Crypto Carnage

Crypto Carnage

Last May (Crypto Volatility) when Bitcoin was trading above $8,700, I wrote that, while bullish on the potential for the underlying technology, I expected the majority of these digital currencies would end up worthless. At the time, there were over 1,600 ‘coins’ listed on the Coinmarketcap.com website, with a combined market value in excess of $400BN. Roll forward to today, you can buy a Bitcoin for $3,980. There are now 2,073 coins listed on Coinmarketcap.com but their combined market value has plunged -67% to $131BN. Some will emerge from the carnage but the majority will die.

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Gold Cycle Revisited

Gold Cycle Revisited

Last month, I noted how the gold cycles have been a little trickier to navigate as we have experienced a series of quite abnormal left-translated daily cycles where the gold price pops higher at the start of a cycle and then trades lower for the next 10-15 days making it difficult to read. Since the last investor cycle kicked off in August, gold traded sideways for a few months before rallying in October. So far, the pattern is quite similar to the bottom that formed in late 2015. However, it is time for gold to get a move on now as the current investor cycle is starting to age. Gold broke through its 20-week moving average in October and is now coming back to test this support line from above. The clock is ticking for the current cycle.

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The Centre Must Hold

The Centre Must Hold

Back in May 2018 I started highlighting a potential head-and-shoulders topping pattern that was forming in the German stock market. Over the following 6 months, that pattern has played out to a tee with German equities recently breaking sharply lower in October. If the engine of Europe is slowing down, it does not bode well for the rest of the region. I am waiting patiently to add a position in European equities in the Active Asset Allocator, but as long as the growth engine of Europe is sputtering, cash remains the preferred position and capital preservation the primary focus.

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Riding the Curve

Riding the Curve

During periods of economic growth, long-term government bond yields typically trade 1.5% - 3.0% above short-term bond yields as fixed income investors demand a higher return on their capital for longer duration investments. As the market cycle matures, while short-term yields generally continue to rise, long-term bond investors tend to accept a lower return (yield) with capital preservation becoming a primary focus. The yield curve flattens as a result. The chart below captures the difference between 2 and 10 year US government bond yields.

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Trending Lower

Trending Lower

While the stock markets are bouncing off the lows following a brutal spate of selling in October, all is not well when we take a look beneath the surface. Despite the recent rally, just 35% of the 3,000+ stocks trading on the NYSE remain in uptrends, above their long-term 200 day moving averages. When two thirds of stocks in the US have shifted to a bear market downtrend, investors should be concerned and take heed. Following almost ten years of steadily rising stock prices, the tide has turned.

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Bouncing From Oversold

Bouncing From Oversold

Following the sharp break lower in October, stock markets are now bouncing from an oversold position. The NYSE Index lost -11% in October, so a relief rally is overdue in the short-term. A lot of damage has been done to the technical picture, however, following the recent sharp decline and it is likely now that a multi-year bear market has begun. Stock markets would need to recover quickly to negate this view. If we are now in a bear market, rallies should be sold rather than dips bought.

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Trouble Brewing in Europe

Trouble Brewing in Europe

I have been following the performance of the STOXX Europe 600 Index with interest, waiting to see if it could muster the strength to break out of the triangle consolidation that has formed since European stocks peaked in 2015. I was unsure whether the market would break out higher or lower, so I have been patiently waiting for the market to show its hand. A break higher and I planned to take a position in EU stocks in the Active Asset Allocator; a break lower and an overweight holding in cash would remain the order of the day.

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Breaking...

Breaking...

The recent sharp break lower in stock markets has done a significant amount of technical damage on the charts. Just 26% of the 3,000+ stocks that trade on the New York Stock Exchange are now trending above their long-term 200DMA, while a full 74% of NYSE stocks are in a bear market. News from the tech sector is not much better, where just 31% of NASDAQ 100 stocks are trending higher above their long-term moving averages. The stock markets need to bounce quickly and put in a meaningful rally or losses will accumulate rather quickly.

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Gold Cycles

Gold Cycles

The gold cycles have been a little trickier to navigate in recent months, not helped by a series of quite abnormal left-translated daily cycles and a longer than normal 8-month medium-term, investor cycle, which finally ended in August at $1,167. (I will go into more detail in the ‘Gold Trader’ section of the website once the current gold trade closes). Since the new investor cycle started in mid-August, gold has traded sideways, similar to the bottom in late 2015. However, I believe the precious metal is building energy to break out higher soon and I note with interest the recent close above the 20-week moving average.

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Chips Ahoy!

Chips Ahoy!

