- Interim Update 7th December 2016
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"Price inflation" to
heat up in the US during 2017
If the rate of US "price
inflation" doesn't accelerate during the coming 12 months then the
Economic Cycle Research Institute (ECRI) should find a new line of
business.
The ECRI's Future Inflation Gauge (FIG) is designed to
lead "price inflation" (as indicated by the CPI), with the average
lead-time being 9-11 months. As illustrated by the following chart, the
FIG commenced a steep rise in early-2016 and is now at its highest level
since June of 2008. The implication is that the CPI's growth rate is now
in an upward trend that will extend well into next year.
This chart
is a good reason to believe that the extremely 'oversold' Treasury market
will experience nothing more than a 1-2 month counter-trend rebound.
Uranium Revival?
There are signs that the
speculative juices are beginning to flow in the uranium-mining sector of
the stock market. For example, the stock price of Cameco (CCJ), the
world's largest listed uranium producer, has been in an upward trend since
early-November and is now up by around 40% from its low. For another
example, the stock price of Energy Fuels (EFR.TO, UUUU), a junior uranium
producer and a highly-leveraged play on uranium (EFR will be one of the
biggest winners during the next uranium bull market), moved sharply higher
over the past week and has possibly completed an intermediate-term base.
Here are the relevant charts.
The associated commodity, however, is showing no signs of life. As
illustrated by the first of the following charts from
https://www.uxc.com/, both the spot
uranium (U3O8) price and the long-term contract uranium price are at
2-year lows. As illustrated by the second of the following charts, the
2-year low is also a 12-year low.
In fact, in nominal dollar terms
the uranium price is no higher today than it was in late-1995. In real
terms the uranium price is probably at a 50-year low (effectively, an
all-time low).
Is the recent price action within the uranium-mining sector pointing
to a major turnaround in the uranium price?
The above question can
be answered by noting that the uranium-mining sector has predicted seven
of the past zero major turnarounds in the uranium price. In other words,
based on the track record of uranium-mining investors/speculators there is
no good reason to assume that the recent rallies in uranium-mining
equities mean that a sustained recovery in the uranium price will soon
begin.
We suspect that uranium-mining equities are being bid-up as
part of a general increase in the speculative demand for
industrial-commodity equities. The equity rally could continue, but it
won't be sustainable beyond a few months unless it is validated by
evidence that the uranium price has reversed direction.
With the
spot uranium price now at a level where almost all production is
unprofitable there is a realistic possibility that a major turnaround will
soon happen. However, we'll believe it when we see it.
The Stock Market
The US
The US stock market was strong over the first three days of this week,
especially on Wednesday. As a result, some important indices, most notably
the S&P500, have built on their recent upside breakouts. Interestingly,
however, the NASDAQ100 Index (NDX) is yet to break above its
September-October highs.
The most significant development stemming
from the stock-market strength of the past few days was a break to a new
all-time high by the Dow Transportation Average (TRAN). As illustrated by
the following weekly chart, TRAN has finally broken above the high set way
back in the final quarter of 2014.
TRAN's breakout removes the US stock market's only remaining major
bearish non-confirmation/divergence (the NDX's inability to get above its
September-October highs is currently a minor non-confirmation with only
short-term significance). However, it doesn't imply that there will be
meaningful additional upside over the weeks immediately ahead. This is
primarily because the breakout has occurred with the index at an
'overbought' extreme on both a short-term and an intermediate-term basis.
The only other time over the past 10 years when TRAN's weekly RSI was
near its current level of around 80 was in early-2013. At that time the
extreme RSI was followed by a multi-week pullback to the vicinity of the
20-week MA (the black line on the above chart).
Europe
Greece
Two weeks ago (in the
23rd November Interim Update), we wrote:
"...it's now worth
considering an intermediate-term bullish speculation on Greece's stock
market via the Global X MSCI Greece ETF (GREK). Even though this ETF is
US$-denominated and has therefore been pressured downward over the past
few months by weakness in the euro, it has broken above a downward-sloping
trend-line that originates way back in early-2015 and appears to be in the
process of tracing out an intermediate-term basing pattern. The top of the
base is near $9.00."
We went on to write that the Greek stock
market offered good value, that we had begun to average into GREK in our
own account and that we would probably add GREK to the TSI List if it
pulled back to around $7.50.
