- Interim Update 11th November 2020
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The Stock Market
The Vaccine News
Good news about a potential COVID-19 vaccine provoked some big moves
and impressive reversals in the US stock market on Monday 9th November.
Did these moves/reversals mark important trend changes?
One
consideration is that even if the vaccine created by Pfizer and its German
partner BioNTech is as effective as suggested by early reports and is
approved in quick time by the US Food and Drug Administration (FDA), the
planned rate of vaccine production would enable the vaccination of no more
than 10M people per month in the US. This means that it could take a
couple of years to get to "herd immunity", assuming that most people are
willing to take the vaccine and that the virus doesn't mutate in a way
that renders the vaccine ineffective. A second consideration is the
difficulty of transporting and storing the vaccine, given that it must be
kept at -70 deg C. Furthermore, even in a best-case scenario regarding
test results, approvals and distribution, the vaccine would have minimal
effect on the spread of the virus over the next few months. Therefore, the
price action during the early part of this week is an example of the
financial markets getting way ahead of on-the-ground reality.
Although the above is true, it's also the way that markets generally work.
When something (in this case a vaccine) is known to be coming, its effects
usually are discounted by the financial markets well before it arrives.
It's far too early to be sure, but we suspect that the big price
moves that occurred in reaction to this week's vaccine news signalled
important trend changes. At the moment in the US there are economic and
political risks that probably will weigh on sentiment over at least the
next two months and ensure that the discounting of a post-COVID world
doesn't happen in a straight line. There will be detours along the way,
but there's a decent chance that cyclical sectors such as oil and banking
are now on the road to much higher price levels. There's also a decent
chance that the mega-cap tech stocks and other stay-at-home plays have
seen their best days.
The Senate Risk
Currently, a Democrat in the White House and Republican Party control of
the Senate is the most likely final result of the recent US election.
Prior to the election we described this as the second most bullish
government configuration on a long-term basis, our thinking being that
Republican control of the Senate would prevent a 'hard left tilt' and that
the difficulty of the House, the Senate and the Administration reaching
agreement on anything would restrict government spending.
However,
there is still a realistic chance of the Democratic Party gaining control
of the Senate, which would happen if Democrats were to win the two Georgia
Senate seat run-offs scheduled for 5th January. In terms of the US
economy's long-term prospects, this would establish the most bearish
government configuration.
Due to the potential for the Georgia
Senate run-offs to shift the political balance of power, over the next
eight weeks the financial markets will have to deal with another "known
unknown" with major implications. Consequently, there is still more than
enough uncertainty to keep the markets 'on edge' in the short-term.
Current Market Situation
The S&P500 Index
(SPX) spiked well above its early-September high (3581) on Monday to a new
all-time intra-day high and then pulled back to below its September high.
It hasn't yet closed at a new all-time high, although it is within 8
points of doing so.
Of greater significance than the SPX's momentary new all-time high is
the breakout in the Bank Index (BKX) on an absolute and a relative basis.
As illustrated below, the BKX and the BKX/SPX ratio have broken above
their highs of the past four months. The BKX is now trading well above its
200-day MA for the first time since February.
Also of note is the performance of the Oil Services ETF (OIH), not
because of what it did but because of what it will do if it gains a little
more ground.
As illustrated by the first of the following charts,
the OIH rocketed upward on Monday 9th November. However, it is yet to make
a higher high on a short-term basis and this week's surge was capped by
the 200-day MA. Monday's impressive gain therefore wasn't sufficient to
signal a major change, but the second of the following charts shows that
if OIH can move above its 200-day MA and stay there for at least a few
days it will have done something it hasn't done since the first half of
2018. This would be evidence of a major change.
A major change for
the better should be signalled within the next three months and could be
signalled as soon as this month.
We don't see any reason to be short-term or intermediate-term bullish
on stock indices such as the SPX and the NDX at this time, but we continue
to like the idea of beefing-up exposure to the energy sector during
pullbacks.
Gold and the Dollar
Gold
In
the email sent to subscribers in response to Monday's dramatic market
action (Email Alert #291), we wrote:
"Counter-cyclical and
safe-haven plays such as gold and T-Bonds were sharply lower on Monday as
the market began to discount the superficial economic strength that will,
we think, appear during the first half of 2021.
The US$ gold price
dropped all the way back to its September-October lows in the mid-$1800s
and in doing so negated last Thursday's upside breakout. We expected a
pullback this week, but not such a steep one. We would have anticipated a
larger pullback had we known about the imminent vaccine news.
In
any case, Monday's price action is an example of why it generally isn't a
good idea to buy in reaction to an upside breakout. Generally it is better
to buy pullbacks to support than to buy breaks above obvious resistance.
