-- Weekly Market Update for the Week Commencing 4th November 2019

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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

There were no blog posts last week.

Summary of current thinking/positioning

1) The Dollar Index (DX) confirmed a short-term reversal to the downside four weeks ago, but must end a week below 96 to confirm an intermediate-term reversal to the downside. We are anticipating such a reversal, but we are uncertain as to whether it will happen in the near future or during the first half of next year.

2) The US$ gold price, the US$ silver price and the gold-mining indices appear to have ended their corrections and embarked on short-term upward trends that probably will result in new multi-year highs within the next three months.

3) The Fed's new asset monetisation program has increased the risk for bearish stock-market speculators and clear signs of equity strength have started to emerge outside the US. However, the senior US stock indices probably will reach short-term tops during the first half of November.

4) There is a realistic chance that the T-Bond will trade below its September low before bottoming on a short-term basis, but we expect that major price weakness (yield strength) in the Treasury market will be postponed until next year.

5) Industrial commodities such as oil and copper could be in the process of bottoming, but we expect that meaningful price strength won't show up until next year.

6) We are holding a cash reserve of 25%-30%.

The Monthly Closing Prices

At around this time every month we review some of the most important (from our perspective) monthly charts. We do this because monthly closing prices can confirm or deny intermediate-term trend changes. For October-2019 we'll review the monthly closes for gold, the Gold Miners ETF (GDX) and the S&P500 Index (SPX).

Regarding gold, this is part of what we wrote a month ago:

"...critical monthly-closing support for gold's intermediate-term upward trend is defined by the 8-month MA. That is, a monthly close below the 8-month MA would confirm that an intermediate-term top (a top that holds 6-12 months) is in place. This MA is now at $1383 and should rise to about $1400 by the end of this month.

At this time we do NOT expect a monthly close below the 8-month MA."

The following monthly chart shows that the US$ gold price didn't come anywhere near its 8-month MA during October and that at the end of the month this MA was at $1408. The MA is continuing to rise, should reach $1450 by the end of November and should not be breached on a monthly closing basis anytime soon.

Monthly resistance lies at $1570. A monthly close above this resistance would point to an upcoming test of the 2011 major peak, but let's not get ahead of ourselves.

Shorter-term charts suggest that gold has completed a 1-2 month correction. If so, a rally lasting at least three months has begun and this rally should at least result in an intra-month spike above $1570.



GDX tested its 2016 high at the beginning of September and then reversed downward. As is the case with gold, it appears to have completed a 1-2 month correction.

Monthly-closing support for GDX's intermediate-term upward trend is now defined by the October-2019 low of $26.18. However, there should be warnings in daily and weekly charts that the intermediate-term upward trend is over well before such a reversal is signaled by the monthly chart.

At this stage it's reasonable to expect that GDX will trade above its 2016 high before topping on an intermediate-term basis.



The SPX's price action during the period since September-2018 still looks similar to the price action that followed the intermediate-term top in 2011. The similar periods are indicated by the red boxes drawn on the following monthly chart.

For the similarity to be maintained, the 12-month MA should not be breached on a monthly closing basis for a long time to come. Although this not what we expect, we are not prepared to rule out this possibility.

A monthly close below the 12-month MA would be the first clear sign on the monthly chart that the bull market is over.



US Recession Watch

Our favourite leading indicators of US recession are the ISM New Orders Index (NOI), Real Gross Private Domestic Investment (RGPDI) and the yield curve.

Two months ago the NOI became the first of the above-mentioned leading indicators to issue a recession warning, meaning that the monthly NOI for August-2019 was below the red demarcation line drawn on the following chart. The NOI remained below the demarcation line in September.

The results of the latest monthly ISM survey were published last Friday and revealed that in October-2019 the NOI rebounded to slightly above the recession warning level. However, this does not negate the earlier warning. It would take a move to well above 50 to negate the warning.

There have been ten US recessions since the early-1950s and for eight of these the time from the NOI warning to the recession start was five months or less. The August-2019 NOI signal therefore could be construed as a warning that a recession will begin by January-2020. However, the NOI occasionally generates a false signal. If the current NOI recession warning is valid then it should be confirmed by our other favourite leading recession indicators and also by an extension of its own downward trend within the next few months, whereas if it is invalid it should be cancelled within the next few months via a move to well above 50.

Note that over the past 20 years there was only one false NOI recession signal. This was the dip below the red line in March-April of 2003.



