Timing the Turn

Timing the Turn

Gold made a slightly lower low on Friday 13th July at $1,236, which could mark the low for this Investor Cycle. We are certainly very close now in time. The current cycle has lasted 7 months and sentiment readings have now reached a level that suggests a turn is near. Significant gains can be made if you can time the IC low and hold for the first couple of daily cycles of the new IC. This is particularly true when gold is in a bull market. Since bottoming in December 2016, gold has has been trending higher, suggesting that a new bull market is underway, following the corrective process that occurred between 2011 and 2016. A close above $1,260 will confirm a new cycle has begun. 

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Head-And-Shoulders Top

Head-And-Shoulders Top

The German stock market has led the bull market in European shares in recent years but now looks to be losing momentum. The Dax Index is forming a head-and-shoulders top formation, indicating to me that the next move in the European indices will be lower, not higher. There are also divergences appearing in the RSI (relative strength) and MACD (momentum) indicators on the chart. The weakening technical picture provides a clue of the market's next move. However, until price confirms, I continue to wait.

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Indecision!

Indecision!

Stock market volatility is on the rise, a late-cycle phenomenon. In Europe, stocks have been chopping sideways in a directionless fashion for 18 months now. I continue to wait for the market show its hand. If the Eurostoxx 600 breaks out above resistance of 400-415 to new all-time highs, I will take a position in European shares in the Active Asset Allocator. If EU stocks roll over here and break below this triangle consolidation pattern, I will maintain the current defensive stance in the Active Asset Allocator. I sense we won't have to wait much longer for the stock market to show us the way. 

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Ag & Industrial Commodities Price in Fed Tightening

Ag & Industrial Commodities Price in Fed Tightening

Agricultural commodities (DBA) and Industrial metals (DBB) are feeling the heat from the recent bout of central bank quantitative tightening. The Federal Reserve raised interest rates by 25 basis points in June to 1.75%-2.00% and the market is pricing in another 2 rate hikes over the course of the next six months. The Fed is also withdrawing money from the banking system  directly at a rate of $20 billion per month, increasing to $50 billion per month by October. QT and rates hikes are a double whammy that will impact risk assets in unforeseen ways. Expect volatility to ramp higher. When the bubble pops and risk assets reprice, the Fed will step back on the gas and fire up the printing press once again. The resulting impact on stocks, bonds and commodities will be dramatic.

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Dollar Rally Ending

Dollar Rally Ending

The EUR rallied from $1.03 to $1.25 versus USD in 2017 and has spent the first half of 2018 consolidating those gains. The EUR declined from $1.25 in March to a low of $1.15 in June but that correction looks over now and the USD downtrend should resume shortly. The reason for the USD rally in 2018 is likely in response to the recent round of interest rate increases by the Federal Reserve. The Fed hiked rates again in June and the market is pricing in two additional interest rate increases in the US by the end of 2018. If long-term yields remain unchanged, the yield curve will invert as a result of the Fed's actions. The spread between 2 and 10 year Treasury yields is just 29 basis points today. 

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Miners on Sale

Miners on Sale

During the 2011-2016 correction in the gold market, the precious metal declined -42% while the gold miners collapsed -81%. Gold bottomed in 2016 and rallied $300 from $1,100 to $1,400. During that time, the miners almost tripled in price. Both metals and miners have consolidated those gains over the last 18 months and I am now expecting the next move up in both metals and miners to start shortly. I think the miners could be explosive on the upside once again. A glance at the chart below will show that the mining stocks, relative to the gold price, are as cheap today as they have ever been. Also of note, the gold miners have not declined this year despite the recent drop in the USD price of gold. This is an early indicator of strength in the sector. The Active Asset Allocator has taken a position in the miners in advance of what I expect will be a strong move higher.

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Breaking Down

Breaking Down

Participation in this bull market in stocks continues to narrow despite the major indices trading near all-time highs. Today, just 46% of the top 100 US companies by market capitalisation now trade above their 200-day moving average. When the majority of stocks start trending lower, a sell signal is triggered for the broader market. We are at a crucial juncture today. Unless stock markets can turn higher shortly, selling will likely accelerate. Watching closely now.

