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- Interim Update 27th January 2016
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Yearly Forecast
Our 2016 Yearly Forecast was
presented piece by piece in TSI commentaries over the past two weeks. The pieces
have now been put together and posted at
http://www.speculative-investor.com/new/yearly.asp.
The Fed and
Interest-Rate Expectations
Figuring out what the Fed is
likely to say/do in a particular situation is fairly straightforward. Just
imagine what a dogmatic follower of crude Keynesianism (is there any other
kind?) would say/do, and there you have it. Figuring out how the markets are
going to react to what the Fed says/does is far more difficult, because market
reactions to new information are based on what has already been factored into
current prices and on how other traders interpret the information.
With regard to the policy statement issued on Wednesday 27th January, we had
expected the Fed to 'give a nod' to the recent financial-market turbulence while
not ruling out a rate hike within the coming few months. From our perspective,
there was no reason to expect anything else. There was certainly no reason to
expect an interest-rate change as soon as this week or to expect the Fed to
alter its course.
The Fed did what we were expecting and, we believe, what most traders were
expecting. There was some price volatility in the aftermath of the Fed's
announcement, but nothing out of character with the recent market trends. Of
particular significance, the December-2016 Fed Funds Futures contract barely
moved on Wednesday. According to the price of this contract, at the close of
trading on Tuesday 26th January the market was expecting the Fed to implement a
single 0.25% rate hike this year. The market is still expecting the Fed to hike
once.
Expectations regarding what the Fed is going to do this year didn't change this
week, but they have changed over the past month in response to the stock-market
downturn. Specifically, late last year the market -- according to the prices of
Fed Funds futures contracts -- was expecting two-to-three 0.25% rate hikes from
the Fed in 2016. In other words, in the space of about a month we've gone from a
market expectation of 2-3 Fed rate hikes to a market expectation of just one Fed
rate hike in 2016.
The Stock Market
The US
Over the past four trading days the SPX was up 20 points, down 20 points, up 20
points and then down 20 points. It is therefore fair to say that we are getting
the expected two-way volatility as part of an overall upward
correction/consolidation.
Last week's low could be tested as part of an upward correction, but it's very
unlikely that a solid and sustained break below last week's low will happen
within the next two weeks. Furthermore, some indicators point to last week's low
holding -- at least on a weekly closing basis -- for 1-2 months.
One such indicator is the 10-day MA of the high-low differential (the daily
difference between the number of individual stocks making new 52-week highs and
the number making new 52-week lows). As illustrated by the following chart, the
10-day MA of the NASDAQ's high-low differential has turned upward after hitting
a rare extreme last week. The up-turn is not easy to see on the main part of the
chart, but it is clearly evident on the "zoom thumbnail" at the right-hand-side
of the chart. When this indicator reverses upward from an 'oversold' extreme it
generally means that there won't be anything more bearish than a test of the
price low within the ensuing month.
Consequently, don't be in a hurry to establish a new bearish speculation. A
better opportunity is likely to arrive at some point over the next couple of
months.
Emerging Markets
In three TSI commentaries during late-November and early-December of last year
we wrote that a bearish EEM (Emerging Markets Equity ETF) speculation could be a
reasonable hedge for investors with exposure to commodity-related equities. Our
reasoning was that although the trends for commodities and emerging-market
equities are linked, EEM had become very expensive relative to the average
commodity. EEM's price subsequently lost about 15% in quick-enough time to
warrant taking profits on any bearish positions, but the relationship between
emerging-market equities, commodities and commodity-related equities still
points to sizable downside potential for EEM over the months ahead.
The point we want to reiterate today is that although EEM's bearish trend
relative to the US stock market looks stretched in terms of both time and
magnitude, relative to commodity-related equities in general and mining stocks
in particular it's a different story. To explain, here is an update of the chart
we showed in the 9th December Interim Update. The chart compares EEM (the black
line and the right-hand scale) with the stock price of BHP (the blue line and
the left-hand scale), the world's largest diversified mining company.
Notice how closely the two lines on the chart tracked each other until the
second quarter of 2014, at which point BHP began to fall relative to EEM. As was
the case when we first presented the above chart seven weeks ago, a wide gap has
opened up between these two related equities. Furthermore, the gap has become
even wider.
If the pre-2014 relationship between EEM and mining stocks had remained in
force, EEM would now be trading at around $18. Instead, it is trading at around
$29. So, although it looks like the days of EEM weakness relative to the senior
US stock indices are numbered, bearish EEM speculations such as put options will
still be worth considering after the current 'oversold' condition has been
worked off.
