Strange Economic Data

 

Economic Activity Seems Brisk, But…

Contrary to the situation in 2014-2015, economic indicators are currently far from signaling an imminent recession. We frequently discussed growing weakness in the manufacturing sector in 2015 (which is the largest sector of the economy in terms of gross output) – but even then, we always stressed that no clear recession signal was in sight yet.

US gross output (GO) growth year-on-year, and industrial production (IP) – note that GO continues to be published with a lag of two quarters. As the upper half of the illustration shows, growth in manufacturing output turned negative in 2014 – 2015, while y/y growth in “all industries” GO fell to zero by Q3 2015. The lower half shows the culprit: the mining sector, which includes upstream oil and gas production. While the sector is small, it is very volatile and accounted for an uncommonly large share of capex due to the shale oil/fracking boom. This was confirmed by the action in credit spreads during this time period as well, as junk bond spreads exploded mainly due to a relentless sell-off in energy company debt in the wake of plunging oil prices. Although happy times are here again following the oil price recovery, GO has begun to weaken slightly again in Q1 and Q2 2017 (note: the surge in IP since then does not tell us much, as GO leads IP).

There are a number of “sine qua non” indicators, such as real gross private domestic investment, the Philly Fed’s US leading index, the ISM/PMI indexes, initial unemployment claims, the yield curve (here in the form of the 10 year minus 2 year spread), and the National Financial Conditions Index, which routinely provide early warning signals ahead of economic downturns.

In 2015 no clear recession signal was evident from these indicators and they are now even further removed from giving such a signal. The yield curve is a potential exception – it has flattened significantly throughout last year, and its recent upturn may be the beginning of a trend change toward steepening (it is still too early to tell). A sustained trend change traditionally constitutes a recession warning.

The Citigroup economic surprise index has turned down this year after rising  relentlessly in the second half of 2017. This indicates that economists have finally adjusted their expectations after a series of strong data releases, just as these data begin to weaken somewhat. If the current downtrend persists, it may become meaningful for stock and bond markets in the short to medium term (usually slightly negative for the former and positive for the latter).

The Citigroup economic surprise index has begun to turn down late last year (compares economic data releases to the average expectations of economists/analysts). This index is very volatile and rather short-term oriented. It may be worth watching now, as the recent stock market correction has led to wild gyrations in various positioning data.

And yet, even though economic activity in terms …read more

US Equities – Retracement Levels and Market Psychology

 

Fibonacci Retracements  

Following the recent market swoon, we were interested to see how far the rebound would go. Fibonacci retracement levels are a tried and true technical tool for estimating likely targets – and they can actually provide information beyond that as well. Here is the S&P 500 Index with the most important Fibonacci retracement levels of the recent decline shown:

So far, the SPX has made it back to the 61.8% retracement level intraday, and has weakened a tad again since then. This is not yet conclusive evidence that this level will contain the rebound, but it is worth noting that the RSI made it back to just below 50 as well (the 40-50 area in the RSI is often an important demarcation in both bullish and bearish market phases). On the other hand, the decline has injected somewhat greater caution than was detectable previously (e.g. the VIX remains around the 20 level). That may help support a larger rebound; note also that the 200-dma serves as support, so an argument could be made that the decline was merely one of the periodic tests of this moving average. One should watch what happens if lower Fibo retracement levels, i.e., the 50% and 38% retracement are approached from above. According to Canadian technical analyst Ross Clark, statistics suggest that the 38% level must hold to maintain a positive bias. If it breaks, a retest of the lows becomes the minimum expectation.

A New Acronym to Remember – DART

We mentioned that we would occasionally talk about rarely discussed indicators and familiarize  readers with new acronyms, and here is one of them. Some of our readers may have seen this chart already, as it is slightly dated by now (it was first published by sentimentrader on January 18, prior to the market swoon). The acronym in question is DART, which stands for “daily average revenue trades” at two major discount brokerages, E-Trade and TD Ameritrade. Here is the chart:

The “DART” index of retail trader activity at two of the largest discount brokers as of January 18. We include this slightly dated chart because it shows how intense emotions were near the recent top. Such data are important in determining the potential importance of a market peak. In conjunction with all the other sentiment and positioning data we recently discussed, it suggests that it won’t be easy to overcome the January 2018 peak. If this peak cannot be overcome in a fairly short period of time, there will be only one way for the market to go, and that will no longer be up.

