- Interim Update 22nd December 2020
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Merry Christmas!
Stupidity reigns at
the Fed
Last week the Fed promised to maintain aggressive asset purchases until
the economic recovery makes substantial progress. This would be funny if
it weren't so serious, given that the Fed's asset purchases (money
creation out of nothing) distort price signals and make a sustainable
economic recovery impossible. In reality, what the Fed is promising to do
is create another artificial boom that will collapse into a pile of
economic rubble soon after the monetary stimulus is removed.
Also,
last week the Fed predicted that its targeted interest rates will remain
near zero until at least 2023 and that "inflation" will be 1.8% in 2021.
We expect that both of these forecasts will be 'blown out of the water'
next year. Based on what has happened on the monetary and fiscal fronts
this year and what's likely to happen over the next several months,
there's a good chance that the US CPI will print above 4% by the middle of
next year (reflecting an actual rise of 8%-10% in the average American's
cost of living) and that the combination of obvious signs of "inflation"
and rising yields on long-dated government bonds will force the Fed to
start hiking its targeted interest rates before the end of next year.
More money for the
masses
The two major US political parties have come to agreement regarding
another round of fiscal 'stimulus' (financial aid to households and
businesses)*. At US$900B the new stimulus package is only about 40% the
size of the previous package (the $2.2T program introduced in March), but
it's a good bet that during the first quarter of next year the new
Administration will attempt to get approval on another $1T+ stimulus
package as well as a massive infrastructure bill.
The upshot is
that the monetary and fiscal floodgates are set to remain wide open for
many months to come in the US, maintaining downward pressure on the US$
and upward pressure on most things priced in dollars.
*At the time of writing President Trump has refused to approve the
deal, not due to any pangs of financial prudence but because the amount of
additional government spending/debt is too small.
The US monetary
inflation rate stabilises
The US monetary inflation rate
has stabilised over the past five months, but the stability is occurring
at an extremely high level. As illustrated below, the year-over-year rate
of growth in US True Money Supply (TMS) stayed in the 34%-36% range during
July-November.
For all intents and purposes, the rate of growth in the supply of US
dollars has probably peaked for the cycle. If it hasn't and the
money-supply growth rate is above this year's peak in six months' time
then our current "price inflation" forecast will prove to be conservative,
but the more likely outcome is that the US monetary inflation rate will
trend downward during the next 6-9 months.
It's important to
understand, though, that it usually takes years for the effects of major
changes in the money supply to ripple through the economy. As a result,
inflation expectations typically peak years after a major peak in the
monetary inflation rate and bottom years after the monetary inflation
trend has reversed upward. Consequently, inflation expectations probably
won't peak before 2022 even if the monetary inflation peak is behind us.
The Stock Market
The US stock market sold off at
the start of this trading week despite bullish news in the form of an
agreement regarding fiscal stimulus and positive results from the Fed's
latest commercial bank stress tests. This is probably because the stimulus
deal was in line with expectations and because the bullish news was
counteracted by the UK government's decision to implement severe lockdowns
over the Christmas period in reaction to the latest surge in the number of
COVID-19 cases.
Anyhow, on a trending basis nothing has changed.
The first of the following daily charts shows that there was a volatility
spike at the start of this week (the VIX got as high as 32 on Monday
morning), but the second chart contains no evidence that the SPX's
short-term upward trend has ended. Instead, what we got during the first
two days of this week was a pullback that held the 20-day MA on a daily
closing basis.
For the SPX, trend-defining support lies at around 3550. This implies
that the SPX could drop as far as 3550 without signalling that its
short-term upward trend was in trouble. By the same token, a solid daily
close below 3550 would be preliminary evidence that a short-term top (a
top that holds for 1-3 months) was in place.
The seasonal pattern
suggests that the SPX's upward grind will continue until at least
mid-January. However, we wouldn't attempt to profit from this probable
outcome via leveraged short-term trades, because the risk of something
going wrong is high. Ideally, you will be positioned such that your
intermediate-term holdings of cyclical stocks (e.g., the stocks of
industrial commodity producers/explorers) will enable you to profit from a
3-6 week extension of the upward trend, but you will have a sizable cash
reserve and will not be depending on an extension of the short-term rally.
If the rally extends into January then at that time we will consider
taking a more defensive or bearish stance. For example, we possibly will
add some SPY (S&P500 ETF) and/or IYT (Transportation ETF) put options to
the TSI List.
Our guess at this time is that the next meaningful
stock market correction will be similar to the early-2018 episode. As
illustrated by the following chart, in 2018 there was a 2-week plunge in
the SPX from a late-January peak to the 200-day MA.
Gold and the Dollar
Gold
In
the email sent to subscribers on 20th December, we wrote:
"Gold
and the Treasury Bond, the two most important safe havens, are trying to
'carve out' short-term bottoms. Gold is doing better at the moment because
in addition to benefiting from declining economic confidence it benefits
from US$ weakness."
And:
"The US$ gold price
signalled an upward reversal of its short-term trend last Thursday. Such
signals usually don't create immediate buying opportunities, but buying
opportunities can be created by subsequent pullbacks."
If you
are in the habit of buying in reaction to obvious signs of strength and
selling in reaction to obvious signs of weakness, then it's likely that
you regularly buy near multi-week tops and sell near multi-week bottoms.
Clearly, it's a bad habit.
Since generating an obvious sign of
strength by closing above its early-December high last Thursday, the gold
price has dropped by about US$20. The pullback is minor to date, but it
could become more significant within the next couple of weeks.