Gold and the Dollar
Gold
With confidence in the Fed and the US economy in decline, gold has been trading
in a more bullish manner in US$ terms. There was a risk that the $20 rally
during the first two days of the week would lead to a post-Fed sell-off, but
this risk was mitigated by the gold price dropping back a little on Wednesday
morning in the US.
The US$ gold price is now approaching its first big test, in the form of
resistance defined by the 200-day MA. Gold rallies in October and May of 2015
ended a day after the 200-day MA was reached and the larger gold rally in
January-2015 ended a few days after the 200-day MA was reached.
With gold nearing its 200-day MA and now slightly 'overbought' on a short-term
basis, we won't be surprised if there's a downward reversal in the next three
days. If so, what happens thereafter will be informative. For example, a test of
the 200-day MA that is followed by a few days of consolidation and then a rise
to a new high for the move would differentiate the current rally from the
counter-trend rallies of the past 18 months.
The COT data will also be informative. The further the price can rise without a
surge in speculative buying of gold futures, the more bullish it will be.
Gold Stocks
In the latest Weekly Update we discussed the possibility that the HUI's 19th
January break below obvious support was the sort of false breakout that can mark
an important turning point. Due to the price action of the past three days, this
possibility has become the most probable scenario. But before we deal with the
gold sector's current situation, here are two charts showing excellent examples
of a downside breakout occurring just prior to the start of a multi-year bullish
trend.
The first chart shows the S&P500 Index (SPX) during 1982. In August-1982 the SPX
broke below obvious lateral support to a new bear-market low -- a few days
before it commenced a bull market.
The second chart shows the SPX during 2008-2009. In March-2009 the SPX broke
below obvious support to a new bear-market low -- a few days before the start of
a major rally.
We now turn to the HUI, which broke below obvious support on Tuesday 19th
January and then immediately began to rally.
A significant difference between the two historical SPX examples presented above
and the HUI's recent performance is that the SPX breakdowns were sustained for
several days. The fact that the HUI's breakdown was immediately reversed casts
some doubt on whether it was a breakdown at all, and if it wasn't a breakdown
then it can't be a bullish 'false breakdown'. However, any doubt arising from
the indecisiveness of last week's downside breakout in the HUI disappears when
we consider the following chart of the XAU. The XAU sustained its downside
breakout for about the same amount of time that the SPX sustained its
bear-market-ending downside breakouts in August-1982 and March-2009.
It is obviously still early days and certainly too soon to proclaim with
confidence that a cyclical bull market has begun. We also recall earlier
gold-mining rallies that failed dismally after initially showing great
potential. For example, promising starts were made in December2014-January2015
and September-October2015. A significant difference is that the earlier
promising rallies didn't begin shortly after a downside breakout that put almost
everyone, including many long-term bulls, off side.
The HUI has just risen for 6 days in a row and has reached some trend-line
resistance, so a pullback will probably soon happen. However, IF we are seeing
the birth of a new cyclical bull market then there shouldn't be anything more
than a 1-2 day consolidation prior to the resumption of the rally, and a
multi-week top shouldn't be in place until the HUI trades at least as high as
its 200-day MA (currently about 130). Also, the 50-day MA should act as support
during any 1-3 week correction that occurs within the next two months.
The Currency Market
The Dollar Index has again dropped back to near the lower boundary of its
well-defined short-term price channel. A daily close below the channel bottom
would suggest a near-term target of 96.5-97.0.
On a longer-term basis the Dollar Index remains within the 7-point horizontal
range that began to form during the first quarter of last year.
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
As
noted in the email sent to subscribers after the close of trading on Tuesday,
for TSI record purposes we will exit the short-term position in EDV.TO if the
stock trades at C$9.50 this week and we will exit the long-term position in MUX
if the stock trades at US$1.23 this week.
The FCG (Natural Gas ETF) Trade
A short-term FCG position was added to the TSI List last week at US$3.35. This
position will be exited if FCG trades at $4.90, which is just below the
short-term target that would be implied by a break above resistance at US$4.00.
FCG tested the $4 resistance level on Wednesday and ended the day at $3.82.
B2Gold (BTG) Update
Last week we concluded a brief write-up on BTG as follows: "Despite BTG now
offering good value for the first time in years, due to the Fekola financing
uncertainty we are continuing to watch from the sidelines."
Our tentative plan is to wait for the announcement about how the Fekola project
will be financed before making a decision on whether to add BTG to the TSI List.
However, shortly after the start of trading on Wednesday 27th January we took an
initial position for our own account in the low-US$0.70s with the aim of adding
to the position if the gold-mining indices continue to signal a major upward
reversal and the financing issue is 'put to bed' in a satisfactory way.
Chart Sources
Charts appearing in today's commentary
are courtesy of:
http://stockcharts.com/index.html