The latest quarterly RGPDI number (for Q3-2019) was published last week. As illustrated below, RGPDI made a new all-time high in Q1 of this year and turned down in Q2. The Q3 number was slightly below the Q2 number, thus increasing the probability that a trend reversal has occurred.

A trend reversal in RGPDI from a Q1-2019 high would be consistent with a recession getting underway in the final quarter of 2019 or the first half of 2020.

Note that the vertical red lines on the following chart mark the starts of the last two official US recessions.



Finally there is the yield curve, which generates a recession warning when it 'flattens' to an extreme (usually but not necessarily involving an inversion) and then begins to steepen. A yield-curve reversal from flattening to steepening was signaled last month (October-2019).

Consequently, all three of our favourite leading recession indicators have now issued recession warnings. There is still some uncertainty, however, because each of the warning signals is marginal at this time.

Based on the latest data, our rough estimates of recession start-time probabilities are:

  - Q4-2019: 30% (down from 35% a month ago)
  - H1-2020: 40% (not stated a month ago*)
  - H2-2020: 25% (not stated a month ago*)
  - Later than 2020: 5% (unchanged from a month ago).

Note that even if the US economy doesn't slide into recession anytime soon, the weakness over the past several months in the ISM NOI suggests that coincident indicators such as industrial production will continue to deteriorate over the next few months.

Also note that although the US economy has not been officially in recession at any time over the past two years, the entire period since H1-2018 could be viewed as an economic downturn. There has been no growth in overall corporate profitability during this period, many stock indices remain below their H1-2018 highs, and industrial production has been declining since Q4-2018. This actually could be a positive as far as the future is concerned, because it could mean that a downturn is in its late stages rather than its early stages.

Finally, we can't rule out the possibility that the Fed's attempts to extend the current economic cycle will work. The reason is that unlike 2000 and 2007, this time around the Fed has begun to pump money aggressively with the senior stock indices at/near all-time highs. Due to the Fed's actions, this could be more like 1998 or 2012 than 2001 or 2007.

    *Last month we indicated a 60% probability of a recession start sometime in 2020.

The Stock Market

During the week before last the SPX broke above the top of its contracting triangle pattern. Last week it went a step further by breaking into new all-time high territory. Moreover, the upside breakout was confirmed by additional gains in the NYSE Advance-Decline Line (ADL).



It isn't hard to find US stock indices that are yet to exceed last year's highs. However, recently some of the lagging indices have shown signs of strength. For example, although the NYSE Composite Index (NYA) remains well below its January-2018 all-time high, last week it broke above intermediate-term resistance defined by its September-2018 and July-2019 highs.



Be aware, though, that last week's breakouts don't imply that significant additional gains are in store. Instead, we explain below that the market has reached a critical juncture that COULD lead to upward acceleration over the coming several weeks, but more likely will lead to a sell-off.

A week ago we wrote: "The [Fed's] new program has the potential to extend the long-term equity bull market well into next year, but there are two reasons, one technical and the other fundamental, to believe that the market won't make much additional headway before commencing its next significant correction.

The technical reason is illustrated by the following weekly chart. The chart shows that over the past 18 months the SPX has commenced a sizable multi-week decline soon after making a new all-time high. If the pattern continues, the SPX won't go higher than about 3070 before reversing course."

An updated version of the same weekly chart is displayed below. Notice that last week's gain took the SPX to the top of its 2-year broadening range.



Many traders will be drawing similar lines to the ones drawn on the above chart. This means that there could be an immediate increase in selling pressure and a downward reversal this week. It also opens up the possibility that a solid break above the upward-sloping line on the chart will lead to acceleration to the upside over the ensuing few weeks as a large number of wrong-footed traders rush for the exit or shift from short to long.

The most likely catalyst for the more bullish short-term scenario is the signing of a US-China trade deal, but the Fed's money pumping has been the root cause of the upward move of the past month and would be the root cause of any meaningful price gains that happen within the next few months.

At this stage we favour the more bearish short-term possibility, which means that we expect a 1-3 month 'risk off' trend to begin within the next couple of weeks without the SPX making significant additional headway. As well as putting irresistible downward pressure on the broad stock market, this trend probably would boost the prices of gold, gold-mining stocks, T-Bonds and the Yen.

