Technical Scoop Weekend Update

Weekly Update

Week one of the Trump Presidency and already it is mired in controversy. From “fake news” to “alternative facts” we are quickly learning there is an “alternative universe” that apparently the leader of the “free world” is occupying. Speaking of “free world” we learned this week that the US had been downgraded to a “flawed democracy” by the Economist’s Intelligence Unit. Almost half the world’s countries are considered to be democracies of some sort. Only 19 including Canada are considered to be full democracies.

Controversies broke out as a result of Trump’s speech to the CIA; how many people showed up at the inauguration; the “wall” along the border of Mexico where the Mexican President cancelled a meeting with Trump as Mexico reiterated their stance that Mexico “would not pay for that wall”; his banning of Muslins from a number of Mid-East countries that resulted in chaos on the weekend; and, possibly the most egregious that “millions of people” had voted illegally in the last election without presenting any evidence. The latter was like a “wink, wink – nudge, nudge” nod of head that “we know”. The claim was widely derided given that no evidence was presented. Trump has ordered an investigation into it on the firm belief that it is true.

All of this reminds us of the canard that Iraq had weapons of mass destruction (WMD) in order to justify the 2003 US led (illegal) invasion and occupation of Iraq. To this date no WMD were ever found and it was suggested that they were instead moved to Syria. This of course is only one of the unspoken reasons why Assad of Syria must go so that the WMD can be found. It resulted in a huge loss of credibility for the Bush administration and they never recovered. The wars continue to this day.

History is littered with “false flag” operations in order to justify an action (usually war) and of high ranking leaders lying in order to reach their end goals. Propaganda is the staple of dictatorships. Given the numerous accusations of “falsehoods” hurled at Trump the lies may well be rising to a new level. And what appears to be concentrated war on the press particularly what is known as the “mainstream” press (i.e. New York Times, CNN etc.) will no doubt continue.

Model Portfolio

It wasn’t a particularly good week for our model portfolio. The S&P TSX Gold Index (TGD) was down on the week by 1% although overall (simple average) our portfolio was down 3%. Only 3 of our 10 picks eked out a gain on the week. It is not unusual to see these kinds of moves on a week to week basis. Detour Gold (DGC) appears to be struggling a bit but we remain overall quite confident in the company. Moneta Porcupine (ME) is our other loser at this point and again we remain quite high on the company. Still up (simple average) 8.2% on the year.

Source: David Chapman

MARKETS AND TRENDS

Source: David Chapman

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

Key Economic Numbers Week January 9-13, 2017

Source: www.tradingeconomics.com

Source: www.shadowstats.com, www.data.bls.gov, www.statcan.gc.ca, www.tdeconomics.com

The US Q4 GDP number had to be a disappointment. Annually GDP has come in the weakest the collapse of 2008 although you would never know it from the stock market. It bodes poorly for going into 2017. Overall the US economy never fully recovered from the 2008 collapse and now appears to be rolling over slowly. Durable goods showed that things are still stagnating. The market actually expected a 3% rise not a 0.4% decline.

An exciting upcoming week. The FOMC meets this week and the interest rate decision is on Wednesday. Watch language as no change is expected. Expect President Donald Trump to take pot shots at Fed Chair Janet Yellen. Friday is the release of the January employment numbers. Market is looking for at least 170 thousand nonfarm payrolls and the official unemployment rate (U3) to remain steady at 4.7%.

Source: www.stockcharts.com

Break out the bubbly! Drop the balloons! Put on the party hats! MAKE NOISE!!!!

The Dow Jones Industrials (DJI) crossed 20,000 this past week for the first time ever. The DJI crossed the 10,000 barrier back in March 1999. So it took almost 18 years for the DJI to double in value. So what was the cause for celebration? Well even if the Trump agenda is facing protests in the streets the business and money investment community is embracing it. This past week Trump approved the Keystone pipeline and the Dakota access pipeline (DAPL) to both go ahead. That both of them will face numerous hurdles including potentially disruptive protests before they really do see the light of day almost seemed irrelevant to those that helped push the DJI past 20,000.