The importance of this burst of optimism near the top may be mitigated by a commensurate, rapid surge in fear upon a renewed decline. Whether that actually  happens remains to be seen. Keep in mind that the most important fundamental pillar supporting the rally – namely true money supply growth – has withered away dramatically since November 2016 and has reached levels historically associated with …read more

When Budget Deficits Will Really Go Vertical

 

Mnuchin Gets It

United States Secretary of Treasury Steven Mnuchin has a sweet gig.  He writes rubber checks to pay the nation’s bills.  Yet, somehow, the rubber checks don’t bounce.  Instead, like magic, they clear. How this all works, considering the nation’s technically insolvent, we don’t quite understand.  But Mnuchin gets it.  He knows exactly how full faith and credit works – and he knows plenty more.

Master of the Mint and economy wizard Steven Mnuchin and his wife at the annual ritual greenback burning festival. [PT]

In fact, Mnuchin’s wife, Louise Linton, says she admires him because “he understands the economy.”  And Mnuchin, no doubt, admires Linton, a Scottish actress 18 years younger, because “she loves SoulCycle Snapchat filters that make people look like puppies and piglets.”  Naturally, Mnuchin gets the importance of puppy and piglet filters and how this bizarre fad fits into the big picture of the economy.

Unlike Mnuchin, we find the economy, and its infinite and dynamic relationships, to be beyond comprehension.  But that doesn’t deter us from attempting to make some sense of it each week.  When it comes to Snapchat filters we know nothing – and we could care less.  Still, who are we to question Snap Inc.’s $24 billion market capitalization?

What we do understand is simple arithmetic.  So, too, we care a great deal about the increasingly precarious predicament the 115th U.S. Congress is putting the American people in.  As far as we can tell, the approaching disaster is much closer than Mnuchin will publicly recognize.

US public debtberg-to-GDP ratio – cruising for a bruising. The growth in public debt in recent years is unprecedented in peace time (arguably, the term “peace time” is not an accurate description of the current era). Lettuce not forget, this is just the debt they actually admit to, so to speak. It does not reflect what is known as “unfunded  liabilities”, which best translated as “stuff that will never be paid, at least not in a form that remotely resembles the original contractual terms”. Anyway, purely from a technical perspective, the most recent wobbles in this ratio look like a “running correction”, i.e., another big leg up is probably imminent. [PT]

Grim Particulars

The growth of federal debt has been out of control for decades.  The solution that’s commonly offered for reeling this back is for the economy to somehow grow its way out of the debt.  This has yet to transpire despite a variety of policies over the years that have generally involved borrowing money from the future and spending it today.

The simple fact is you can’t grow your way out of debt when the debt’s increasing faster than gross domestic product (GDP).  For example, in 2000 the federal debt was about $5.6 trillion and real U.S. GDP was about $12.5 trillion.  Today the federal debt is over $20.6 trillion and real U.S. GDP is about $17 trillion.

In just 18 years the federal debt has increased by over 265 percent while real U.S. GDP has …read more

The Future of Copper – Incrementum Advisory Board Meeting Q1 2018

 

Copper vs. Oil

The Q1 2018 meeting of the Incrementum Fund’s Advisory Board took place on January 24, about one week before the recent market turmoil began. In a way it is funny that this group of contrarians who are well known for their skeptical stance on the risk asset bubble, didn’t really discuss the stock market much on this occasion. Of course there was little to add to what was already talked about extensively at previous meetings. Moreover, the main focus was on the topic presented by this meeting’s special guest, Gianni Kovacevic.

Copperbank chairman Gianni Kovacevic

Gianni believes that oil has a bleak future as a fuel for transportation, as he expects the trend toward adoption of electrical vehicles to accelerate – not least because government mandates to this effect have begun to proliferate. This trend should in turn boost long term demand for copper, as the existing electrical infrastructure will have to be adapted to cope with rising demand for electricity.