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Miners Getting Ready to Launch

Miners Getting Ready to Launch

Gold has spent the last few weeks falling into an Investor Cycle Low (ICL), a pattern that repeats each year with regularity. There are multiple signs now that I am observing suggesting we are at a major turning point, none stronger than the recent performance of the gold mining stocks. Usually erratic and volatile, the gold miners, captured by the Gold Mining ETF GDX, has steadfastly refused to drop despite the recent -9% decline in the precious metal. This suggests accumulation and GDX should accelerate higher once a new gold IC has been confirmed. The Active Asset Allocator will take a position in what I expect will be a powerful move higher over the next 3-4 months.

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Trouble Emerging

Trouble Emerging

The Chinese stock market continues to fall and the decline is accelerating. In the first six months of 2018, the Shanghai Stock Exchange Composite Index declined -23% and is now down -46% from the highs set in 2015. The Chinese renminbi has fallen sharply in recent months and may be causing emerging market equity investors some concern. However, a more fundamental reason is likely the cause for the increased risk aversion. Debt as a percentage of GDP has exploded in China over the last ten years, rising from 160% of GDP in 2008 to 266% of GDP in 2017 according to Bloomberg Economics estimates. Many suggest China is on an unsustainable path. The stock market is starting to reflect these greater risks.

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New Lows Increasing

New Lows Increasing

Stocks making new lows on the NYSE continue to increase and are starting to outpace new highs now as the market slowly transitions from bull mode to bear. Strength in the FAANG stocks conceals the deteriorating market breadth underneath, as smart money heads for the exits. Facebook, Amazon, Apple, Netflix and Google will be the last to fall and when they do, then the selling will really accelerate. For now, the market slowly drips lower a little more each day without causing any real concern.

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QT Triggers Market Reversal

QT Triggers Market Reversal

With yesterday's decline in the stock market, just 52% of the top 100 companies in the US as measured by market capitalisation now trade above their long-term 200-day moving average. When the majority of stocks start trending lower, a broader market sell signal is triggered. This market reversal is coinciding with efforts by central banks to reverse years of money printing via Quantitative Tightening (QT). I do not think they will get very far with this experiment. In Q3 2018, the US Federal Reserve will attempt to withdraw $120 billion from the market while the ECB will add $100 billion for a combined net withdrawal of -$20 billion. This net withdrawal by the Fed and ECB will accelerate sharply in Q4 2018 and 2019, unless the market breaks. All eyes are watching. Something has to give.

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Almost Time

Almost Time

Gold moves in cycles. Medium-term investor cycles (IC's) tend to last 5-7 months on average. Each IC ends with a selling climax as the last holders are washed out, clearing the way for a new cycle to begin. Significant gains can be made if you can time the IC low and hold for the first couple of daily cycles of the new IC. This is particularly true when gold is in a bull market. After bottoming in December 2016, gold has put in a series of higher IC lows, suggesting to me that a new bull market is underway, following the corrective process that occurred between 2011 and 2016.  6 months have passed since the last IC low took place in December 2017, so it is almost time for a new IC to begin.

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Tipping Over

Tipping Over

“At height of the great tech stock bubble in 2000 (record US stock valuations), the market cap of five highest valued tech companies was slightly over $2 Trillion..... Today, the combined market cap of AAPL, AMZN, GOOGL, MSFT & FB is $3.96 trillion or nearly 2x..... In 2000, the top five were MSFT, CSCO, INTC, ORCL & NOK. CSCO had the highest P/E (120, or 100 points lower than AMZN today). Over next 2 yrs, stock declines ranged from -62% to -90%. Nortel just missed the top 5 cut. It's stock lost 99%.” - Fred Hickey, The High Tech Strategist

While certain tech stocks continue to surge higher and prop up the broader market averages, outside of the United States, stock markets have already started to gently roll over, without much fanfare or notice from the public. The MSCI World (ex USA) Index has dipped and held below its 30-week MA. Emerging market stocks, particularly in China, also continue to trend lower. It is a dangerous time for equity investors but few seem concerned to date.

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End of an Era

End of an Era

On May 26th 1896, Charles Dow, then editor of the Wall Street Journal, constructed the first known index of US industrial stocks, which he named the Dow Jones Industrial Average (DJIA). The Index originally comprised just 12 industrial companies spanning sectors from sugar, tobacco, oil and gas to electricity, coal, iron, leather and rubber. The number of components in the DJIA later increased from 12 to 30 and in recent decades, the number of non-industrial stocks in the Index has risen sharply. Today, the DJIA includes many technology, financial and consumer discretionary brand names, while old economy industrial names are few and far between. Until now, only one company has lasted as a member of the DJIA since its (near) inception. That company is General Electric, added to the Index in 1907. However, the powers that be have now decided to remove GE, the last remaining link to Charles Dow, from the Index following its recent -58% share price collapse. It is the end of an era.

