-- Weekly Market Update for the Week Commencing 9th 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

There were no blog posts last week.

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, 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) The SPX is about to either end its correction by completing a successful test its early-February low (2530) or escalate the significance of the January-2018 top by breaking to a new low for the year. The former outcome is the more likely, but we are not betting either way.

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%.

US Recession Watch

The latest iteration of the ISM New Orders Index (NOI) was reported last week. The NOI is one of the three leading indicators of US recession that we care about, the others being Real Gross Private Domestic Investment (RGPDI) and the yield curve.

The NOI has declined each month since making a 13-year high in December-2017. However, it remains near the top of its 20-year range and far above the level that it would have to drop below (the red line on the following chart) to warn of a recession.



RGPDI only gets updated quarterly and won't get its next update until late this month, but as at Q4-2017 it was still in an upward trend (an upward trend in RGPDI implies that the start of a recession is at least two quarters away).

The yield curve, which is updated daily, warns of a recession when a major flattening trend (short-term rates rising relative to long-term rates) comes to an end, that is, when evidence emerges that the major trend has changed from flattening to steepening. With the spread between the 10-year and 2-year T-Note yields having recently hit a 10-year low, there is presently no sign of the yield-curve reversal that almost always precedes a recession.



The upshot is that there has been no change in our expectations regarding the timing of the next US recession. The probability of a recession beginning during the first half of this year remains close to zero (for all intents and purposes, it is zero), but due to the tightening of monetary conditions there is a realistic chance that a recession will begin before year-end.

Commodities

Oil's double top

In the 27th March Interim Update we wrote that the oil price had probably double-topped near $66 as part of a multi-month correction. Our thinking hasn't changed.

Under the double-top scenario a decline to well below the early-February low ($58) would complete the correction.



Copper turns around after breaching support

Copper is one of the "EV Metals", that is, one of the metals that will receive a significant demand boost due to the increasing popularity and eventual domination of electric vehicles. As explained in previous commentaries, we think that "EV Metals" is the commodity group that offers the best risk/reward with regard to the current year and the next five years. In particular, it offers a better risk/reward than the precious metals group (gold, silver and platinum) or the traditional energy-fuels group (oil, natural gas, thermal coal and uranium). However, timing, as always, will be important, and within the long-term "EV Metals" bull market there will be many opportunities to scale into and out of positions.

In late-March the copper price broke below support at $3.00-$3.05, warning that a decline to as low as $2.50 could be on the cards. However, a subsequent reversal negated the breakdown. Also worth mentioning is that the upward reversal has placed more emphasis on the $2.90-$2.95 support range, as this is the support that acted as a floor.



The recent rebound has muddied the waters as far as the price action is concerned. At the same time, sentiment (as indicated by the COT data) is neutral and the current physical supply-demand situation (as primarily indicated by the futures price curve) is neutral or perhaps even slightly bearish. Therefore, we don't have a good reason to expect that a substantial rally is about to begin. Instead, despite the late-March false breakdown we think the odds favour some additional weakness prior to a correction low.

Additional short-term weakness in the copper price should be viewed as an opportunity to add exposure to copper mining stocks in anticipation of a strong rally from whatever low is made over the next month or so. One such stock is Freeport McMoran (FCX), the world's largest publicly-traded copper producer. FCX has been in correction mode for the past three months and may be close to a correction low in terms of both price and time.

If we are dealing with a 3-4 month correction within a longer-term upward trend, which is probably the case, then the optimum place for new buying would be slightly above the lateral support line drawn on the following daily chart (that is, near $16.00). Interestingly, this lateral support now roughly coincides with the 200-day MA.

Note that speculators who want more bang for the buck and are prepared to accept the risk of a much greater percentage loss, an alternative to buying the stock would be to buy FCX call options with an expiry date of January-2019. The timing would be the same, that is, the options ideally would be purchased with the stock trading at around $16.00.



Platinum's correction goes deeper than expected

There was a false downside breakout in the platinum price in December-2017 that set the stage for a powerful rally that added $150 in the space of only 6 weeks. By late-January the market was very 'overbought' and, as we noted in these pages at the time, the price was unlikely to get through resistance at $1025-$1050 without a sizable intervening correction.

We guessed that the correction would end near $950, but it has retraced more of the preceding rally than expected and might not yet be complete.



Platinum is now very 'oversold' in US$ terms and relative to gold. In fact, relative to gold it ended last week at a new multi-decade low. On this basis and due to the fact that useful commodities always have significant monetary value, investors who are prepared to hold for at least 1-2 years should be buyers of physical platinum or platinum ETFs at this time.

The Stock Market

The point of recognition

As explained in numerous TSI commentaries, the stock market will usually view a new downward trend in bond prices and the associated upward trend in interest rates as a minor issue until a point is reached when falling bond prices (rising interest rates) are the only issue that matters. After this 'point of recognition' is reached, the downward trend in the bond market begins to have a very negative effect on the stock market.