There's a good chance that gold has embarked on a 1-3 month rally, but
the pullback from last week's high will have to become more significant to
entice us to 'go long' for a short-term trade. At this time we don't feel
any urgency to buy gold or gold derivatives for a short-term trade because
we have ample exposure to the monetary metal via longer-term positions.
Silver
Although gold has some
commercial/industrial applications, these are trivial in relation to the
demand associated with its monetary characteristics. For all intents and
purposes, it is 100% a monetary metal. Silver, however, is part monetary
metal and part industrial metal. Silver's monetary characteristics
dominate most of the time, which is why major trends in the silver price
invariably line up with major trends in the gold price, but silver tends
to do better than gold when industrial metals are in bullish trends and
worse than gold when industrial metals are in bearish trends.
Over
the past nine months and especially over the past two months, industrial
metals generally have done very well. Therefore, it's not surprising that
silver has been in a rising trend relative to gold over the past nine
months and has held up better than gold over the past two months.
Industrial-metals-related speculation had a very noticeable effect on the
silver market during the first two days of this week when the silver price
surged from US$26.00 to US$27.64. This sharp rise took the price well
above obvious resistance (see chart below) and in the process possibly set
a multi-week top.
As is the case with gold, silver has done enough
to suggest that its short-term trend has reversed upward, but a more
significant pullback is required to create a short-term buying opportunity
with a sufficiently attractive -- from our perspective -- risk/reward
ratio.
Gold Stocks
The HUI moved up to its 50-day MA
last week and then reversed course.
The HUI/gold ratio moved up to its 40-day MA last week and then
reversed course.
If the gold mining sector (as represented by the HUI) didn't make a
short-term bottom in late-November then it should be close to doing so.
However, the price action of the past several days has kept alive the
possibility of a plunge to a new multi-month low prior to the start of a
tradable rally.
There is no evidence that the decline from the
August-2020 peak is complete, but as mentioned in recent commentaries the
risk of a final plunge -- for those looking to add exposure to the gold
sector -- can be mitigated by averaging in. Keep in mind, though, that the
economic/financial backdrop probably will favour the industrial metals and
the associated stocks over gold and the associated stocks for at least
another six months.
The Currency Market
Due to our vacation, the most recent TSI commentary was the 14th December
Weekly Update. In that report we wrote:
"At some point there
will be a sizable countertrend move in the DX, but at this stage it
appears that such a move won't occur until the first quarter of next year.
In the meantime, any reaction to the upside probably will be minor and
capped by either the 20-day MA or former support (now resistance) at
around 91.8."
There was a reaction to the upside over the past
two trading days that was capped by the 20-day MA. Considering the extent
to which the DX is stretched to the downside it won't surprise us if the
current move extends to resistance at 91.8, but we doubt that a
significantly larger rebound will occur in the near future.
As
previously mentioned, long-term support at 88 beckons.
The following chart shows that during the first half of December the
Canadian dollar (C$) broke above resistance at 77 and quickly rose to 79.
It has since pulled back to 'test' its upside breakout.
We expect
the C$ to continue its intermediate-term advance during 2021 on the back
of rising commodity prices, but we have no opinion regarding its
short-term prospects. It's possible that a short-term top is in place, in
which case a decline to as low as 74.5 could be on the cards. However,
it's also possible that the decline from last week's top is just a 1-3
week 'pause for breath' within an on-going short-term upward trend.
Over the past eight months we have been bearish on the Canadian dollar
relative to the Australian dollar (A$), primarily for one simple reason:
we have been bearish on the US$. The C$ tends to be weak relative to the
A$ when the US$ (the DX) is in a downward trend and strong relative to the
A$ when the US$ is in an upward trend.
The following chart shows
that the C$/A$ exchange rate peaked at around 1.20 in mid-March, which was
when the DX was hitting a major high. It has since fallen to 1.03.
Our guess is that the C$ will trade at least 5% below the A$ before the
C$/A$ rate bottoms on a long-term basis.
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.
Option
Trades
1) FXE (euro) and SLV (silver) Put Options
Due to the risk of a strong countertrend rebound in the US$ and a
final plunge in the silver price, until last week the TSI List had FXE and
SLV put options with December-2020 expiry dates. These options expired
worthless last Friday.
In the TSI List there remains an SLV $20
put option with a 15th January-2021 expiry date. This option is a long way
out of the money and has minimal value at the moment. There is a chance
that the silver price will fall far enough within the next two weeks to
inject significant value into this option, but if we were buying more SLV
options for hedging purposes we would choose the January-2021 US$23.00
put.
Unless you have substantial silver exposure to protect, at
this point it is better to wait for a good opportunity to establish a
BULLISH silver speculation via the purchase of SLV calls with expiry dates
in mid-2021 than to speculate on or insure against a correction-ending
price plunge.
2) Cronos (CRON) Call Option
We are bullish on the cannabis sector and would like to have an
intermediate-term cannabis-related speculation in the TSI List. Therefore,
the July-2021 CRON US$10.00 Call Option has been added to the List at the
22nd December closing price of US$1.10.
With reference to the
following chart, CRON has been building a base over the past 14 months.
The top of the base is at US$9.00 and there appears to be good support
near US$7.00.
We think that the stock has the potential to rise to
US$14-$16 during the first half of next year.
By the way, a scaling in/out approach works well with options just as
it does with stocks. This tactic obviates the need to get the timing
exactly right when entering or exiting a position.
Chart Sources
Charts appearing in today's commentary
are courtesy of:
https://stockcharts.com/
https://www.optimalprint.com.au/
