-- Weekly Market Update for the Week Commencing 2nd April 2018

Big Picture View

Here is a summary of our big picture view of the markets. Note that our short-term views may differ from our big picture view.

The BULL market in US Treasury Bonds that began in the early 1980s ended in mid-2016, but there will be many years of topping action in bond prices and bottoming action in bond yields before major new trends get underway. A major decline in government bond prices will unfold during the 2020s. (Last update: 11 September 2017)

The stock market, as represented by the S&P500 Index, commenced a secular BEAR market during the first quarter of 2000, where "secular bear market" is defined as a long-term downward trend in valuations (P/E ratios, etc.), gold-denominated prices and inflation-adjusted prices. This secular trend will bottom in 2020 or later. (Last update: 11 September 2017)

A cyclical BEAR market in the US Dollar began in 2016-2017. (Last update: 11 September 2017)

Gold commenced a secular bull market relative to all fiat currencies, the CRB Index, bonds and most stock market indices during 1999-2001. This secular trend will peak in 2020 or later. (Last update: 11 September 2017)

Commodities, as represented by the CRB Index, commenced a secular BULL market in 2001 in nominal dollar terms. The first major upward leg in this bull market ended during the first half of 2008, but a long-term peak won't occur until 2020 or later. (Last update: 11 September 2017)

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True Fundamentals Summary [Notes: 1) The date shown next to the current True Fundamentals Model (TFM) signal is when the most recent change occurred. 2) Charts of the Gold and Equity TFMs are included in the "Charts and Indicators" section of the TSI web site]

Last week's posts at the TSI Blog

Money Matters

Summary of current thinking/positioning

1) A number of markets are set up for trend reversals or accelerations, with the US$ being the linchpin. If the DX breaks out to the downside from its recent narrow range, then rallies should begin or accelerate across the commodity world with silver bullion and gold-mining stocks leading the way higher. However, if the DX breaks out to the upside from its recent range then the commodity world will be pressured downward for at least a few weeks thereafter.

2) There is a good chance that the SPX will revisit its early-February low (2530) before the correction comes to an end.

3) Downward corrections in oil and copper will end by May, with the timing dependent upon what happens in the currency market.

4) Bond yields are in long-term upward trends and will go much higher before year-end, but a counter-trend move is underway. The counter-trend move could end at any time.

5) Holding a cash reserve of around 30%.

No Interim Update this week

Please note that we'll be traveling this week and therefore won't be able to publish an Interim Update. The next TSI report will be the Weekly Update scheduled for publication on Sunday 8th April.

As usual, we'll send a Market Alert email if something happens that demands an immediate comment.

Monetary Inflation Update

With the February-2018 money-supply data for the euro-zone becoming available last week, we've updated our calculation of the G2 (US plus euro-zone) monetary inflation rate. The G2 monetary inflation rate has a closer relationship to the overall financial-market and economic backdrop than does the US monetary inflation rate in isolation.

As illustrated by the following chart, the G2 monetary inflation rate has dipped a little further into 'bust territory' (the historical record suggests that 6% is the boom-bust demarcation level) and is at a 9-year low.

The monetary backdrop therefore remains unsupportive of equity prices and Keynesian measures of economic performance such as GDP. Importantly (considering the effect that changes in interest rates have on all asset prices), it is also unsupportive of bond prices. Over the months/quarters ahead the bond market will be dealing with declining liquidity combined with the late-stage effects of the earlier period of abundant liquidity. These late-stage effects include a faster rate of CPI increase.



Is it time to bet against the T-Bond, again?

In the 19th March Weekly Update, we wrote:

"The 30-year T-Bond broke out to the downside from a major top formation in late-January. This breakout provided powerful confirmation of our bearish outlook for long-term bond prices and bullish outlook for nominal interest rates.

The T-Bond's breakout suggests that there is scope for considerable additional downside in the price over the coming two quarters, but by the third week of February the Treasury market had become sufficiently 'oversold' to enable a counter-trend rebound to get underway. The base of the major top formation (146.5-147.0) is an obvious target for this rebound."

