- Interim Update 25th November 2020
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The Stock Market
Bullish Vaccine News
The stream of positive news on the COVID-19 vaccine/treatment front
continued this week.
The biggest beneficiaries of this news have
been the stocks of cyclical companies, that is, companies that tend to do
best during periods of relatively-rapid economic activity. Chief among
these beneficiaries have been the stocks of Oil and Gas (O&G) companies,
mainly because in addition to being 'cyclicals' they were/are trading at
very depressed valuations. Bank stocks also have outperformed for the same
reasons.
Interestingly, stocks that have not done especially well
in reaction to the positive vaccine news are those of the big
pharmaceutical companies that will make money from selling the vaccines.
This is understandable, though, because the amount of profit that likely
will be generated by the pharmaceutical industry through selling COVID
vaccines is not enough to 'move the dial' substantially for this
multi-trillion-dollar industry. Even the "big pharma" companies that are
positioned to profit the most by virtue of being first to market will not
achieve major earnings increases from the vaccines. That's why the stock
prices of Pfizer (PFE) and Astrazeneca (AZN) are no higher today than they
were 6 months ago in terms of depreciating US dollars and are near
12-month lows relative to the S&P500 ETF (SPY). Refer to the following
daily charts for more information.
Another consideration is that the vaccine news might not be as
positive as it superficially seems. The reason, as explained
HERE, is that the 90%-95% efficacy rates that have been touted in
press releases do not imply what they seem to imply. In particular, while
it is certainly possible that the companies involved are onto something,
there is no evidence, yet, that the vaccines prevented any
hospitalisations or deaths.
It might not matter to the financial
markets, though, because a) COVID-19 death rates are plunging (in the US
and many European countries, the virus's second wave has involved a much
larger number of cases and a smaller number of deaths), the public's
tolerance for lockdowns is wearing thin, and during the first half of 2021
there will be massive fiscal stimulus combined with ultra-easy monetary
policy. Moreover, the worse the COVID situation appears to get over the
next couple of months, the greater the monetary/fiscal stimulus will be
and the higher that prices will go during H1-2021.
Current
Market Situation
The SPX achieved a new daily-closing
all-time high on Tuesday of this week and then pulled back a little on
Wednesday. The NYSE Advance-Decline Line (ADL), which is shown in the
lower section of the following chart, also made an all-time high on
Tuesday.
The market is closed on Thursday for the US Thanksgiving holiday, so
this week only has one more trading day and trading on that day should be
light due to many market participants taking a 4-day weekend. Therefore,
unless there is some important unexpected news, the SPX probably will end
this week not far from its current level.
We perceive a high risk
of a short-term correction for the reasons mentioned in the latest Weekly
Update, but not a major decline.
Gold and the Dollar
Gold
The
gold price tested support near US$1800 on both Tuesday and Wednesday of
this week. It could test the more important (for the intermediate-term
trend) support near $1700 before making a sustainable low, so we think
there's about $100 of remaining short-term downside risk.
A rebound
could begin at any time, but the short-term risk/reward does not yet
favour a 'long' position in gold. The intermediate-term risk/reward is
bullish for gold, but it's more bullish for many other commodities.
Silver
Silver held up better than gold over
the first three days of this week and hasn't broken out to the downside
yet. As illustrated below, the silver price stopped at the 'precipice'
(support at $23.00).
The following chart shows that silver has been in an intermediate-term
upward trend relative to gold since mid-March. This performance is due to
silver being part industrial metal and part monetary metal. Silver's
industrial component caused it to weaken relative to gold in a big way in
response to the economic lockdowns and strengthen relative to gold in a
big way in response to the economic rebound. The intermediate-term upward
trend was interrupted during September due to election uncertainty and
fading economic confidence.
We expect that silver will continue to outperform gold over the coming
2-3 quarters, but in the short-term it is more vulnerable than gold to a
US$ rebound. In other words, if the Dollar Index (DX) holds critical
support at around 92 and begins to rebound with conviction, silver
probably will become very weak in US$ terms and gold terms.
Gold Stocks
Revisiting
the August-September Cycle
In multiple TSI commentaries
during July we discussed the gold mining sector's August-September cycle.
Specifically, we pointed out that in each of the past five years the gold
mining sector, as represented by GDX, had made its high or low for the
year between early-August and early-September. This one-month period
contained the low for the year in 2015, the high for the year in 2016 and
2017, the low for the year in 2018 and the high for the year in 2019. We
also pointed out that based on this cyclical tendency and the strong
upward trend that was underway at the time, there was a decent chance that
the gold mining sector would make its high for this year between
early-August and early-September.