We have to admit that we are personally still a bit skeptical with respect to this particular notion. While it is clear that government mandates and subsidies for “clean energy” have multiplied well beyond the nuisance level in many countries, we harbor grave doubts about the ability of government decrees to trump issues of economic viability.

Gianni’s main argument is though that while oil prices are likely to be capped by the fact that advances in extraction technology (i.e., fracking) have created a source of supply that can be rapidly switched on and off as needed, a similar revolution has not taken place with respect to copper supply. On the contrary, not only were there very few new copper finds due to investment drying up over the past decade, mine development has become such an onerous and time-consuming process that it is hard to see how there can be a rapid reaction in terms of supply additions should hitherto unexpected demand growth materialize.

Over the past three years, copper and crude oil have moved in tandem, reflecting both the vagaries of the USD exchange rate and perceptions about global economic growth.

Indeed, as the chart included in the transcript shows (the transcript is available for download below), the number of significant mineral discoveries between 2011 and 2017 in both the precious metals and industrial metals categories has shrunk more dramatically than in any commodities bear market since at least 1975.

Due to the unique stock-to-flows situation in gold and silver, the dearth of discoveries is not as significant for the prices of these two metals as it is for those of base metals. If one looks at the action in some of the less liquid base metals such as e.g. zinc in recent years, one can see that a relatively small shift in perceptions about demand can indeed have an outsized effect on prices under such circumstances.

Zinc, weekly – since putting in a low in early 2016, zinc prices have made an …read more

What Kind of Stock Market Purge Is This?

Actions and Reactions

Down markets, like up markets, are both dazzling and delightful. The shock and awe of near back-to-back 1,000 point Dow Jones Industrial Average (DJIA) free-falls is indeed spectacular. There are many reasons to revel in it.  Today we shall share a few. To begin, losing money in a multi-day stock market dump is no fun at all.  We’d rather get our teeth drilled by a dentist.  Still, a rapid selloff has many positive qualities.

Memorable moments from the annals of dentistry [PT]

For example, the days following a market correction are full of restoration and redemption.  Like the prayer of Saint Francis of Assisi, Tuesday’s 567 point DJIA bounce brought hope where there was despair, light where there was darkness, and joy where there was sadness.  President Trump even acknowledged that his powers over the stock market are less than omnipotent.

From a practical standpoint, a market correction clarifies that we live in a world that is exacting and just, as opposed to a fabricated fantasy.  A stock market purge demonstrates that the central planners haven’t entirely broken the markets just yet.  Markets still go both up and down. This important detail is always forgotten at the worst possible time.

The stock market purge also clarifies that Fed actions provoke reactions. The Fed’s rate raising and quantitative tightening efforts are having an effect.  After pumping stock and credit markets up for the last decade they are now, by design, deflating them. What a delicate and unnecessary game these central bankers play.

The tree month t-bill yield and total assets held by the Federal Reserve system – moving in opposite directions. Amazingly, many market participants seem to believe that when these data change direction, the stock market will remain unaffected. That is probably wishful thinking. [PT]

Sick Markets

Central planners relentlessly endeavor to control the future and improve upon it before it even comes into existence.  But how do they know what an improved future would be?  Is it one with higher stock prices?  Is it one with a lower rate of unemployment?  Moreover, how do they know how to bring it to fruition?

The sweat off a central banker’s brow is for the purpose of making the future predictably bland for their member banks.  So they can mint money by borrowing short and lending long without fail.  Attempting to tame credit markets is one way they strive to achieve this.  These efforts are futile and destructive.

Perhaps they can push out the growth phase of the business cycle.  But, in so doing, they encourage layers upon layers of bad decisions, including massive debt based malinvestment, to stack up across the landscape until the world is greatly at odds with itself.

They can’t accept that the future is always veiled with uncertainty.  No one really knows what tomorrow will bring.  This is a universal fact of humanity.  Attempting to control the future in ways that are against its natural tendencies will lead to market distortions and lopsided economies.