As illustrated below, the T-Bond has since moved up to within one point of the 146.5-147.0 obvious rebound target. Note that if resistance at 146.5-147.0 doesn't hold then a rise to as high as 149-150 could occur.



So, is it time to establish a new position in the ProShares UltraShort 20+ Year Treasury Fund (TBT), a leveraged ETF that moves in the opposite direction to the T-Bond?

In our 19th March report we wrote that we hoped to be able to re-enter TBT at around $36 in preparation for another multi-month decline in the bond market, but that we would take our cues from the COT data and the price action in the Treasury market. TBT traded as low as $36.05 on Friday and, as mentioned above, the T-Bond is nearing an obvious rebound target. However, while the COT data for last week won't be available until Monday of this week, it's likely that the speculating community still has a very large net-short position in 10-year T-Note futures.

Therefore, price action suggests that it's time to start averaging into TBT, but the sentiment situation suggests that the sidelines are the place to be.

Once a market begins to trend strongly in a particular direction, sentiment can stay near an extreme -- an optimistic extreme in an up-trend and a pessimistic extreme in a down-trend -- for many months. As a consequence, there are times when price action trumps sentiment. We suspect that this is one of those times. To put it another way, we doubt that the rising interest-rate trend will be derailed or even interrupted for more than a brief period simply because speculators, as a group, have bet heavily on higher bond yields (lower bond prices) via the futures market.

We haven't yet decided whether to return TBT to the TSI List, but if you are interested in speculating on a further increase in long-term interest rates it could make sense to start averaging into a TBT position now.

The Stock Market

The Monthly Close

Going into last week the SPX/euro ratio was in a position where a small decline over the course of the week would result in a monthly close below the 24-month MA. If this had happened it would have been a warning that the bull market was over, but it didn't happen. The SPX/euro ratio gained some ground last week and ended the month above its 24-month MA. Refer to the following monthly chart for details.



Current US Market Situation

In the Market Alert email sent to subscribers following last Wednesday's trading session, we wrote:

"The SPX ended Wednesday's session in essentially the same position that it ended last week: precariously poised within a few points of the widely-watched 200-day MA. Perhaps it will again rebound from this obvious support level, but the risk of a 'whoosh' to the downside is high. As mentioned in the Interim Update posted yesterday, if this happens it should be viewed as an opportunity to take profits on short-term bearish speculations, not as a reason to lean further to the bearish side.

If the SPX's 200-day MA (2588) is crossed then the next level of support will be the February low (2530). While a test of the February low could be successful, a short-lived spike to well below this level would have a better chance of creating a multi-month bottom.

Note that 'market internals' are holding up quite well and at the moment we have early signs of a bullish divergence between the internals and the senior indices. We'll review this potentially-bullish development in the Weekly Update."

The chart displayed below shows that the SPX has again rebounded from the widely-watched 200-day MA. This means that traders and trading programs are still reflexively buying dips to support, the assumption being that the market is experiencing nothing more than a short-term correction. This assumption could well be on the mark, but it increases the risk of a very sharp decline when the obvious support is eventually breached.



Not all of the important US stock indices are in the same position as the SPX relative to their respective 200-day MAs, but many of them rebounded from critical support levels last Thursday. Here are three examples:

1. The NASDAQ100 ETF (QQQ) rebounded from the bottom of what is now a well-defined 12-month price channel. This means that closing below last Wednesday's low would be evidence that we are dealing with an intermediate-term, rather than a short-term, correction.



2. The Dow Transportation Average (TRAN) rebounded from the bottom of a well-defined 2-year price channel. As is the case with the QQQ, closing below last Wednesday's low would be evidence that we are dealing with an intermediate-term correction. Consequently, there is a lot at stake right now.



3. The Dow Industrials Index is one of the few US stock indices that has fully tested its February low. The Dow ended the week before last slightly above its early-February spike low and held up relatively well last week.