It subsequently pulled back to around
$7.50, but the pullback and the ensuing upward reversal happened too
quickly to be 'captured' in a TSI commentary and for the ETF to become
part of the TSI List.
GREK has gained about 12% to the US$8.40s
since completing its pullback to the US$7.50s early last week. It will
potentially test lateral resistance (the top of the base) at $9.00 this
month, but we suspect that it will spend several weeks or longer
consolidating in the $8-$9 range before completing its intermediate-term
basing pattern. There could therefore be another buying opportunity during
Q1-2017.
The Banks
In mid-July (in the
18th July Weekly Update), we wrote:
"While there's definitely a
risk that the current stresses in the European banking industry will soon
evolve into a full-blown crisis, we caution against being overly
influenced by some of the hyperbolic commentary doing the rounds. It's
possible that short-sellers of European bank stocks will make large
additional profits over the weeks ahead, but we appear to be close to the
point where every man and his dog are well aware of the bearish
fundamentals. When that happens, the path of least resistance shifts from
down to up."
It turned out that the European banking sector,
as represented on the following chart by the Europe 600 Banks Index (FX7),
had bottomed a week earlier and that the path of least resistance had
indeed shifted from down to up. FX7 has been trending upward and broke
above intermediate-term lateral resistance over the past two days.
By the way, it's not a fluke that the bottom for the European banking
sector coincided with the top for the gold market.
European banks are generally no healthier today than they were 5-6
months ago, so the problems that 'everyone' was worried about in June-July
will probably return to centre-stage during the first half of next year.
Gold and the Dollar
Gold
The
Treasury Bond is showing tentative signs of strength, which is removing
downward pressure from the gold price. However, at this time neither the
T-Bond nor gold has signaled a short-term reversal to the upside.
We aren't expecting anything more from gold over the weeks ahead than a
counter-trend rebound. The rebound should result in a test of resistance
in the low-$1200s and could extend as far as $1250, but given the
gold-bearish fundamental backdrop it probably won't do any better than
that.
In the coming Weekly Update we'll discuss the most likely
ways that the fundamental backdrop could soon (within a few months) turn
bullish for gold, thus enabling an intermediate-term rally in the bullion
market that paves the way for the sort of returns we seek from our
gold-stock speculations.
Gold Stocks
We suspect that the HUI is forming
a short-term base, although the recent price action could also be a
consolidation prior to a plunge to new multi-month lows. There's no way to
know.
The good news is that the 'technical' parameters are clear.
This is because a) the downward-sloping channel that dates back to
July-August is very well defined, b) the 50-day MA is very close to the
channel top, and c) both the channel top and the 50-day MA are now within
a few points of important lateral resistance at 195. This means that there
is currently a confluence of resistance in the 195-201 range. And since
the channel top and the 50-day MA are declining it also means that the
resistance range is shrinking.
A week from now (interestingly, at
around the time of the next FOMC announcement), the confluence of
resistance should be focused on 195.
In other words, a daily close
above the low-200s would currently be required to generate a clear-cut
reversal signal, but by the middle of next week it will probably only take
a daily close above 195 to generate the same signal.
If the recent price action is a short-term base rather than a
consolidation, the coming rebound should take the HUI as high as the
200-day MA (near 220) and could take the HUI as high as 250.
The Currency Market
It seems that the financial
markets are becoming increasingly inured to de-stabilising political
events. It took the markets 2 days to get over "Brexit", 2 hours to get
over the Trump victory and 2 minutes to get over the uncertainty caused by
the "no" result in Italy's referendum.
There's an ECB meeting later
today that will almost certainly cause some currency-market volatility,
but the euro continues to hold the line (major support at 105). As noted
in the latest Weekly Update, it could rebound as far as 110 before
resuming its intermediate-term decline.
Updates on Stock Selections
Notes: 1) To review the complete list of current TSI stock selections, logon at
http://www.speculative-investor.com/new/market_logon.asp
and then click on "Stock Selections" in the menu. When at the Stock
Selections page, click on a stock's symbol to bring-up an archive of
our comments on the stock in question. 2) The Small Stock Watch List is
located at http://www.speculative-investor.com/new/smallstockwatch.html
Chart Sources
Charts appearing in today's commentary
are courtesy of:
http://stockcharts.com/index.html
http://bigcharts.marketwatch.com/