The US$ gold price hit support on Monday and probably will bounce over
the next few days as the financial markets partially retrace Monday's big
moves, but there is now a high risk of our Gold True Fundamentals Model
(GTFM) turning bearish (the GTFM actually turned bearish on Monday 9th
November, but official changes in the Model are determined by the weekly
closing levels of its seven inputs). We continue to think that rising
inflation expectations will push the US$ gold price to new highs during
the first quarter of next year, but we also continue to think that the
industrial metals will outperform gold for at least another six months
(gold tends to be weak relative to the industrial metals when inflation
expectations are rising)."
Here's a chart that illustrates the
tendency for the industrial metals (as represented by the Industrial
Metals Index - GYX) to strengthen relative to gold when inflation
expectations (as represented by the ProShares Inflation Expectations ETF -
RINF) are rising. We've shown similar charts many times over the years.
Regarding the US$ gold price, there isn't much that we can add to what
we wrote in the above-mentioned email. The following daily chart shows
that support has held for now, as expected. More importantly, our comment
regarding a likely shift in the GTFM from bullish to bearish at the end of
this week remains applicable. If it happens, the implications will be
discussed in the next Weekly Market Update.
Regarding the euro gold price, the next chart shows that support
defined by the August-September lows was breached on Monday of this week
and that the 200-day MA has been tested. This means that in euro terms the
gold price has reached the target we had in mind over the past three
months.
Gold Stocks
In the above-mentioned email we
noted that the gold mining indices/ETFs were sufficiently resilient on
Monday to enable the HUI/gold ratio to stay above its 40-day MA. However,
the relative resilience evaporated the next day and the HUI/gold ratio
fell far enough to negate last week's bullish signal.
Last week's performance by the HUI/gold ratio created the impression
that the HUI was about to break upward from the channel in which it has
traded since early-August, but the following chart shows that the HUI
remains well within the confines of this channel.
Recent signs that the gold mining correction had ended disappeared
during the first half of this week, but our intermediate-term outlook
hasn't changed. Perhaps the gold sector will spend a few more weeks in
correction mode before commencing a new multi-month upward trend, but in
response to rising inflation expectations and a weakening US$ the HUI
probably will trade well above its August-2020 high during the first half
of 2021.
However, as has been the case for the past several months,
the intermediate-term outlook for the industrial-metals miners is more
bullish than the intermediate-term outlook for the gold (and silver)
miners. Therefore, while we will be on the lookout for good opportunities
to buy high-potential gold and silver mining stocks, we are more
interested in adding exposure to the stocks of companies involved in the
mining of copper, zinc, nickel, lithium and REEs. We are also more
interested in adding exposure to oil, natural gas and fertiliser
producers. That was the situation before this week and will be doubly so
if the GTFM makes a sustained move into bearish territory.
The Currency Market
Regarding the Dollar Index (DX), in
the latest Weekly Update we wrote:
"...to definitively signal
the resumption of its long-term decline the DX will have to achieve a
weekly close below its 1st September low (91.75). We plan to maintain some
hedges in the form of euro (FXE) and silver (SLV) put options until that
happens."
The DX rebounded over the first three days of this
week and does not appear to be in immediate danger of breaking below
91.75.
It's possible that the DX has just made a double bottom near 92 and
that a rally to the 96-98 range (the price area we've had in mind as a
target for a countertrend rebound) is underway. If this is going to happen
it should do so within the next two months.
Although the DX bounced
from support over the past three days and maintains the potential for a
much larger countertrend up-move than has occurred to date, the
probability of such a move is diminishing. The market/economic situation
remains very sensitive to news regarding COVID-19 and US political
developments, so a sudden shift in sentiment is more of a risk than usual.
However, this week's bounce in the DX currently looks more like a reaction
to last week's decline than the start of a sustained move to the upside.
In any case, it will be prudent to maintain some hedges against US$
strength until the DX realises its short-term upside potential by surging
to 96-98 or confirms the resumption of its cyclical decline by ending a
week below 91.75.
Updates on Stock Selections
Notes: 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.
Goldmoney
Inc. (TSX: XAU). Shares: 75M issued, 80M fully diluted. Recent price:
C$2.30
As advised in Email Alert #291, XAU.TO has been
added to the TSI Stocks List as a long-term position at Monday's closing
price of C$2.24. Based on the earnings generated by the company over the
past two quarters, the stock price has the potential to move up to at
least C$4.00 within the next 12 months.
The optimum place for new
buying would be near book-value-minus-goodwill, which means the C$1.80s.
However, the risk/reward is attractive enough to justify taking an initial
position near the current price.
Chart Sources
Charts appearing in today's commentary
are courtesy of:
https://stockcharts.com/