Semiconductor manufacturers are one of the more volatile sectors of the technology industry given the capital intensive, high fixed cost nature of their business. Semiconductor stocks are also very cyclical given that chips can be found in every industry and every country around the world. So, the chip stocks are a great barometer of the overall health of the economy and tend to lead the market up and down, similar to the banking stocks. Like the financials, the semiconductors peaked in early 2018 and have been making lower highs and lower lows in the intervening months.

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Banking On A Reversal

Banking On A Reversal

A healthy banking sector is a requirement for a healthily functioning economy. We saw back in 2008 what can happen when banks gorge on debt and lend recklessly to highly geared market participants. It never ends well. Banking stocks also have a tendency to lead the broader stock market, both higher and lower. Bank shares tend to discount future economic prospects faster than almost any other sector of the market. So, it is with interest that I note the recent turn lower in the financial sector.

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In Search of Shelter

In Search of Shelter

Last month, in ‘The Correlation Conundrum’, I noted that stocks and bonds have been rallying together since the 2009 lows and delivering strong positive returns for both equity and fixed income investors over the last decade. This trend, however, peaked in 2016, has drifted lower over the past two years and is now at risk of breaking meaningfully lower. With the recent weakness in both stock and bond markets in October, the chart below, measuring the relationship between the S&P 500 and the US 10-year yield has broken lower by -8% from 95 to 87 in the last four weeks.

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2018 v 1987

2018 v 1987

In my last post - A Look Back to Black Monday - I reviewed the performance of US equities, bonds and USD in the run up to the 1987 stock market crash. From 1981 to 1986, US equities and bonds went on a tear. The S&P 500 rallied +237% from 1982 to 1987, while bonds surged +84% higher. The USD ran up +68% and then collapsed -42%. The combination of an overvalued stock market, overly bullish investor sentiment, a collapsing currency and automatic trading programmes in place at the time resulted in the panic now known as Black Monday.

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A Look Back to Black Monday

A Look Back to Black Monday

In the run up to the 1987 stock market crash, from 1981 to 1986, US equities and bonds went on a tear on the back of sharply falling interest rates. Federal Reserve Chairman Paul Volcker had successfully tamed inflation by ratcheting up the Fed Funds rate from 4.7% in February 1977 to 19.1% in July 1981. Once inflation was brought under control, Volcker dropped the Fed Funds rate all the way back to 5.9% by October 1986. Cheap stocks and plunging yields led to a surge in equity prices. The S&P 500 rallied +237% from 1982 to 1987.

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Another Shoe Drops

Another Shoe Drops

Another shoe drops. Despite US equities continuing to deliver on the positive side of the ledger in 2018, market breadth is thinning out. Fewer and fewer stocks are trending higher and the majority have now flipped into bearish mode. Today, just 41% of the 3,000+ stocks on the New York Stock Exchange are trading above their long-term 200-day moving average. The stock market declined by -5% during the first two weeks in October. It has rallied in recent days but if this rally fails, the market could be in serious trouble.

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Got Gold?

Got Gold?

Regular readers will know that I am quite bullish on the outlook for precious metals, given the macroeconomic landscape, which we must navigate today. I have not always been a ‘gold bull’ and I look forward to the time again when I am not. Today however, I most certainly am and believe gold will prove to be one of the best investments over the next 5+ years. At times, stocks have been a better investment than the barbarous relic, and at other times, gold has outperformed all other asset classes. A glance the the chart below will provide a good guide as the the future path of both asset classes.

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Trend Reversals

Trend Reversals

US equities have acted as a port in the storm in 2018 while the majority of other asset classes have delivered negative returns for investors. Unfortunately, it looks like the US stock market is now joining the herd and rolling over after putting up an incredibly strong relative performance in recent years. The S&P 100 Index made a slightly higher high in October 2018 but the underlying trend has weakened sharply.

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Trouble Brewing!

Trouble Brewing!

Trouble is brewing across global equity markets, as I have been highlighting for months now. Dams are starting to break and risks are running high. European equities, measured by the STOXX Europe 600 Index, have been consolidating in a range for the past three years but look to be breaking lower now out of that range. There is a lot of room to fall.

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As Good As Gold

As Good As Gold

There should be no doubt of China’s long-term intentions to replace the US as the world’s global superpower. Part of that process is providing an alternative to the US dollar as the world’s reserve currency. Chinese policymakers have a long way to go in this regard but they are making progress. In 2015, China announced that the renminbi would no longer be managed against the USD but instead against a basket of currencies.

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Tech Leaders Retreating

Tech Leaders Retreating

The US Technology sector has been on fire in recent years. The tech leaders have accounted for the vast majority of the gains of the entire US stock market. Today, Apple, Amazon, Google, Microsoft and Facebook are worth a combined $4 trillion or 20% of US GDP, a remarkable achievement. Outside the US however, the picture is a little less favourable. SOCL, the Global Social Media Index ETF has corrected by -23% since the start of 2018.

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