Commodities Crumbling

April 24, 2017

The S&P500 bounced about 0.85% last week. Volume was light and volatility, as measured by the VIX index, inched back down slightly.

US macro news was mostly disappointing last week. The Empire State manufacturing survey missed badly. The housing market index also missed. Housing starts came in lower than predicted. Initial jobless claims were worse than expected. The Philly Fed business outlook survey missed. And PMI composite flash also missed. On the positive side of the ledger, industrial production beat slightly. Leading indicators beat expectations and finally, existing home sales came in higher than predicted. But the overall mix of results was certainly more negative than positive.

In terms of technical analysis, last week’s gain in the S&P500 means that the downward momentum on the short-term charts (daily resolution) is waning and that another upward move can be expected. On the longer-term charts (weekly resolution) the upward momentum is still intact and while not as strong as it was in the winter months, it’s still allowing for more increases…despite the fact that prices are also stretched to the upside by a large degree.

Finally, let’s look at commodities again. Why? Because their prices reflect the overall health of the global economy. If it’s growing at a reasonable rate, then commodity prices would climb. If it’s stagnating, then commodity prices would generally be expected to fall or at least not climb.

So what are key commodity prices doing today?  As measured by DBA (a respected ETF that tracks most major industrial commodities), prices today are at—not near—but actually at lifetime lows. This is not a good sign for global economic growth today. And it also strongly contradicts the generally elevated equity prices in the US and in Europe today, which are at or near lifetime highs.

Sooner or later these two measures will converge—either commodity prices will soar back up to meet stock prices, or stock prices will climb down substantially to meet the depressed commodity prices.

US Housing Market—Fully Recovered

April 17, 2017

The S&P500 lost about 1.1% last week, as geo-political tensions rose in several spots around the world, especially North Korea where the US government has essentially pre-announced that it is likely to take military action. And keep in mind that North Korea has nuclear weapons. So not only did US equities give back some recent gains, but two classic safe-haven assets rose in price:  US Treasuries and gold. S&P volatility, as would be expected, not only increased, but it increased to the highest levels since the November presidential election. US equity trading volume was on the light side, but that’s in part due to the holiday-shortened week.

In US macro news, the results were disappointing. Small business optimism fell off a bit. Producer prices—both core and headline came in well below expectations (not something one would expect in a healthy and growing economy). Retail sales missed badly. Both the headline and ex-autos figure came in well below expectations. And consumer prices (also headline and core) registered far lower readings than economists had predicted. Only consumer sentiment, a fuzzy measure at best, beat expectations.

On the charts, the recent pullback in the S&P500 has now resulted in some technical damage. For example, the 50 day moving average has failed to hold. Last week, prices not only dipped below this average,  but closed the week well below it. That said, prices are still well above the 200 day moving average and the 200 day is clearly sloping upwards….both of these are still bullish, over the medium to longer term.

Finally, it’s interesting to note that US single family housing prices have not only recouped all the losses that were incurred near the lows of 2012, but in many of the major (20 cities measured by Case-Shiller) metro areas in the US, prices have now set new record highs. The question obviously is this—will these price gains be durable, unlike the gains in the prior market peak, circa 2005-2006? While nobody knows for sure, given the fact that the Fed’s ultra-easy monetary policy was primarily responsible for the recent run up in prices, and given that the Fed has now implemented a new policy to reverse much of the old ultra-easy measures, there’s a very good chance that US housing prices will give back at least some of their recent gains.

The crash in US housing between 2006-2012 proves that prices can—and do—move downward as well as upward.

More Stalling in the S&P 500

April 10, 2017

The S&P500 slipped 0.3% last week. Volume was light and volatility inched higher, but nowhere near any levels associated with fear, or much less panic. Diverging bearishly from the S&P, the HYG etf closed higher on the week, suggesting that many investors were more comfortable taking on risk.

In US macro news, there were only a couple of major positive surprises. The ISM manufacturing index beat expectations (but only slightly) and the initial jobless claims figure dropped back to multi-decade lows. Aside from these two beats, most everything else was a miss. PMI manufacturing disappointed. ISM services fell and missed expectations badly. Construction spending missed. PMI services missed. The payrolls result was a huge miss—only 98,000 new jobs were created instead of the 175,000 expected. To add insult to injury, average hourly earnings missed…..and so did the average workweek figure. The bottom line is that last week, US economic data took a turn for the worse.

Technical analysis is now suggesting that the S&P’s surge after the Trump election is once again stalling. Momentum indicators have turn down. MACD for example has diverged negatively for several weeks now on the daily charts; on the weekly charts, MACD is on the verge of diverging bearishly. Also, prices have now dropped back down to the 50 day moving average….and for the last few weeks, this moving average has held, despite being tested 4-5 times. So now any relatively minor movement downward will cause this moving average support level to fail; this would almost certainly lead to more selling…..perhaps at least down to the 200 day moving average.

So the US equity market is once again at a critical cross-road. While valuations remain at nosebleed levels, relative to 100+ years of history, the near-term catalysts for further upward price movement seem to be running out.

Gold and Silver Poised to Rise?

April 3, 2017

Last week the S&P500 bounced back 0.8% but on very light volume. Volatility in the S&P barely changed; it remains on the extremely complacent end of its long-term range. Confirming the move higher in US stocks, the HYG (or high yield) ETF also moved higher by the end of the week. On the other hand, US Treasuries resisted the positive tone in risk asset markets and their yields barely budged, instead of rising to confirm the movement of money into risk assets.

In US economic news, the results were once again very mixed. The Dallas Fed manufacturing survey missed. So did personal spending. Initial jobless claims came in worse than expected, and consumer sentiment disappointed. On the positive side, international trade beat expectations. So did consumer confidence. Pending home sales and the Chicago PMI also beat consensus estimates.

In terms of technical analysis, the recent retreat in prices (last week’s rise notwithstanding) has slowed the upward momentum that has characterized the Trump reflation trade. For this slowdown to be reversed completely, stock prices would have to continue to rise this week and most likely next week.

The price of gold and silver continue to trace out a long-term bottoming pattern, a pattern that spans more than three years. Specifically, the dip in the fall of 2016 has completed the right (and final) shoulder in an inverted head & shoulders pattern, a bullish pattern that usually precedes a major upward movement in prices. The left shoulder was formed in late 2014 (or possibly mid 2015), and the head was formed in late 2015. The last remaining hurdle in this pattern will be the movement of prices above the neckline, which is approximately at the mid-$1300 level. If prices break above $1375 and stay there, then the long-term nature of this bullish pattern suggests that prices could echo their last bull market run which added over a $1000 to the price of gold. So this means that if another bull market develops, gold could finally reach and exceed $2000. It came close in 2011, but never reached this level.

Almost the exact same analysis applies to the price of silver.

So despite the fact that a huge sword is hanging over the US stock markets, here’s one market that’s poised to do the opposite—enter a major bull market that lasts several years.