Weekly Technical Scoop

August 1, 2017

One can’t help but wonder if the world is truly coming apart. Then again, maybe it’s all normal. Extreme weather gripped parts of the world with huge fires in France, California, Montana, and the still ongoing fires in BC. Floods were causing destruction in India, Spain, Japan, Ecuador, Arizona, and New Zealand. Violent thunderstorms hit Hawaii and an earthquake hit Turkey. That was just last week. Insurrection and riots continued apace particularly in Venezuela and in Israel over the Temple Mount where some are describing it as the start of the third Infatada.

Possibly overlooked are almost daily clashes in America somewhere between supporters of Donald Trump and those opposed as well as clashes with police, blacks, Hispanics, and others. Some pundits are describing it as a second US civil war, except it does not have clashing armies and they haven’t started shooting each other, yet. But in America today according to a number of pundits, Americans are more divided morally, ideologically, and politically then they have been at any time in the US’s history.

Even in the US House of Representatives, it is deeply divided. So it seemed rather strange this past week that Republicans who control the White House, Congress, and the Senate were unable to get through legislation concerning the repeal and replacement of Obamacare or the repeal of Obamacare. This came after seven years of Republicans clamouring for the repeal of Obamacare. The week ended with President Trump threatening to pull subsidy funding to insurance companies, a move that could lead to not only higher insurance premiums but also imploding of the health care system.

There was also the spectacle of the President in one of his twitter rants saying that transgendered people were to be barred from serving “in any capacity” in the US military. The military confused the issue with a statement that nothing will change with regard to Transgender people serving in the military. There are an estimated 2,500-to 15,000 transgendered people in the military. There is, however, no official count so these are just estimates.

The US Congress and Senate approved further sanctions against Russia, Iran, and North Korea putting Trump in a bind. He can’t veto them as even he called for sanctions against Iran and North Korea but this does throw into question the entire Russian connection. Russia immediately retaliated by ordering the US to cut hundreds of diplomatic staff at the US embassy and seize US properties. The tit-for-tat diplomatic war continues.

Finally, there was the spectacle of the new Communications Director, Anthony Scaramucci, trash-talking Steve Bannon and Reince Priebus two key Trump aides. Apparently, they don’t get along. Subsequently, Reince Priebus was replaced as Chief of Staff. In the Trump administration, chaos reigns.

Fires, floods, and storms around the world, and fires, floods, and storms in the White House. So maybe it is all just another normal week in America. The stock markets yawned. It was against this backdrop that the US stock markets soared once again to new all-time highs.

Ok it wasn’t a clean march to new all-time highs. The Dow Jones Industrials (DJI) did but the Dow Jones Transportations (DJT) fell instead. The S&P 500 made new highs but closed lower as did the NASDAQ. So maybe it was a lonely march. The Fed came out with one of its policy statements they issue about every six weeks and the market interpreted it as bullish—or maybe dovish is a better word. Result: the US Dollar continued its recent nosedive and gold reversed and closed higher. The Fed, if one reads between the lines, has given up thoughts of rate hikes in September and December. But then again the recent release of Q2 GDP showed a US economy improving. The stock market reacted by selling off.

The Fed continues to plan to reduce its huge $4.5 trillion balance sheet. Reducing the balance sheet, which also reduces the monetary base, is actually a form of Fed tightening akin to hiking the interest rate. That could result in a slowing US economy.

All of the activity on the week helped gold to reverse to the upside and close over $1,260 an important resistance point. Gold did seem to react to the possibly dovish Fed statements but maybe gold is focused on other events too. The looming federal debt ceiling is a possible event that could once again see a government shutdown as it did in 1995 and 2013. But this time, unlike 1995 and 2013, Republicans control the White House, Congress, and the Senate. So they should find a way out of any impasse. But then, they thought that way about killing Obamacare as well and we saw what happened there. If they can’t kill Obamacare after seven years of railing about it, the debt ceiling along with tax reform, NAFTA reform, infrastructure and the infamous “wall” may face an even rougher ride.

So, all is not well in the US, except for the stock market continuing its march to ever-higher highs against the backdrop of political turmoil and a “muddle through” economy. Meanwhile, here in Canada our Prime Minister appeared on the cover of Rolling Stone. Americans can only wish.