The story of this nine-year bull market is a story …read more

Why I Own Gold and Gold Mining Companies – An Interview With Jayant Bandari

 

Opportunities in the Junior Mining Sector

Maurice Jackson of Proven and Probable has recently interviewed Jayant Bandari, the publisher of Capitalism and Morality and a frequent contributor to this site. The topics discussed include currencies, bitcoin, gold and above all junior gold stocks (i.e., small producers and explorers). Jayant shares some of his best ideas in the segment, including arbitrage opportunities currently offered by pending takeovers – which is an area that generally doesn’t receive much attention, but seems to harbor quite a bit of potential.

Jayant Bandari at the at the Sprott Natural Resource Symposium in Vancouver in 2017.

The interview dovetails nicely with something we are working on at the moment and plan to make available to our readers soon, namely a comprehensive list of gold and silver juniors (plus a few base metals juniors), which summarizes the most important background information on them and provides links to more in-depth data for further study. The list should serve as a useful starting point for anyone planning to create a broadly diversified portfolio focused on junior gold companies.

As far as we can tell, Jayant prefers to pursue a more concentrated approach, while our list is basically about obtaining exposure to the sector’s potentially large upside, while at the same time mitigating risk through diversification (this approach lowers risk but also caps upside potential to some extent, but will no doubt be quite useful for people who would like to invest in the sector but don’t have the time to analyze and follow it in depth. We should also mention that we do not believe that the currently available junior ETFs are good substitutes for a carefully chosen diversified portfolio focused on the sector). Of course, even if one is just looking for ideas, the list will undoubtedly be helpful and save a lot of time and effort. We will discuss the philosophy behind our approach to investing in the junior sector in more detail once the document is ready for publication.

Without further ado, here is Jayant talking about his investment style and his current investment ideas in the segment (incidentally, they are complementary to ours):

 



Maurice Jackson speaks with Jayant Bandari about gold and gold companies

…read more

Seasonality of Individual Stocks – an Update

 

Well Known Seasonal Trends

Readers are very likely aware of the “Halloween effect” or the Santa Claus rally. The former term refers to the fact that stocks on average tend to perform significantly worse in the summer months than in the winter months, the latter term describes the typically very strong advance in stocks just before the turn of the year. Both phenomena apply to the broad stock market, this is to say, to benchmark indexes such as the S&P 500 or the DJIA.

Summer and winter in the stock market…  [PT]

Illustration via CNNMoney

A number of individual stocks have their own “seasons” though, i.e., certain individual stocks have a habit of diverging from the major indexes and exhibit seasonal patterns of their own. I will illustrate this with an example that is relevant for the current time period.

 

Hasbro: Seasonal Strength from February to April

I have picked Hasbro, a manufacturer of toys headquartered in Pawtucket, Rhode Island in the US.  Our readers  are very likely familiar with one of the company’s most famous products: the board game Monopoly, which  was originally made by Parker Bros.

Below is a chart showing the typical pattern the stock exhibits in the course of a calendar year.  These patterns  can be discerned at a glance on a seasonal chart, which is calculated by averaging the performance of the stock over the past 20 years. The horizontal axis depicts the time of the year, the vertical axis the level of the seasonal pattern (indexed to 100).

Hasbro, seasonal pattern over the past 20 years. Hasbro typically advances strongly from February to April.

As the chart shows, Hasbro typically rallies very strongly in the three months to the end of April. On the other hand, the stock’s seasonal pattern shows that it usually tends to lose ground over the rest of the year.  The time period associated with the strongest seasonal performance is highlighted on the chart in blue. It begins on January 31 and ends on May 2.

Hasbro’s very positive performance at this time of the year diverges significantly from that of benchmark indexes such as the S&P 500 Index. In seasonal terms, the index barely rises in February, while – also in contrast to Hasbro –  it usually displays significant strength at the end of the year.

How frequent were rallies in Hasbro during the seasonally strong period? After all, it is theoretically possible that  an outstanding gain achieved in just one or two years was responsible for generating this strong average performance.