However, although we have positions that will benefit from it, we aren't betting heavily on the short-term 'risk off' scenario. In effect we are hedging our bets, because the upward breakout scenario would boost the values of our industrial-commodity-related equity positions.

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 and Gold Stocks

We are combining our Gold and Gold Stocks discussions today because they are more inter-related than usual.

In the email sent to subscribers after the close of US trading last Thursday, we wrote that Thursday's market action had generated some persuasive evidence that the corrections in gold and gold mining are over. Of particular significance:

1) The US$ gold price closed above its short-term channel top and its 50-day MA.

This is illustrated below. There was a small pullback on Friday that held the 50-day MA.



2) Gold's upside breakout was confirmed by strength in the Yen (the major currency that is most strongly correlated with gold).

The following chart illustrates the strong positive correlation between the US$ gold price and the Yen. The Yen had led gold at turning points since late last year, but it appears that gold was the leader at the most recent turn. As shown more clearly in the chart included in the Currency Market section of today's report, the Yen is yet to confirm that a short-term bottom is in place; however, the Yen's 30th-31st October turnaround from below the 200-day MA looks like the first step in a trend reversal.



3) The HUI, GDX and GDXJ closed above their 50-day MAs.

The following daily chart of the HUI shows Thursday's break above the 50-day MA and a trivial pullback on Friday. GDX has been a little weaker than the HUI of late and ended Friday's session exactly at its 50-day MA.



4) The HUI/gold ratio continued to perform in a bullish manner.

As illustrated below, the HUI/gold ratio bounced off its 150-day MA in the middle of October and broke above its 40-day MA during the week before last. At this point there was nothing to differentiate the rebound from a counter-trend move, but the ratio then pulled back to its 40-day MA before rising to a new multi-week high. As a result, the rebound from the mid-October low now looks more like the start of an upward trend than a reaction within a downward trend.



We mentioned in the email that if the corrections have ended then they have done so within the expected time-window, but at higher price levels than originally expected. With regard to the HUI and GDX, we had expected that 200-day MA's would be tested before the correction was over. This would have entailed the HUI dropping to the low-180s before resuming its intermediate-term advance. With regard to gold bullion, we had expected that the price would fall at least as far as support at $1450 and were prepared for a decline to as low as the mid-$1300s.

We also mentioned in the email that the recent upward reversal in the gold-mining sector is roughly in line with the 1980s Model we've been tracking. As illustrated below, this model suggests that the gold-mining indices/ETFs will trend higher over the next three months.

By the way, the spectacular plunge in the green line on the following chart is the 1987 stock market crash. In October of 1987 the gold mining sector crashed with the stock market while the gold price rose, thus highlighting a major difference between gold-mining stocks and gold bullion. The latter is a safe haven in times of extreme turmoil/trouble, the former is not.

Unless the broad US stock market starts to form a crash pattern before year-end, the current market should start to diverge from the 1980s path early next year.



Something we've been harping on is that there has not been a proper sentiment reset in the gold market. In fact, due to a surge in open interest last Thursday it's possible that the total speculative net-long position in Comex gold futures has returned to the vicinity of its September-2019 all-time high. The lack of a sentiment reset means that the short-term risk is higher than we would prefer, even though a rally to new multi-year price highs appears to be underway.

The most reasonable assumption is that rallies to new multi-year price highs have begun in both the bullion market (silver and platinum as well as gold) and the associated mining indices/ETFs. If so, it's likely that downward corrections will be limited by 20-day MAs. Therefore, pullbacks to near 20-day MAs by the US$ gold price, the HUI and/or GDX should be viewed as short-term buying opportunities.

The Currency Market

The Dollar Index (DX) ended last week slightly below its 200-day MA. This is a downside breakout of sorts, but more important support is defined by the channel bottom and lies about one point lower. Another test of the channel bottom appears to be in store and could occur as soon as this week.

To get a sustained break below the channel bottom the dollar's "true fundamentals" will have to turn bearish. This will require additional strength in European equities relative to US equities.

Our view at this time is that a 1-2 year period of US$ weakness either has begun already or will begin within the next few months.



We have been getting increasingly bullish about the Yen's short-term and intermediate-term prospects, but prior to the past three trading days there was no evidence that the currency had completed its downward correction. Preliminary evidence that a short-term bottom is in place emerged during the second half of last week.