There was a high risk that the 'point of recognition' this time around would be the T-Bond breaking below its March-2017 low, signaling the completion of a major topping pattern for long-dated US government bonds. However, the bullish equity trend was shaken but not shattered by the T-Bond's breakdown.

The issue isn't settled, but we suspect that what occurred over the past 2.5 months is akin to the initial scare caused by the T-Bond's break below support in April-1987. As illustrated by the following chart, 1987's 'initial scare' evaporated and the SPX commenced a new short-term upward trend when the T-Bond rebounded. It wasn't until August, when the T-Bond breached its May low, that a major stock market decline began to unfold.

With the benefit of hindsight it is clear that the August-1987 downside breakout by the T-Bond was the stock market's 'point of recognition' -- the point when a critical mass of market participants realised that the rise in interest rates was inexorable and totally incompatible with current equity valuations.



If the effect on the stock market of the T-Bond's January-2018 downside breakout is equivalent to the 'initial scare' of April-1987, then this time around the 'point of recognition' for the stock market will coincide with the T-Bond breaking below its February-2018 low.



Our expectation is that the T-Bond price will continue to fall until higher interest rates have set in motion a major decline in the stock market or a major decline in the stock market has begun for some other reason. To put it another way, we doubt that the rising interest-rate trend will end in the absence of a large decline in the stock market.

Current Market Situation

Daily volatility in the US stock market continues to be much greater than usual, with daily SPX swings in excess of 1% now being more the norm than the exception. We expect this higher-volatility environment to persist over the remainder of the year, creating a stark contrast between 2018 and 2017.

Last Monday the SPX closed below its 200-day MA, but somewhat surprisingly there was no follow-through to the downside. There also wasn't a rebound of any substance and at the end of the week the index was hovering only 10 points above this MA.



On Friday 6th April there was a marginal breakdown in the Dow Transportation Average (TRAN). As illustrated below, TRAN ended the week slightly below its channel bottom (note that the channel shown on this chart is well defined and goes all the way back to the January-2016 low).



The message of the above two charts is that the market's current position is precarious. The next chart amplifies this message. It shows that, like the TRAN, the NASDAQ100 ETF (QQQ) ended the week slightly below its channel bottom.



That some of the most important stock indices closed slightly above or slightly below critical support levels at the end of last week opens up the possibility of downward acceleration this week.

While daily closes below last week's lows would elevate the correction from the short-term to the intermediate-term variety, there is still scant evidence that a major decline has begun. Of particular relevance, the market is exhibiting a lot more internal strength than it most likely would be if we were dealing with the early months of a cyclical bear.

For example, a week ago we noted the shrinking number of NYSE-traded common stocks making new 12-month lows. The trend continued last week. As illustrated below, although the NYSE Composite Index (NYA) ended last Friday near the bottom of this year's trading range, only 17 stocks made new 12-month lows on the day. This contrasts with more than 170 new lows on one of the days during the early-February sell-off.



For another example, the next chart shows that a) there was no bearish divergence between the NYA and the NYSE Advance-Decline (AD) Line at the January price peak (the AD Line confirmed the price peak) and b) the AD Line has held up well during the market turmoil of the past 2.5 months.



The bottom line is that the technical position of the market makes it vulnerable to another multi-day plunge, but it's still likely that we are dealing with a bull market correction rather than the start of a bear market.

What are we doing?

With regard to the management of our own account, advantage was taken of the sharp decline that occurred last Monday to exit the remaining short-term bearish speculations (QQQ put options with an expiry date of 20th April). We then placed an order to buy QQQ put options with a June expiry date, but the order wasn't filled because the rebound from Monday's low wasn't quite strong enough. We are therefore 'on the sidelines' awaiting a better opportunity.

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

Gold sentiment (as indicated by the COT data) is neutral and gold's true fundamentals (as indicated by our Gold True Fundamentals Model - GTFM) are finely balanced. As things stand today the GTFM is still bearish, but small changes in other markets could soon shift it into bullish territory.

In any case, it's very likely that the direction of the next significant move in the US$ gold price will be determined by the direction in which the Dollar Index (DX) breaks out of its multi-month trading range. Regardless of sentiment and the overall fundamental backdrop, it's highly probable that an upside breakout by the DX would push the gold price well into the $1250-$1300 range and a downside breakout by the DX would push the gold price into the $1400s.



Silver

The US$ silver price is not normally as stable as it has been over the past two months. It spent the period oscillating between $16.10 and $16.90.

A daily close above the upper end of the aforementioned 2-month trading range ($16.90) would project a further rise to near the top of the channel drawn on the following daily chart, whereas a daily close below the bottom of the range ($16.10) would project a further decline to at least as low as $15.60 (the December-2017 low) and potentially as low as the channel bottom at $14.50-$15.00.