Trump’s pro-business agenda is being embraced by the market. Tax cuts, deregulation, expansion of the military and economic stimulation through an infrastructure program are still to come. Banks, defence stocks, infrastructure stocks, materials and pipelines all benefitted. But there are negatives lingering in the background. The market has been rising now for almost eight years with only shallow corrections less than 20% seen in 2011 and again in 2015/2016; valuations as measured by the Case Shiller PE ratio are at levels rarely seen marginally lower than what was seen in 1929 prior to the stock market crash and Great Depression and just below the levels seen in 1999 prior to the Internet/High Tech crash of 2000-2002 yet higher than the level seen prior to the 2008 financial crash; margin debt on the NYSE is hovering just below record levels (see chart); the Buffett Indicator (Market Cap to GDP) is at its third highest level since the measurement was devised with each previous high preceding a sharp market correction.

None of these are a suggestion that the market is about drop precipitously but they are a sign that if a spark occurred it could result in a sudden sharp decline in the stock market given the long period that has seen the stock market steadily rise with little or no corrective period.

Breakdown on the DJI appears to be currently around 19,700. We continue to have objectives that could see the DJI rise to the 21,500 zone. Most stock markets made new all-time highs this past week besides the DJI. Joining the DJI was the Dow Jones Transportations (DJT), the S&P 500 and the NASDAQ. No divergences here. Elsewhere the S&P TSX Composite also hit new all-time highs with a small gain of 0.2%, the TSX Venture Exchange (CDNX) jumped 1.5% while the Russell 2000 gained 1.4% but remained just below its previous all-time high. Overseas the London FTSE fell 0.2%, the Tokyo Nikkei Dow (TNK) was up 1.7%, the Shanghai Index (SSEC) was up 1.2%, the German DAX was up 1.6% but the Paris CAC 40 fell 0.2% and finally the MSCI World Index gained 1.3% to a new all-time high. If there was a divergence anywhere it was with the Dow Jones Utilities (DJU) that was essentially flat on the week but remains down 9.1% from its all-time high.

Source: www.dshort.com

It seem that margin debt just grows and grows as the market goes higher and higher. Margin debt peaked back in early 2015 just prior to a sharp market correction in August and after a bounce the market plunged again into February 2016. The stock market has been on the rise ever since although margin debt has not as yet gotten back to the pre-2015 drop’s levels. But it is easy to note that margin levels today are higher than they were prior to the 2000-2002 High Tech/Internet collapse and prior to the 2008 financial collapse. It’s a warning sign not a suggestion that the market is at dangerous levels.                                                                   

Source: www.stockcharts.com

Since the low seen last February there has been three occasions that saw the MACD indicator cross to the downside. None of them have amounted to much in terms of a drop. The 200 day MA captured the low in June 2016 and again in November 2016. After each low the market marched to new all-time highs. Could the S&P 500 be forming a sharp ascending wedge triangle? If so there is very little room for the index to move much higher, maybe 2,300. It hit that level this past week. A breakdown under 2,275 could start a decline. Major support is seen down to 2,150.

Source: www.stockcharts.com

“They are getting away with murder”. So declared President Trump on January 11, 2017. And the biotech stocks crashed. Trump also added they “need new bidding procedures”. Dramatic? Yes but the Biotech sector had been weakening for months and all it needed was another spark.  The Biotech Index topped way back in July 2015 at 4457 some 40% higher than current levels. After bottoming in February 2016 along with the rest of the market the Biotech sector has been making a feeble recovery. The most recent top was seen in August 2016 at 3,512 and the index has been falling, recovering, falling, recovering and then down again. The pattern is a failing index. All Trump provided was a little spark to cause the latest downdraft. The forming triangle breaks down 3,100. The entire pattern is a failing one. There is little or no sign that would suggest that this index is going to move higher Trump or no Trump.

Source: www.stockcharts.com

The feeble rally that occurred in December 2016 appears to be running out of steam. There continues to be sign that foreign entities are dumping US Treasuries. China is no longer the largest holder of US Treasuries being supplanted by Japan. China’s holdings are down over $200 billion in the past year while Japan’s are stagnating. Rises have been seen in tax havens such as Ireland, Luxemburg and the Cayman Islands. The Fed balance sheet also continues to rise suggesting that the Fed is a significant buyer. Foreign official holdings are down almost $350 billion.