Hasbro Rose in 16 out of 20 Cases

The bar chart below depicts the percentage returns generated by Hasbro shares over the relevant time period from January 31 to May 2 in every year since 1998. Red bars indicate years in which negative returns were posted, green bars indicate years with positive returns.

Hasbro, average return in percentage points from Jan. 31 to May 02, in every year since 1998 – The stock posted relatively small losses on …read more

US Stocks – Minor Dip With Potential, Much Consternation

 

It’s Just a Flesh Wound – But a Sad Day for Vol Sellers

On January 31 we wrote about the unprecedented levels – for a stock market index that is – the weekly and monthly RSI of the DJIA had reached (see: “Too Much Bubble Love, Likely to Bring Regret” for the astonishing details – provided you still have some capacity for stock market-related astonishment). We will take the opportunity to toot our horn by reminding readers that we highlighted VIX calls of all things as a worthwhile tail risk play. Not only were we right, we were actually kind of double-plus right, with near perfect timing to boot. That doesn’t happen very often, so forgive us for enjoying this brief moment of Zoltar glory.

Sometimes it just works… Zoltar has happy news for that exceedingly rare species, the “long vol” speculator (lately seen to be recovering – the endangered species, we mean).

Most of our readers are probably aware by now that there was a very specific reason behind the VIX intraday spike to more than 50 points in the face of what was not even a 10% correction. One of the most beloved “free money”/ “it’s like taking candy from a baby” trades of the past few years, namely “selling volatility”,  blew up rather spectacularly for some traders.

Judging from assorted sob stories that have made the rounds, some people appear to have neglected reading the fine print accompanying leveraged inverse VIX ETNs (or decided to ignore it). These instruments benefit greatly from a declining VIX, but are rather uncomfortable to hold during VIX spikes. ETNs such as the recently unceremoniously expired XIV are liquidated if they lose more than 80% of their value in a single day.

What many people failed to consider was the fact that the VIX is subject to an effect akin to bond convexity – which was incidentally a major reason why we liked VIX calls as a tail risk play. Essentially, the lower the VIX went in absolute terms, the more likely it became that it would one day experience a very large percentage move in a very short time period (such as going up by 100% or more in one day).

Given that there wasn’t even a single noteworthy down day since early 2016 and considering that the market had become extremely overbought, people should have expected that a bit of upheaval would eventually intrude and at least interrupt the party. Ultimately it didn’t take much to bring XIV and at least one more inverse VIX ETN to their knees.

XIV – the inverse VIX ETN performed gloriously as long as the VIX declined – but this decline by itself actually laid the foundation for the subsequent one day wipe-out of the ETN. Ironically, some $500 million or so had poured into the fund just one week earlier, with traders piling in at the first sign of market weakness.

From Hysteria to “Party On Dudes!” in …read more

“Strong Dollar”, “Weak Dollar” – What About a Gold-Backed Dollar?

Contradictory Palaver

The recent hullabaloo among President Trump’s top monetary officials about the Administration’s “dollar policy” is just the start of what will likely be the first of many contradictory pronouncements and reversals which will take place in the coming months and years as the world’s reserve currency continues to be compromised.  So far, the Greenback has had its worst start since 1987, the year of a major stock market reset.

A modern-day reenactment of the famous “our currency, your problem” play that went over so extremely well in the 1970s… [PT]

The brief firestorm was set off by Treasury Secretary Steven Mnuchin who said in response to the dollar’s recent slide:

“Obviously, a weaker dollar is good for us, it’s good because it has to do with trade and opportunities.”*

Mnuchin backtracked a bit as international financial leaders criticized the apparent shift in policy while Administration officials sought to clarify the Secretary’s remarks.  President Trump weighted in on the matter saying:

“Ultimately, I want to see a strong dollar” and added that Mnuchin’s comments were “taken out of context.”

While President Trump sought to allay jittery currency markets that monetary policy had not changed, candidate Trump supported the Federal Reserve’s suppression of interest rates and did not want to see a rising dollar:

“I must be honest, I’m a low interest rate person. If we raise rates and if the dollar starts getting too strong, we’re going to have some very major problems”.**

Of course, the entire uproar about a strong dollar versus weak dollar is a sham. When the dollar (and for that matter all other national currencies) cannot be redeemed for either gold or silver, it is inherently “weak” and ultimately worthless.