Despite the fact that speculators, as a group, recently became net-short silver futures for the first time in many years, silver's Commitments of Traders (COT) situation is not unequivocally bullish. One reason is the high open interest (OI) in the futures market. As we explained two weeks ago:

"...although the COT situation now looks more bullish than at any time over the past 10 years if we consider only the net positioning of speculators, if we also consider Open Interest ... we find that the sentiment backdrop is less clear-cut. Important price bottoms in the silver market have tended to coincide with relatively low levels of OI, but OI surged last week and is not far from the all-time high reached in April of last year.

The low level of the total speculative net-long position in silver futures combined with the high level of OI suggests substantial disagreement among silver speculators."

The OI has since increased and is now at an all-time high. This warns that silver is preparing to make a big move in one direction or the other. It doesn't suggest that the direction of the move will be to the upside.

Another reason that silver's current COT situation shouldn't be interpreted as unequivocally bullish is that "small traders" (the proverbial dumb money) now have close to their largest net-long position in silver futures in 9 years. The following chart contains the details. Note that the "NonReportable Positions Net" figure (the black line on the chart) is what we refer to as the net position of small traders.



We'll end this silver discussion by repeating the suggestion we made two weeks ago: It would be reasonable for long-term traders to buy some silver now, but short-term traders should not buy until one of the following happens:

1. The gold price closes above resistance in the low-$1360s, especially if it's a weekly close.

2. The silver price drops to around $15.00.

3. The silver price breaks above its channel top and then pulls back to test the breakout.

Gold Stocks

We are keeping an open mind, but it still seems that gold bullion will have to break above resistance in the low-$1360s to bring about a gold-mining rally worth trading. Also, there is still a high risk that the gold-mining indices and ETFs will move to new lows for the year prior to the start of a substantial rally.

The chart presented below shows that GDX has important support at $21.25. A daily close below this support should be respected in that it could prompt 'stale longs' to capitulate, leading to a 10%-15% plunge. However, it could also turn out to be the sort of false downside breakout that happens shortly before the start of a strong rally.

The chart also shows that on three occasions over the past two weeks, up-moves in GDX were capped by the declining 50-day MA (the blue line). The most recent of these occasions was on Friday 6th April, which means that this Monday's price action will be interesting.

If GDX can close above its 50-day MA within the coming few days then a quick rise to as high as $23 may follow.



The Currency Market

The Euro

Like the Dollar Index, the euro has spent the past 2.5 months chopping around within a narrow range. A daily close below 122 would indicate that a decline to as low as 116 could be on the cards whereas a weekly close above 125 would be a major upside breakout.



The Canadian Dollar (C$)

In the 14th March Interim Update we wrote that it would make sense to start accumulating the C$ for an intermediate-term trade if it dropped to around 76.5. It subsequently traded a little lower than 76.5, thus setting-up the buying opportunity.

Due to the recent rebound, the C$'s March-2018 low looks similar to its May-2017 low. However, while the C$'s current COT situation is bullish, it is not as supportive as it was when the big rally got underway last May.



The C$'s correction probably ended in March, but due to the COT situation and what we expect to happen elsewhere in the financial world over the coming few weeks we can't rule out the possibility that the March low will be tested or undercut before a substantial rally kicks off.

Despite the risk that the March low will be undercut prior to the start of a multi-month rally, we would view a pullback to around 77.5 as a new opportunity to buy.

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 6th April 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]

  *Alio Gold (ALO) reported the results of the second and third holes from its surface drilling program at the 100%-owned Ana Paula project in Guerrero, Mexico. Both holes yielded positive results in that they both intersected significant widths of near-surface gold in the low-grade hydrothermal breccia south of the proposed pit and also intersected the high-grade complex breccia below the proposed pit. The best intercept was 2.03 g/t gold over 48.2m in the complex breccia.

The following diagram illustrates the positions of the proposed open pit, the high-grade complex breccia, the low-grade hydrothermal breccia and some of the holes in the current surface drilling program. The results reported last week were for holes AP-18-284 and 285.

The fourth and fifth holes in the 6-hole program are complete and awaiting assays.



  *Solitario Zinc (XPL) announced the 2018 work program for the Lik Zinc project in Alaska. This project is a 50/50 JV with Teck and contains about 3B pounds of zinc within a high-grade open-pittable deposit.

The 2018 work program will be jointly funded by XPL and Teck, with Teck being the operator, and will entail surface geologic, geophysical and environmental work, as well as Lik camp rehabilitation. The aim is to identify targets for drilling and to come up with a plan to move the project forward.

A PEA completed in 2014 estimated that the Lik project would have an after-tax IRR of 22% at a zinc price of US$1.20/pound. This suggests that the project would be economically robust at the current zinc price of US$1.45-1.50/pound.

We estimate that XPL is worth more than double its current stock price. Our main concern is that the 2018 work programs at its two major projects (Lik in Alaska and Florida Canyon in Peru) will not generate market-moving news.

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$0.79)

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

4) CNL.TO (last Friday's closing price: C$3.30)

5) PG.TO (last Friday's closing price: C$2.63)

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.

Chart Sources

Charts appearing in today's commentary are courtesy of:

http://stockcharts.com/index.html
http://www.goldchartsrus.com/