The following daily chart shows that:

a) The Yen spiked below its 200-day MA and an important lateral support level last Wednesday, but recovered to end the day above support.

b) After recovering from below support on Wednesday, the Yen gapped higher on Thursday.

c) There was a pullback on Friday that left the bulk of Thursday's gain in place.

This price action could have marked a trend reversal, but even if it didn't we expect that a multi-month bottom will be put in place within the next two weeks due to a downward reversal in the stock market and an associated shift away from risk. As explained in last week's Interim Update, although the Yen is not a safe haven it often trades like one because Yen carry trades tend to get closed en-masse when economic and/or financial-market risk is perceived to be on the rise.



It would be reasonable to buy CurrencyShares Japanese Yen (FXY), a daily chart of which is displayed below, for a short-term or an intermediate-term trade with the Yen in the 92.0-92.5 range. To manage risk, an initial stop could be placed slightly below last week's low.

As noted later in today's report, our short-term bullish outlook for the Yen will be reflected in the TSI List via an FXY call option.



The Australian dollar (A$) has moved up to slightly below its 200-day MA. This is interesting, because the following chart shows that every significant rebound in the A$ since March of last year has ended at or slightly below the 200-day MA. This means that for the A$ it's time to fish or cut bait. Will the current rebound be the one that morphs into an intermediate-term upward trend, or are we about to get another rally failure at/near the 200-day MA?



We are neutral with regard to the A$'s short-term prospects and bullish with regard to the A$'s 1-2 year prospects.

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 1st November 2019:

[Note: AISC = All-In Sustaining Cost, EBITDA = Earnings Before Interest, Tax, Depreciation and Amortisation (a measure of cash flow), EV = Enterprise Value or Electric Vehicle, FS = Feasibility Study, FY = Financial Year, IRR = Internal Rate of Return, ISR = In-Situ Recovery, JV = Joint Venture, 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 or Net Smelter Royalty, P&P = Proven and Probable, PEA = Preliminary Economic Assessment, PFS = Pre-Feasibility Study]

  *Africa Oil (AOI.TO): At around this time last year AOI announced that it owned 25% of a consortium that had agreed to buy 50% of Petrobras Oil and Gas B.V. (POGBV) for US$1.407B. This was a huge deal for AOI at the time, but the deal has just become much bigger. Four times bigger, to be specific. The reason is that prior to the start of trading last Friday AOI announced that its consortium partners have pulled out and that AOI will be the sole acquirer of the 50% interest in POGBV for US$1.407B.

POGBV owns 8% and 16% interests in offshore Nigerian oil fields operated by Chevron and Total. At the time of the original deal the combined production of these fields was 368K barrels/day (b/d) and expected production within 12 months was 568K b/d, so we assume -- given that there has been no new information -- that the production rate is now about 568K b/d.

POGBV's share of this production was 47K b/d in 2017 and should now be about 79K b/d. Given that AOI will own 50% of POGBV, this implies that AOI will have production of about 40K b/d after the deal is completed. The reported production cost 12 months ago was only $10/barrel, so this should be very profitable production at the current oil price.

At an oil price of US$55/barrel, 40K b/d of oil production results in annual revenue of around US$770M. And based on the reported production cost, this could result in a gross margin of at least US$400M. That's massive for a company with a current market cap of only US$415M.

The biggest question right now is: How will AOI finance the purchase?

The company has about US$300M of cash and has just arranged a US$250M bridge loan facility with BTG Pactual (the owner of the other 50% of POGBV). According to AOI's press release, "the bridge loan together with the available cash provide the necessary funds for the company to cover its POGBV deal completion payments and 2020 budget." This suggests to us that the purchase involves staged payments.

We are surprised that there was minimal reaction in the stock market to AOI's news. Trading volume was higher than average on Friday, but the price was unchanged. In our opinion the news is very positive and justifies an upward re-rating of the stock.

  *Jervois Mining (JRV.AX, JRV.V), an exploration/development-stage miner that offers exposure to cobalt and nickel, issued its quarterly report for the September-2019 quarter. The report contained no new information of significance.

JRV is well financed, with no debt and about A$17M of cash following the recent receipt of A$3M for the sale of a gold royalty. We expect that the next major milestones for the company will be the completion of the updated FS for the Idaho Cobalt Operation (ICO) and the completion of a scoping study regarding the construction of a refinery at the ICO. These are both due in Q1-2020. In the meantime there will be drilling results from the ICO and the company's early-stage exploration prospects in Uganda.