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China Falling

China Falling

China is the second largest economy in the world by GDP at $14 trillion according to the IMF, behind but catching the US at $20 trillion. The Chinese economy has been growing by 6% per annum, 4 percentage points ahead of US annual GDP growth. Chinese economic growth has been fueled by a massive expansion of government debt and this debt-fueled growth is starting to negatively impact the performance of Chinese companies trading on the stock market. While US equities continue to rally, albeit with performance being concentrated in just a handful of technology names, Chinese equities have started to drop sharply in recent months. The Shanghai Stock Exchange Composite Index has fallen -20% from the highs of January 2018 and have started to accelerate lower again in recent weeks. 

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Record Junk Bond Issuance

Record Junk Bond Issuance

Yesterday, in Credit Excess, I highlighted the fact that never before has so much debt been issued by the corporate sector in the United States on such a consistent basis. Since 2011, US companies have accelerated their issuance of corporate bonds to over $1.3 trillion per annum. Today, I discuss a recent study from the folks at Investech Research that focuses on the quality of that debt, or lack thereof. In the 1980's and 1990's, the majority of corporate bonds issued came from high quality, investment grade companies, while less than 5% of issues were considered high-yield or 'junk bonds'. Over the last decade, that trend has changed dramatically. Today, the amount of junk bonds being issued has never been higher and almost caught up with new investment grade debt issuance in 2017.  This surge in supply has been met with ever-increasing demand as investors reach for yield in riskier and riskier places. 

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Credit Excess

Credit Excess

US companies are gorging on debt. Never before has so much debt been issued by the corporate sector on such a consistent basis. Since 2011, US companies have accelerated their issuance of corporate bonds to over $1.3 trillion per annum. Record low bond yields have distorted the playing field. If US companies are raising capital for productive purposes, then issuing debt at record low yields makes a great deal of sense. However, if capital is being raised for less productive purposes, like buying back shares for example, in an effort to manipulate stock prices higher, then leveraging company balance sheets makes much less strategic sense. Stock prices may rise in the short-term but highly geared companies become much more vulnerable when the downturn inevitably comes.

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The Great Unwind

The Great Unwind

Dr. Edward Yardeni (www.yardeni.com) publishes some great research tracking the changes to central bank balance sheets over time. Since the Great Financial Crisis of 2008, total assets at the Federal Reserve, ECB and Bank of Japan have exploded from $3 trillion to $15 trillion. Money has flowed into capital markets across the world as a result and has led to a boom in equity and fixed income prices. The Fed was the first central bank to ramp up the printing press back in 2008, expanding its balance sheet from under $1 trillion to $4.5 trillion in just six years. The Fed then passed the baton on to the ECB and Bank of Japan who stepped on the accelerator over the last four years. Now, in their wisdom, our central bankers have decided it is time to withdraw financial support, all at the same time.

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Powell's Dilemma

Powell's Dilemma

The Federal Reserve raised the short-term Fed Funds rate by 0.25% to 1.75%-2.00% yesterday evening, as expected and to little fanfare. Long duration bonds rallied a little into the close of trading while equities declined marginally. The ECB is up next and Mario Draghi will today outline his plans for the potential partial removal of monetary support to European markets. It will be interesting to see how far he gets with that plan.

Fed Chairman Jerome Powell desperately wants to raise (short-term) interest rates but he is hesitant to increase faster than the market is anticipating for fear that he will invert the yield curve. Inverted yield curves (when 2 year yields > 10 year yields) are a precursor to recession. Today, 2 year yields in the US have surged to 2.59%, up from just 0.60% 24 months ago, while 10-year yields have reached 2.98%. The spread between 2 and 10-year yields has narrowed to just 39 basis points. 

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Long in the Tooth

Long in the Tooth

The current economic expansion is now in its tenth year and is the second longest in history at 36 quarters and counting. We have another year or so to go before this unprecedented period of expansion overtakes the current leader. The run into the 1999/2000 technology bubble and subsequent bust lasted 40 quarters, a full decade of uninterrupted real GDP growth. While the duration of this boom has been unparalleled, its strength has been less impressive. Cumulative growth over the last 9 years has amounted to just 22%, about half that experienced in prior booms of similar duration. Mounting government, corporate and household debt have curtailed spending and lowered the marginal propensity to consume.

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