.69% in July 2007 to 0.15% in December 2008. With this, the S&P dropped from 1576 to 741, as short-rates plunged. The ultimate S&P low was 666. Oh yeah, the Fed did cut the administered rate. Many times, and the more they cut, the faster the stock market went down. An interesting study of cause and effect. From long-dated to short-dated, yields for low-grade stuff have been expected to increase after mid-Year. By later in the year, the increase could become serious. The reason would not be due to a surge in CPI inflation, but to a contraction whereby servicing debt becomes a problem.
Commodities
Generally, commodities have been likely to be firm into August. The CRB started the year at 196 and by stages declined to 166 in June. Oversold, the rally made it to 177 and is now above the 50-Day ma. There is resistance at this level and further gains could be limited. Base metals (GYX) declined to 309 in June and we though the rally could make it to 324. The high was 332 last week and there is resistance at this level. Gains into August could be limited.
Lumber, made a low in June and has rallied. The low was 340 and so far, the high has been 392. The Daily RSI has recovered quite a bit. At 68, closer to 70 would limit the move. As it soared to 415 in April, we noted the exceptional technical readings and concluded it could be setting a cyclical high.
Crude oil became very overbought at 55 early in the year. The rebound from the initial low made it to 53 in April. The low at 42 in June was down to 30 on the Daily RSI, which was enough to pop the rebound, which was likely to run into August. This week it got above the 50-Day ma, which is constructive. Whatever firming for industrial commodities is accomplished into August, the sector is vulnerable to seasonal weakness into late in the year. That would be in a “normal” year. The action this year in financial markets could be setting the climax of a great bubble. In which case, industrial commodities could turn to serious weakening after August.
Precious Metals
Base metals as well as crude oil prices have been likely to be firm to steady into August, which is working out. This has been helping gold and silver. As the ChartWorks noted on Monday, the COT figures were “constructive” for gold and silver. Last week, this page concluded that the GSR could trade “sideways” for a while, which it is. Gold stocks (GDX) have bounced from the low of 21 earlier in the month to 22.28. The 50-Day is at 22.40 and the 200-Day at 22.64. Both represent resistance. However, gold stocks relative to the bullion price GDX/Gold ratio is trying to stabilize. More of this is needed for our “comfort” in investing.
On the bigger picture, gold’s real price as deflated by the PPI has declined since the high at 180 in January. The decline was to 145 a couple of weeks ago. The decline has been mainly under the declining 20-Week ema. Basing and getting above the exponential moving average would be long-term constructive. There doesn’t seem to be anything outstanding in the nearer term and there is risk to gold and silver stocks should there be a general liquidity crisis. In which melancholy event, silver would decline sharply relative to gold.
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