In the email excerpt presented above we mentioned early signs of a bullish divergence between the internals and the senior indices. The divergence is illustrated by the following daily chart. The top section of the chart shows the NYSE Composite Index (NYA) and the bottom section shows the numbers of NYSE common stocks making new 12-month highs (the green bars) and new 12-month lows (the red bars) each day.

Notice that even though the NYA achieved its lowest close of the year on Friday 23rd March, the number of individual stocks that made new lows on that day was much smaller than the number that made new lows in early-February. Also notice that the number of individual stocks making new lows declined every day last week and that on Thursday (the final trading of the week) there were more stocks making new highs than new lows.



The nascent bullish divergence between the market internals and the senior indices is also evidenced by the recent strength in the equal-weighted SPX relative to the normal (that is, market-cap weighted) SPX. This is illustrated by the next chart.



The bottom line is that there is no evidence yet that the correction is over, meaning that the door is still open to a trend-ending 'whoosh' to the downside. At the same time, there is also no evidence yet that we are dealing with something more bearish than a multi-month correction, while there is evidence that for the first time in well over a year the market is stronger underneath than on the surface.

What to do?

The plan should be to exit any existing short-term bearish speculations if there is a near-term plunge by the SPX to the vicinity of its early-February low.

New short-term bearish speculations shouldn't be entered unless there is a significant rebound and should thereafter be kept on a tight leash. For example, it could make sense to buy QID (UltraShort QQQ) or QQQ put options with an expiry date of June-2018 if QQQ rebounds to around $165 within the coming fortnight, while planning to exit (to mitigate losses) if QQQ subsequently closes above $171.

Tesla and Amazon

The Tesla (TSLA) stock price finally broke through the base of its major topping pattern last week, creating an opportunity to take profits on TSLA April put options.

We suspect that TSLA has just taken the first big step along a path to zero. We therefore will be interested in entering new TSLA bearish speculations in the future, but first a rebound is needed to establish a better risk/reward for such a trade.

We may enter a new TSLA bearish speculation if there is a rebound to near $290 within the next few weeks.



Unlike Tesla, Amazon (AMZN) is capable of generating cash and profits. However, its valuation is absurd. Furthermore, its valuation would be absurd even if there wasn't a high risk that the US government will soon begin to consider actions that restrain the company's growth and/or increase its costs, but this risk exists.

AMZN not only sat out the bulk of the Q1 stock market downturn, for a while it was actually treated as a haven by investors seeking safety. However, last week's close below the 50-day MA warns that the stock's speculative blow-off is complete.

Due to the extremely high valuation and the risk of much greater government scrutiny of its business practices, it's not out of the question that AMZN's price will drop by 50% before year-end.



This week's significant US economic events [Notes: 1) The most important events (to the markets) are shown in bold. 2) A list of global economic events can be found HERE]

Gold and the Dollar

Gold

The US$ gold price did what it had to do last week to remain well within the bounds of its 2.5-month trading range. After moving up to near the top of the range on Monday, it pulled back and ended the week in the bottom half of the range. As a result, there wasn't a significant monthly close and the quick rebound from the bottom of the range that began during the week before last now looks similar to the multi-day surge that happened in February.

This has kept alive the possibility that the gold price will drop to $1250-$1300 prior to the start of a substantial multi-month rally.



In the Interim Update published after last Tuesday's trading session, we wrote: "...the fundamental backdrop moved a little further in gold's favour over the first two trading days of this week and is now very close to turning bullish. The improvement (from gold's perspective) in the fundamental backdrop is related to the new bout of stock market volatility and the rebound in the T-Bond."

In the meantime, not a lot has changed. The T-Bond continued to rebound, the stock market stabilised, and the fundamental backdrop is still close to turning gold-bullish. Right now, though, the fundamental backdrop remains gold-bearish.

Gold is positioned differently in terms of currencies other than the US$. For example, in A$ terms the gold price tested its 2011 all-time high in 2016 and is presently within $110 of its all-time high. It is also within $60 of the bottom of the 4-year channel drawn on the following chart. Consequently, there's a high probability of a major breakout in the A$ gold price in one direction or the other within the next 6 months. We think the breakout will be to the upside.