We can be very confident that GDX
peaked for the year in early-August, so it is now six years in a row that
the early-August through to early-September period contained GDX's high or
low for the year. Here's a weekly chart with vertical red lines drawn to
mark these yearly extremes.
The August-September cycle will be something to be aware of during the
third quarter of next year, especially if the gold sector has trended
strongly (in either direction) into this potential turning-point window.
Current Market Situation
We
sent two emails to subscribers early this week that included comments on
the gold sector. In the second email, which was sent in response to
Tuesday's market action, we wrote:
"The gold mining
indices/ETFs have extended their downward trends and are now short-term
'oversold', although not dramatically so. It's unlikely that the ultimate
correction low is in place, but a consolidation or countertrend rebound
could begin at any time.
If instead of rebounding/consolidating for
several days the gold mining indices/ETFs accelerate downward, then a
tradable bottom probably will be in place by early next week."
There was a small bounce on Wednesday, so nothing has changed. Some
additional rebounding/consolidating over the next few days probably would
delay the coming tradable bottom by a couple of weeks.
For the HUI,
the support that begins at 260 and extends down to 250 is the most likely
place for the bottom.
The Currency Market
The currency market is
refusing to 'tip its hand'.
As illustrated below, the DX continues
to probe support near 92. It needs to either end a week below 91.75 (the
early-September low) to signal the resumption of its long-term decline or
do something to signal that the price action of the past four months is a
basing/reversal pattern. At this point we would consider a daily close
above the 20-day MA (the black MA line on the following chart) as an early
warning of the latter.
We expect that the direction of the DX's next significant move will
have a big effect on the financial world. As noted in the latest Weekly
Update, if the DX breaks out to the downside from its recent trading range
it probably will catalyse substantial rallies in gold, most commodities
and the related equities, whereas if the DX signals an upward reversal it
probably will bring about a correction-ending plunge in the gold price and
set in motion sizable corrections in the stock and commodity markets.
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) BP Amoco (BP) Call Options
In the latest Weekly Update we wrote that for TSI record purposes the
BP April-2021 YS$20.00 Call Option would be exited if it traded at
US$2.50. The option traded well above that price on Tuesday 24th November
and therefore has been removed from the TSI List. The result was a gain of
194%.
The TSI List still contains leveraged exposure to the O&G
sector via the Schlumberger (SLB) January-2022 US$20.00 Call Option.
FYI, at the start of this week our own account had two BP call option
positions -- the April-2021 US$20.00 call mentioned above and the
January-2022 US$20.00 call. We took profits on the April-2021 calls on
Tuesday and have retained the January-2022 calls in anticipation of the
O&G sector making large additional gains during the first half of next
year.
2) Tesla (TSLA) Put Options
The TSLA
bubble continues to inflate. Like most great equity bubbles, the TSLA
bubble is based on a story with a kernel of validity. However, TSLA's
market cap is now so large relative to this kernel of validity that
regardless of what the future holds in store, there is no way that the
underlying company will be able to grow into its valuation (its current
production is being valued at more than US$1M per car, even though the
production is unprofitable).
An extremely high valuation on its own is not a good reason to place a
bearish bet, but the positive catalysts for the stock may be peaking now
in response to the bullish vaccine news and the news that the stock will
be included in the S&P500 Index early next month. Therefore, we like the
idea of establishing a small bearish TSLA speculation via out-of-the-money
put options expiring in March-2021 or later.
Further to the above,
we have added the TSLA March-2021 US$300 Put Option to the TSI List at
Wednesday's closing price of US$5.50.
3) Gold Miners ETF
(GDX) Call Options
In the email sent to subscribers after
Tuesday's trading session (Market Alert #293), we wrote:
"Regardless
of the longer-term outlook, the coming bottom for the gold mining sector
should be followed by at least a 1-2 month rally. Significant additional
weakness over the coming days would create a good opportunity to get
positioned for this rally.
Further to the above, we will add the
GDX March-2021 US$40.00 Call Option to the TSI List if it trades at
US$0.80 within the next two weeks. The option currently is priced at
US$1.01-$1.05. For it to become available at the aforementioned price
within our stipulated timeframe, GDX probably will have to drop to the
US$31.50-$32.00 area. In other words, GDX will have to drop by about 6%
from Tuesday's closing level."
4) Cronos (CRON) Call
Options
There was a good opportunity to take profits on
the CRON January-2021 US$8.00 call options (our short-term cannabis
speculation) during the days following the recent US election and
hopefully there will be another such opportunity within the next few
weeks. For TSI record purposes this option will be exited if it trades at
US$2.00.
Chart Sources
Charts appearing in today's commentary
are courtesy of:
https://stockcharts.com/