  *Mineral Resources (MIN.AX) announced that the "Albemarle transaction" has overcome its final regulatory hurdle (approval from Australia's Foreign Investment Review Board) and is now complete. The transaction involves the sale to Albemarle Corporation (NYSE: ALB) of 60% of the Wodgina Lithium Project (leaving MIN with 40%) in exchange for US$820M (A$1,188M at the current exchange rate) in cash plus the transfer to MIN of a 40% interest in the first two 25,000 dry-tonnes-per-annum lithium hydroxide conversion units currently being built by Albemarle in Kemerton, Western Australia. Regarding the Kemerton units MIN is free-carried to production, which is expected in 2021.

This is very good news.

MIN subsequently announced that the MIN-ALB JV had placed the Wodgina project on care and maintenance pending a recovery in the lithium price. This does not affect MIN's 2020 financial guidance.

The lithium market became over-supplied during 2017-2018 as miners aggressively increased production in reaction to a large price rise during 2016-2017, leading to a major downward trend in the price during 2018-2019. The price is still being weighed down by excess supply and there is no turnaround in sight, but we expect that increasing demand from the Electric Vehicle industry will cause the supply-demand situation to become price-supportive within 12 months.

MIN is positioned to benefit in a big way from an eventual recovery in the lithium market, but thanks to its mining services and iron-ore businesses it doesn't need a higher lithium price to be profitable. Consequently, we continue to believe that MIN is the safest way to obtain long-term exposure to lithium.

Our intermediate-term valuation-based target is A$20/share, which is about 40% above the current price.

  *Premier Gold (PG.TO) reported two pieces of good news related to the South Arturo gold project in Nevada. This project is a JV between PG (40%) and Nevada Gold Mines (the Barrick-Newmont JV). The PG-NGM JV has been developing two new mines at South Arturo -- the El Nino underground mine and the Phase 1 open pit.

The first piece of good news is that El Nino has achieved commercial production on budget and well ahead of schedule. Consequently, this mine will contribute significantly more than planned to PG's 2019 gold production. The Phase 1 pit remains on track for production next year.

The second piece of good news is that drilling at El Nino and at the Phase 3 pit (a future development) returned exceptional intercepts, including 24.4 m of 20.60 g/t Au, 50.3 m of 6.36 g/t Au, 39.6 m of 8.75 g/t and 32.0 m of 10.09 g/t Au at El Nino, and 112.8 m of 7.29 g/t Au and 62.5 m of 7.93 g/t Au at Phase 3. These results indicate the potential for very high-margin gold production.

Separately, PG reported 14.5K ounces of gold production during the September quarter from its Mercedes mine in Mexico. This was a disappointing below-plan result as the mine continues to struggle with lower-than-expected grades.

Due to having several 'irons in the fire', including current production from two mines, PG is a relatively low-risk stock to average into for exposure to gold.

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) AOI (last Friday's closing price: C$1.16)

2) JRV.AX, JRV.V (last Friday's closing price: A$0.20, C$0.19)

3) OIH (last Friday's closing price: US$11.71)

4) PG.TO on a pullback to the low-C$2 area (last Friday's closing price: C$2.22)

5) SBB.TO on a pullback to the mid-C$1.60s (last Friday's closing price: C$1.76)

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

Option Trades

1) GDX 15-November-2019 $27.00 Put Option

The above put option was added to the TSI List on 24th September in anticipation of a correction-ending plunge to the 200-day MA. The potential for such an outcome has not been totally eliminated, but it very much looks like the gold-sector correction is over and a new multi-month upward trend has kicked off. Therefore, although for hedging purposes it could make sense to retain this position for at least a few more days, the put option is no longer a valid speculation and has been removed from the TSI List. It will go into the record books as a loss of about 64% and will thus cut into the 428% profit achieved on the GDX put option exited in September.

2) FXY (CurrencyShares Yen) January-2020 $90.00 Call Option

Further to the comment earlier in today's report, our short-term bullish outlook for the Yen will be reflected in the TSI List via the addition of the above FXY call option. The last trade for this option was US$0.40 and it ended last Friday's session with a bid-ask spread of $0.35-$0.45, so we will use $0.40 as our starting price for record purposes.

This is a risk-off play, not an anti-US$ play.

Chart Sources

Charts appearing in today's commentary are courtesy of:

https://stockcharts.com/