Inflation has ticked up somewhat over the past year and that is pressuring bonds. We also can’t help but note some $90 billion of commercial mortgages that were taken out prior to the 2008 financial collapse are coming due. Lenders are clearly nervous and delinquencies have been rising. Besides what is coming due more immediately an estimated $700 billion is up for renewal over the next decade. Further a total of $250 billion of mortgage backed securities were pedalled to institutional investors in 2007 again prior to the 2008 financial collapse. Extremely low interest rates fuelled the borrowing binge. Rising interest rates are anathema to the commercial mortgage market.

The pattern on the TLTs appears to be one that should take prices lower. The test of the sharply falling 0 day MA was on low volume.  US Treasuries are the prime credit. Other credits pay more, sometimes a lot more.

 

Source: www.stockcharts.com

The US$ Index continued its recent losing streak. Significant support lies below near 99 and then down to 97. We could be in the process of forming a potential head and shoulders pattern if the US$ Index were to experience a feeble bounce back over the next week or two. That could set up a neckline at 100. While 103.82 is short of our targets of 106-108 it may be sufficient. Selling of US Treasuries by foreigners is not helping the US$ even as funds are moving into the stock market. Regaining above 102 might begin to negate any H&S pattern. Note the high on the possible left shoulder was at 101.97. Usually an H&S pattern is negated taking out the left shoulder.

Source: www.stockcharts.com

Gold continued its recent pause this past week losing 1.4%. Silver led gold finishing the week with a gain of 0.7%. Platinum also put in an up week with a 0.8% gain. The gold stocks were generally flat to up on the week with the Gold Bugs Index (HUI) gaining 0.2% but the TSX Gold Index (TGD) lost 1.1%. Both are up in January 11.3% and 7.7% respectively.

Since bottoming back on December 15, 2016 at $1,124, gold has been steadily rising. Gold tends to have strong seasonals that can generally run from December through to at least February and the annual PDAC in early March. Sometimes it goes on for longer into March before a corrective period sets in. This is the first good correction since the December low suggesting this may be wave 2 of what should be a five wave advance. One can’t say that the current correction is over until at least gold breaks out above the recent $1,220 high on volume. This current drop may be either a wave 4 correction of the advance that got underway in December or it is the A wave of a corrective that may not as yet be complete.

Either way gold should move to new highs once this is complete. The drop on Friday took gold to its 50 day MA near $1,180 (low $1,179.70) before reversing and closing higher on the day. This suggests that Monday should be an up day assuming follow through from Friday. Resistance lies up at $1,230 to $1,250 and even up to $1,270. Above $1,270 gold would make an assault on $1,310. Support remains at $1,180 and even stronger support down to$1,160. We doubt we will drop that low.

Source: www.stockcharts.com

Silver was up 1.7% on Friday allowing silver to have a gain on the week of 0.7%. Friday actually saw silver put in an outside reversal day meaning its low was lower than the previous day and silver closed higher with a high above the high of the previous day. The reversal day was not a key reversal day. Like we are not sure whether this is just a wave 4 correction to the rally that started on December 20, 2016 at $15.68 or the A wave of a coming ABC type correction to the entire move. Key is the previous high at $17.36. If silver can take out that level on good volume it would suggest we are underway for a move to stronger resistance near $18. On a positive note silver broke over $17 and closed the week over that level. On any pullback it would be important for silver to hold above $16.50 otherwise silver may be about to fall back to test the recent $15.68 low. Silver may also be trying to form a head and shoulders pattern and we are now working on the right shoulder. The left shoulder low was at $16.15 so that level is important to hold.

Like gold we are encouraged by the up move and silver’s seasonals like gold are positive during this period. A number of silver stocks have performed well thus far this year. Of note is the fact that we hold two silver stocks in our model portfolio Pan American Silver (PAA/TSX) and Endeavour Silver (EDR/TSX) and they just happened to be our best performers. 

Source: www.stockcharts.com

The pattern on silver expressed in Cdn$ is very similar to the chart of silver in US$. Silver in Cdn$ is up 4.7% slightly less than the gain of 7.2% expressed in US$. It is a function of a Cdn$ that has been stronger so far in 2017. Silver in Cdn$ has resistance at $23 but above that level a run to $23.50 and $24 is probable. Much depends on the value of the Cdn$. A weaker Cdn$ would get us higher faster but a stronger Cdn$ slows the advance. Nonetheless like silver in US$, silver appears to have made a potential important low in December 2016. Breakouts above $23 and especially above $24 would go a long way to confirming the low.