For another example, in euro terms the 2016 high was well below the 2011 high and the current price is well below the 2016 high. Also, the current price is only about 30 euros from the bottom of a 4-year channel. Consequently, gold is at risk of a major downside breakout in euro terms.



Gold Stocks

The more times a support or resistance level is tested, the more likely it will be breached eventually.

GDX has tested support near $21.00 on seven separate occasions since March of last year. Considering the large number of tests it would be strange if a strong rally were to begin prior to this support being breached. To put it another way, to set the stage for a strong rally there may have to be a breach of support to shake out the remaining weak hands.

A breach of support would not necessarily lead to substantial follow-through to the downside. It could, instead, be followed in quick time by an upward reversal. However, the risk is that taking out the obvious support near $21 would kick off a 1-3 month downward trend, as was the case when the XAU broke below a similar support level in 1986.



The 1986-1987 Model still appears to be a valid guideline for the gold-mining sector's performance in 2018. According to this model, the gold-mining sector will be weak or at best uninteresting until the gold price breaks above US$1363.

The Currency Market

There was a minor upside breakout in the Dollar Index (DX) last week. The DX achieved consecutive daily closes above its 50-day MA for the first time since early-December and closed above the top of a very short-term channel. However, the important resistance as far as the short-term trend is concerned continues to be the top of the 2.5-month range (near 90.5).

The bottom of the range was successfully tested early last week.



The most likely direction of the DX's eventual breakout from its multi-month trading range has been changing from week to week. One week the DX appears to be readying to break one way and the next week it reverses and creates the impression that it is about to break the other way. For example, at the end of the week before last there were signs that the breakout would be to the downside, but the situation at the end of last week suggested that the opposite outcome is more likely.

The direction of the DX's eventual breakout will have a big effect on prices in other markets, especially the prices of gold, silver and the associated mining stocks. Also, if the breakout is to the downside it likely will be accompanied by a major upside breakout in the euro. This is because the euro is positioned near the top of a 10-year downward-sloping channel (refer to the following weekly chart for the details).

That is, as is the case in the stock market there is a lot at stake right now in the currency market.



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

Company news/developments for the week ending Friday 30th March 2018:

[Note: AISC = All-In Sustaining Cost, FS = Feasibility Study, FY = Financial Year, IRR = Internal Rate of Return, ISR = In-Situ Recovery, MD&A = Management Discussion and Analysis, M&I = Measured and Indicated, NAV = Net Asset Value, NPV(X%) = Net Present Value using a discount rate of X%, NSR = Net Smelter Return, P&P = Proven and Probable, PEA = Preliminary Economic Assessment, PFS = Pre-Feasibility Study]

  *Almaden Minerals (AAU) published its financial statements for the latest quarter, revealing that the company had about C$15.7M of working capital at 31st December (about C$1M less than at the end of the preceding quarter). This should be enough to fund AAU through environmental permitting and FS completion for the company's flagship Ixtaca gold-silver project in Puebla State, Mexico.

We had guessed that the FS would be complete by mid-2018, but in the MD&A issued with the latest financial statements the company simply stated that it would be completed in 2018. This vague comment suggests to us that it won't be complete until much later in the year.

  *Energold Drilling (EGD.V) is diversifying with the dual aims of increasing its revenue and smoothing-out its quarterly results. Traditionally its quarterly results have been 'lumpy' due to the seasonality of its energy and minerals drilling businesses.

In this vein, it announced during the week before last that it had been awarded more than $10M in new "green drilling" contracts in the US, and last week it announced that it has recently been awarded $9 million in new infrastructure drilling contracts in Canada.

EGD remains a good candidate for new buying below C$0.50.

  *Euro Sun Mining (ESM.TO) issued its financial statements for 2017, revealing that the company had working capital of US$5.5M at 31st December. This suggests that although the company is not in urgent need of a cash injection, it will do an equity financing within the next two months.