That this obvious fact is not recognized by the Trump Administration, international monetary authorities, and the financial press demonstrates just how unstable the dollar and world currencies actually are.

The US dollar today and in 1987 – in both years the Federal Reserve had embarked on a rate hike campaign, a new and untested Fed chairman took the helm at the Fed, and the US dollar was very weak. As you can see it actually reached “oversold” levels in late January/early February in both years, and started to bounce from there in the short term (before resuming its slide in 1987 – we cannot be certain yet what will happen this time around, but the parallels are slightly worrisome). [PT]

How to Create a MAGA Dollar

If President Trump truly wants to see a strong dollar that will become a linchpin in “making America great again,” he should enact policies that will return the dollar to its original function – a warehouse receipt that can be redeemed for precious metals.  Just as important, an authentic strong dollar policy would mean that no dollar can be created that did not have “an equal amount” of gold/silver in bank vaults – in essence a 100% gold dollar.

These two acts would guarantee a strong dollar and ensure that …read more

How to Buy Low When Everyone Else is Buying High

 

When to Sell?

The common thread running through the collective minds of present U.S. stock market investors goes something like this: A great crash is coming.  But first there will be an epic run-up climaxing with a massive parabolic blow off top.  Hence, to capitalize on the final blow off, investors must let their stock market holdings ride until the precise moment the market peaks – and not a moment more.  That’s when investors should sell their stocks and go to cash.

The DJIA over the past two years – the recent blow-off move has catapulted the average way above its 200 day moving average. As we recently pointed out, the DJIA has posted unprecedented overbought readings in longer-term time frames and we suspect that the distance from the 200 dma it recently reached was quite a rare extreme as well. By itself, none of this would be overly concerning, but in conjunction with foaming-at-the-mouth bullish sentiment, stretched valuations and a sharp slowdown in money supply growth, it is hard to be anything but concerned. [PT]

Certainly, this sounds like a great strategy.  But, practically speaking, how are you supposed to pull it off?  Specifically, how are you supposed to know the exact moment the stock market peaks?

Is the definitive sign of the top when your shoeshine boy offers you a hot stock tip?  Is it when your neighbor tells you about his surefire strategy to juice his returns by shorting the Volatility Index (VIX)?  Is it when your early morning gym acquaintance proudly boasts how he just purchased a luxury pair of Sea Doos using something called a “portfolio line of credit?”

From our perspective, these examples and many more – like extreme valuations – would suffice as conclusive signs of the top.  But what do we know?  We thought we saw the top four years ago, and every year since.  If we had trusted our gut, we would have missed out on significant gains. What to make of it?

Meaningless or Meaningful

Roughly five years ago one of our more challenging clients told us in painstaking detail that our significance, in the grand scheme of things, was that of a gnat on an elephant’s ass.  This insightful comparison was generously delivered moments after we were accused of big jobbing his venture.  Naturally, we grinned and thanked our client for this novel compliment.

The point is, on Tuesday the Dow Jones Industrial Average (DJIA) dropped a full 362 points.  This amounted to a loss of 1.37 percent and was the second biggest single day decline since President Trump was elected.  For a moment, a touch of panic enveloped Wall Street [it has blossomed since then – PT].

Investor nightmare Nikkei 225 – three “lost decades” and counting. So far it is still better than the 68 year long bear market in European stocks after the collapse of the Mississippi and South Seas bubbles. It is astonishing that it has taken the index so long to show some serious …read more

Monetary Metals Brief 2018

 

Short and Long Term Forecasts

Predicting the likely path of the prices of the metals in the near term is easy. Just look at the fundamentals. We have invested many man-years in developing the theory, model, and software to calculate it. Every week we publish charts and our calculated fundamental prices.