Source: www.stockcharts.com

After making a low of 64.84 back in July 2016 the gold/silver ratio as been trading in a sideways pattern generally between that low and 74. On Friday the gold/silver gaped down from a consolidation pattern suggesting that the gold/silver could move lower. A declining gold/silver means silver is outperforming gold while a rising gold/silver ratio means gold is outperforming silver. In a bull market one wants to see silver leading the way and that is why it is important to keep an eye on the gold/silver ratio. If both gold and silver prices were rising but the gold/silver ratio was also rising it would suggest that silver is weak vis-à-vis gold and the rally is probably not sustainable. So it was heartening to see this gap down on Friday as it suggests that silver may be poised to assume its leadership role with gold. A falling gold/silver ratio is bullish and usually means that both gold and silver are rising in price whereas a falling gold/silver ratio usually implies a bear market for both gold and silver.

The gold/silver ratio hit a low of 31.50 in 2011 at the top for the two precious metals and it hit a high of 84.40 in February 2016. Since then the ratio has been falling suggesting that gold and silver have both entered a new bull market. Key of course is new lows for the ratio. That would occur with a break under 65.

Source: www.stockcharts.com

The Dow Jones Industrials (DJI) Gold ratio commonly known as the Dow/Gold ratio is closely watched to determine whether one should be long stocks or long gold. Since gold peaked in 2011 the ratio has favoured stocks over gold. Since 2015, however, the ratio has been in a choppy wide ranging pattern known as a broadening pattern. Broadening patterns often signal markets that are becoming increasingly emotional. Certainly we appear to be seeing that with the broad stock market where valuations and other measurements are at or near extremes yet the market keeps going higher. But countering it is gold that often acts as a hedge against the emotional stock market. Not that gold can’t become emotional as well especially at tops and bottoms. At tops you can’t find a gold bear and at bottoms you can’t find a gold bull. That was the situation in December 2016 when unsurprisingly the Dow/Gold ratio made its top on December 15, 2016 at 17.66. Since then the ratio started a decline favouring gold over the stock market. Except in the past week the ratio has bounced up again on the back of what we are calling the “Trump” rally. It is an emotional rally based on what many see as the pro-business agenda of Trump but it is against the backdrop of rising social unrest on the streets. While gold has corrected back gold remains up 3.2% in 2017 while the DJI is only up 1.7%. In 2016 gold and silver were stronger performing assets with gains of 8.5% and 15.2% respectively. The DJI was up 12.3% in 2016 while the S&P 500 gained 8.5%. WTI oil was the best performer in 2016 with a strong 45.9% gain.

Broadening patterns are usually have five points. Point 1 was at 15.39 in November 2014, point 2 13.37 in January 2015, point 3 at 17.01 in December 2015, point 4 at 12.43 in February 2016 and finally the most recent point at 17.66 in December 2016. The only caveat is that the top did not hit the top of the broadening channel so there could yet be one more peak to come before the Dow/Gold ratio starts a long descent in favour of gold.

Source: www.stockcharts.com

The gold stocks as represented by the Gold Bugs Index (HUI) recently broke the downtrend from the high seen in August 2016 at 286. The recent correction saw the HUI down 44% very typical of the wide swings seen in the gold mining market. The HUI is still down 68% from the highs of 2011. So there is lots of scope for the index to move higher and often quickly. The good news is that the HUI bottomed in February 2016 and has since doubled. The pullback over the past week has been shallow and the HUI actually eked out a small 0.2% gain this past week. Below lies even stronger support at 186 and the 50 day MA. The HUI appears to be trying to find support around the 100 day MA and the 165 day EMA. Above lies resistance at 220 and the 200 day MA. Above 230 the HUI should be able to rise towards 250 resistance and eventually the July high. The gold stocks are leading the way as they should in a bull market. It is encouraging if you are a gold bull.

Copyright 2017 David Chapman

Disclaimer

David Chapman is not a registered advisory service and is not an exempt market dealer (EMD). We do not and cannot give individualised market advice. The information in this newsletter is intended only for informational and educational purposes. It should not be considered a solicitation of an offer or sale of any security. The reader assumes all risk when trading in securities and David Chapman advises consulting a licensed professional financial advisor before proceeding with any trade or idea presented in this newsletter. We share our ideas and opinions for informational and educational purposes only and expect the reader to perform due diligence before considering a position in any security. That includes consulting with your own licensed professional financial advisor.