MARKETS AND TRENDS

 

 

 

Percentage Gains Trends

 

Stock Market Indices

Close

Dec 31/16

Close

Jul 28/17

Week

YTD

Daily (Short Term)

Weekly (Intermediate)

Monthly (Long Term)

 

 

 

 

 

 

 

 

S&P 500

2,238.83

2,472.10 (new highs)

flat

10.4

up

up

up (topping)

Dow Jones Industrials

19,762.60

21,830.31 (new highs)

1.2

10.5

up

up

up (topping)

Dow Jones Transports

9,043.90

9,227.07

(2.6)

2.0

up

up

up (topping)

NASDAQ

5,383.12

6,374.68 (new highs)

(0.2)

18.4

up

up

up (topping)

S&P/TSX Composite

15,287.59

15,128.65

(0.4)

(1.0)

down

down

up

S&P/TSX Venture (CDNX)

762.37

772.57

1.5

1.3

neutral

down (weak)

neutral

Russell 2000

1,357.14

1,429.26 (new highs)

(0.5)

5.3

up

up

up (topping)

MSCI World Index

1,690.93

1,926.77 (new highs)

0.2

14.0

up

up

up

Gold Mining Stock Indices

 

 

 

 

 

 

 

Gold Bugs Index (HUI)

182.31

196.30

2.4

7.7

up

neutral

neutral

TSX Gold Index (TGD)

194.35

194.58

1.2

0.1

down (weak)

down

neutral

Fixed Income Yields

 

 

 

 

 

 

 

U.S. 10-Year Treasury yield

2.45

2.30

 

2.7

(6.1)

 

 

 

Cdn. 10-Year Bond yield

1.72

2.00

6.4

16.3

 

 

 

Currencies

 

 

 

 

 

 

 

US$ Index

102.28

93.11 (new lows)

(0.6)

(9.0)

down

down

neutral

Canadian $

0.7440

0.8050 (new highs)

0.8

8.2

up

up

neutral

Euro

105.22

117.53 (new highs)

0.8

11.7

up

up

neutral

British Pound

123.21

131.47

1.2

6.7

up

up

down

Japanese Yen

85.57

90.40

0.5

 

5.6

up

up (weak)

neutral

Precious Metals

 

 

 

 

 

 

 

Gold

1,151.70

1,268.40

1.1

10.1

up

up

up (weak)

Silver

15.99

16.69

1.4

4.4

neutral

down

down

Platinum

905.70

936.60

(0.1)

3.4

 

up (weak)

down (weak)

down

Base Metals

 

 

 

 

 

 

 

Palladium

683.25

880.15

4.2

 

28.8

up

up

up

Copper

2.5055

2.88 (new highs)

5.9

15.0

up

up

up

Energy

 

 

 

 

 

 

 

WTI Oil

53.72

49.71

8.6

(7.5)

up

down (weak)

down (weak)

Natural Gas

3.72

2.94

(0.7)

(21.0)

down (weak)

down

neutral

Source: David Chapman

Note: For an explanation of the trends, see the glossary at the end of this article.

New highs refer to new 52-week highs.

Source: www.stockcharts.com

It may have been a Trumpian week of epic proportions as one headline declared, but for the stock market, it continues to be music to its ears. The Dow Jones Industrials (DJI), the S&P 500, the NASDAQ, and the MSCI World Index (MSCI) all made new 52-week highs this past week. Only the MSCI index remains marginally below its all-time high seen in April 2015. The other three made new all-time highs.

But a funny thing happened on the way to glory. Of the four, the DJI and the MSCI managed to hold their gains and closed the week higher. The S&P 500 ended the week flat as a sharp pull-back on Friday cost the index the week’s gains. The NASDAQ meanwhile reversed and closed lower. The Dow Jones Transportations (DJT) diverged sharply and for the second week in a row was down. The DJT is already off 5.5% from its all-time highs seen on July 14, 2017. The Dow Jones Utilities (DJU) was also off marginally on the week and its all-time high was made back on June 16, 2017. The DJU is currently off 2% from that high. With the DJI being really the one to march to new highs and new high close all one can say is it gets lonely at the top.

Market sentiment, according to the Market Vane’s Bullish Consensus, remains at the highest levels seen since the top in 2007. The CBOE Volatility Index (VIX), a measurement of fear and greed in the market recently made a new low. The VIX moves inversely to the US stock market. The market remains very bullish with signs of complacency. When the background stories suggest a meltdown but the market continues to go higher, the market begins to think it is invincible. It’s not, of course, so the question that should be on everyone’s mind is when will it drop.

Thursday was an outside reversal day for the S&P 500. It may have been a key reversal given it was made on a day when the index made new all-time highs. Naturally, the reversal needs follow through to the downside and a break of key support zones. And, no new highs. A break under 2,435 would take out the uptrend line from the election panic lows (November 2016). A break of 2,405 would take out the last significant low on the dailies. That point would also signal a break of the last weekly low. A break under 2,330 would confirm and also break another key weekly low. It would confirm that wave 3 from the Brexit panic lows has been completed.

We believe the coming corrective wave should be wave 4 up from the Brexit panic lows. It could correct anywhere from 38% to 62% of the prior move. That would drop the S&P 500 to anywhere from 2,290 to 2,175. A minimum objective would be a decline to at least 2,370. Following that the market should regroup and make another sharp move to the upside to complete wave 5 which would also complete 5 waves to the upside from the March 2009 lows. A more significant correction should follow.