A selection of 1 and ½ ounce gold bars – definitely more fondle-friendly than bitcoin, but a bit more cumbersome to send around. [PT]

However, predicting the outlook for a longer period of time is much harder. The fundamental shows the relative pressures in the spot and futures markets, but they only show a snapshot. They do not predict how those pressures might change. For that, one looks at the dollar of course, credit, interest rates, other currencies, the economy, and even wild cards like bitcoin.

Review of Last Year’s Call

We did not publish an Outlook 2017, because we were in the midst of developing and launching not just our website, but the engine that powers it, our data science platform. We will look at much of this data in this Outlook 2018.

To keep ourselves honest, we like to review our call from the prior year. Without a 2017 call, we will briefly look at what we said in Outlook 2016:

We think that buying gold now is likely to turn out to be a good deal. We do not promise that the price can’t stay low (obviously, if it can be low now it can remain low or even go lower). We simply see value here. To those looking to trade, you might buy gold for a trade.

In silver, we’re in a much better situation than last year when silver was overpriced. The price has come down. It’s now close to the fundamental, plus or minus. However, there just isn’t a strong case for buying it now. There is no case for buying silver for a trade. It’s just a roll of the dice. The gold to silver ratio closed the year around 76.7. Our model suggests it could be headed over 85.

That did not turn out to be a bad call. Gold ended 2015 around $1060. By the middle of the year, its price had shot up to about $1370. This was an overshoot of its fundamentals (which we called in that year’s July 3 Supply and Demand Report). We said market price was $200 above the fundamental price. By the end of the year, the market price was $1150. Our call at the start of the year was right, and so was our call at the mid-year spike.

Gold, weekly – although skepticism remains fairly pronounced in view of the Fed having embarked on a rate hike cycle, the character of the gold market has clearly changed for the better since late 2015. It currently trades at the lower boundary of a strong resistance area between ~$1350 to ~$1400. The gold price has been rejected five to six times from this area …read more

Too Much Bubble-Love, Likely to Bring Regret

 

Unprecedented Extremes in Overbought Readings

Readers may recall our recent articles on the blow-off move in the stock market, entitled Punch-Drunk Investors and Extinct Bears (see Part 1 & Part 2 for the details). Bears remained firmly extinct as of last week – in fact, some of the sentiment indicators we are keeping tabs on have become even more stretched, as incredible as that may sound. For instance, assets in bullish Rydex funds exceeded bear assets by a factor of more than 37 at one point last week.

Bullish investors had every reason to feel smug in recent months. And while there are a number of bears of varying degrees of prominence who have become cautious much too early (many of whom have fallen silent over the past year or so, but that is how it always works…), there are very few traders who are actively betting on a downturn. And yet, we know that the main bubble fuel – namely, broad true money supply growth – is faltering.

Last Friday, after discussing with friends of ours what the best way to play tail risk currently probably is, we updated a few of the charts we showed in those articles. More on the former topic follows further below, but first here are a few charts we made on Friday, just before the recent minor dip began – i.e., the charts are not showing this dip yet, but this is actually not relevant for our purpose. The first chart is a weekly chart of the DJIA as of Friday last week (we are focusing on the DJIA because it is the “bubble leader”).

A weekly chart of the DJIA as of Friday last week. To be perfectly honest, we are actually not 100% sure if a weekly RSI exceeding 92 is entirely “unprecedented”, although we strongly suspect it is. What we do know for certain is that it has not happened in at least 45 years. As noted in the insert, this manic RSI reading has coincided with DSI readings (daily sentiment index of futures traders) on stock index futures that were the exact opposite of the extreme DSI readings recorded at the low in March of 2009.

When it comes to charts, we like to keep things simple – cluttering them up with all kinds of oscillators and overlays is not really our thing. We do however traditionally use RSI and MACD as overbought/oversold indicators, mainly in order to spot divergences, which are often helpful for short to medium term timing. When we looked at longer term charts to see whether the DJIA had ever posted a weekly RSI above 92 before, it occurred to us that this was probably extremely rare for any stock market index.

It turns out we were right about that. As an example, when the great tech mania of the late 1990s topped out in March of 2000, the Nasdaq’s weekly RSI stood “only” at 84. In the DJIA, even the monthly RSI finally exceeded …read more