  *Nevsun Resources (NSU) announced the results of the PFS for its Timok Upper Zone (TUZ) copper-gold project in Serbia. The economics estimated in the PFS were similar to those estimated in the revised PEA completed last October.

At a copper price of $3.00/pound and a gold price of $1300/oz, and including capital expenditure prior to reaching a construction decision, here is a summary:

  - Pre-production capex of US$688M, versus US$630M in the PEA.
  - Average copper production of 175M pounds per year over 10 years, versus 140M pounds per year over 15 years in the PEA.
  - After-tax NPV(8%) and IRR of US$1,311M and 52%, versus US$1,473M and 50% in the PEA.
  - Production start in 2022

The company is now working on the TUZ project's FS, which is due to be complete in mid-2019.

At current metal prices the TUZ is an economically robust project that almost certainly will be developed into a mine. Furthermore, the economics could get even better by converting Inferred resources to M&I resources.

  *Premier Gold (PG.TO) published its financial results for the quarter and year ending 31st December 2017.

During the course of the December quarter PG's net cash (working capital minus long-term debt and deferred revenue) decreased by C$6M -- from C$85M to C$79M. This was a satisfactory result considering the company's rate of spending on growth-related investments.

PG's 2018 gold production is expected to be 85K-95K ounces -- 80K-85K ounces from the Mercedes mine in Mexico and 5K-10K ounces from the South Arturo mine in Nevada. South Arturo should make a much bigger contribution in 2019 due to the start-up of the Phase 1 open pit.

The next important milestone for PG is expected to be completion of the PEA for the McCoy-Cove gold project in Nevada, which has been pushed back and is now scheduled to happen during the current quarter. This will give the market its first look at the project's economic potential.

Separately, PG advised that at its 100%-owned Mercedes gold mine (Mexico) the M&I resource has been increased by 19% to 928,000 ounces at 4.32 g/t (including 417K ounces of P&P reserves) and the Inferred resource has been increased by 23% to 220,000 ozs gold at 4.2 g/t. This is positive. There is clearly a lot more life in the 85K-oz/year Mercedes mine than appeared to be the case when PG bought the project from Yamana in the second half of 2016.

PG's price action warrants a comment.

In last week's Interim Update we wrote: "While Tuesday's pullbacks in the gold-mining indices were minor, many individual gold-mining stocks suffered large declines. It is therefore fair to say that Tuesday's gold-sector action was more bearish than indicated by the indices." PG was one of the stocks we had in mind when writing this.

The PG stock price suffered a dramatic plunge last Tuesday-Wednesday for no fundamental reason we know of (there was no bad news). We therefore can't offer an explanation for the price action, other than it could be that a fund with substantial exposure to the gold sector (perhaps a gold-mining ETF) is being forced to liquidate for reasons that have nothing to do with company-specific details.



List of candidates for new buying

From within the ranks of TSI stock selections the best candidates for new buying at this time, listed in alphabetical order, are:

1) ALK.AX (last Friday's closing price: A$0.29)

2) AAU (last Friday's closing price: US$0.84)

3) AOI.TO (last Friday's closing price: C$1.18)

4) PG.TO (last Friday's closing price: C$2.82)

5) USAU, especially if it drops to the low-US$1 area (last Friday's closing price: US$1.28)

The above list is limited to five stocks. It will sometimes contain less than five, but it will never contain more than five regardless of how many stocks are attractively priced for new buying.

Summary of potential additions to the TSI List

Here again is the table originally included in the 12th March Weekly Update showing the potential additions to the TSI Stocks List that we've mentioned over the past few months. The table notes the price at which each stock would be automatically added (unless advised otherwise) and whether the stock would be a long-term position or a shorter-term trade.

Market prices have moved closer to our stipulated buy levels, but none of the buy levels have been reached yet. Additional weakness is required.



Chart Sources

Charts appearing in today's commentary are courtesy of:

http://stockcharts.com/index.html