Of course, there is still a chance that the market unfolds higher, but it is late in the game for this move. A top maybe, but not “the” top that could end the great bull market run that got underway in March 2009.

Schiller PE Ratio

Source: www.multpl.com

How high can the PE ratio go? Well, higher, it seems. At current levels, it is now on par with the PE before the 1929 stock market crash and the Great Depression of the 1930s. It remains, however, well short of the PE seen prior to the Dot.com crash of 2000-2002. It is also well above the PE seen before the 2007–2009 financial crash and significantly above the PE ratio seen before the 1987 stock market crash. So does this mean the stock market is about to crash? The high PE is merely a warning sign that something is amiss. It doesn’t mean the stock market is going to crash tomorrow. The PE ratio could move even higher as suggested by the 2000 peak. It does suggest, however, that it might not take much to spark a crash either. Do the good times continue forever? Investors may wish to take note.

S&P500 Earnings

Source: www.multpl.com

Earnings may have slowed but they are still on an upward track. Despite all the negative background noise both geopolitically and in domestic politics in the US, the US economy continues to “muddle” through. The Canadian economy is improving and the EU economy is also improving. Even Japan shows signs of life. That bodes well for US corporations whose earnings outside the US exceed their earnings in the US. While arguably, the earnings index is high there are few signs on the horizon that could negatively affect it. Of course, that could change suddenly if NAFTA breaks down, or trade wars break out or the political situation in Washington gets even more out of hand. There were numerous times in the past when earnings took a dip only to recover and move to new highs. If there is a negative here, it is that thus far the earnings index is barely above the peak before the 2007–2009 financial crash. Following the earnings peak in the late teens of the previous century it took until the 1950’s before it was taken out. Thus far the earnings have recovered all of the financial crash and then some. Is it different this time? Unless the earnings index can pull away from the 2007 peak, it could be another warning sign that not all is well.

Source: www.bitcoincharts.com

It’s a bird! It’s a plane! It’s Superman! No, no—it’s Bitcoin! Cryptocurrencies are apparently all the rage. How else does one explain a rise from apparently 6 cents back in September 2010 to $3,000 in June 2017? A gain of (difficult calculation) 50,000%!!! Of course, supply is limited and demand is high. So that helps push it to astronomical levels. It all reminds one of, well, tulips! And even of a famous real estate speculation—the South Sea Company!

Source: www.elliotwave.com

We won’t go into the details as both these events took place a long time ago. But the comparisons are striking. For tulips from 1634 to 1637, the prices rose in astronomical proportions. At its peak, one tulip could buy an estate. At the bottom, it was the price of an onion. Records are sketchy but tulip prices rose at least 6,000%. If correct, the Bitcoin bubble makes the tulip bubble look puny.

The South Sea bubble was another event of huge proportions. Land speculation in the South Seas. The speculation lasted from 1719 to 1722. But once again, investors were wiped out.

We don’t know how the Bitcoin bubble will end…but our best guess is that it will end badly. Bitcoin has already had one mini-crash. It is currently in recovery mode. So far, the chart reminds of us of gold in 1980 that soared to over $850, crashed then attempted to recover. Only it failed the previous high and it ushered in a twenty-year plus bear market. Buyers should beware. Tulip mania and the South Sea bubble were popularized in a book titled Extraordinary Poplar Delusions and the Madness of Crowds – Charles Mackay (1841). Maybe someday Bitcoin will join them in a new edition.

Source: www.goldchartsrus.com

Source: www.stockcharts.com

At the recent lows, there was a considerable divergence between gold and silver. Silver plunged through its previous low at $15.68 and made a new low at $14.34. Gold held a comparable level making a higher low. These divergences are important and are often seen at significant tops and bottoms. In other words, the averages must confirm each other (in this case gold and silver must confirm each other). They didn’t. Silver has a lot more work to do and we can’t say firmly that a low is in even as we highly suspect a low is in. We’ll feel more comfortable once we break through $17 and especially over $18. Over $18 silver should officially enter a new bull market with potential targets up to $25. We would only become concerned if silver were to break back under $16. But we believe it should hold on any pull-back.

Source: www.cotpricecharts.com

The commercial COT for gold slipped a bit this past week, but it hasn’t pulled back sufficiently to give us cause for concern. The commercial COT for gold slipped to 37% from 40% as short open interest jumped roughly 26,000 contracts and long open interest decline about 4,000 contracts. Usually tops are seen when the commercial COT gets down around 25% or even lower. If a strong bull market does get under we note that during the period 2008-2011 the commercial COT was falling but gold kept on rising. There are lots of reasons why gold prices should rise, but our focus is on the technicals and we are currently bullish. Expectations remain that we should break through $1,300 in due course.

******** 

David Chapman regularly writes articles of interest for the investing public. David has over 40 years of experience as an authority on finance and investments via his range of work experience and in-depth market knowledge.

One cubic foot of gold weighs more than half a ton (1,306 pounds).