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-- Weekly Market Update for 14th January 2019
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]
Market | True Fundamentals Model (TFM) |
Gold (US$ Price) | Bullish (04 Jan 2019) |
US Equity (SPX) | Bearish (07 Sep 2018) |
Currency (Dollar Index) | Neutral (04 Jan 2019) |
Commodities (GNX) | Bearish (01 Jun 2018) |
Last week's posts at the TSI Blog
The Japanese government is still pegging the gold price
Summary of current
thinking/positioning
1) The Dollar Index is immersed
in a downward trend with a short-term target of 93.5. The potential exists
for it to move a lot lower, but only if the fundamentals continue to shift
in the euro's favour.
2) The recent positive shift in the
fundamental backdrop suggests that the price rebounds in gold, silver and
the associated mining stocks will extend to higher levels during the first
quarter of 2019. There is also a chance that a gold bull market will be
signaled in the near future.
3) The S&P500 Index has generated more
evidence of a bear market, but at the same time it probably established a
low on 24th December that will hold for a few months. We expect the low to
be tested as part of a multi-month recovery.
4) The oil price is in
a similar short-term position to the S&P500. It probably made a low on
24th December that will hold for several months, but a test of the low is
likely.
5) The T-Bond has made a high that should hold for at least
a few weeks, but the overall counter-trend rebound is probably not
complete.
6) We are holding a cash reserve of 30%-35%.
2019 Forecast for
the T-Bond
Here's how we summed up our 2018
T-Bond forecast:
"We expect that...major support [as defined by
the 84-month MA] will hold if tested during the first quarter but will be
breached during the second quarter in response to rising fear of
"inflation".
In the second half of the year we expect to encounter
substantial 2-way bond-market volatility, with a strong 2-3 month rally at
some point in reaction to falling equity and commodity prices.
Overall, we are anticipating a down year for the T-Bond (an up year for
long-term interest rates), but not a large decline. We expect that major
weakness in 'risk free' government bonds will be one of the next decade's
big stories."
Last year's guess was excellent for government
work and still OK for the private sector. We got the expected breach of
major support during the first half of 2018 and the strong 2-3 month rally
in reaction to falling equity and commodity prices late in the year. Also,
it was a down year for the T-Bond, but not a large decline (the T-Bond
price was down by about 4%). The only 'miss' was that we expected the
T-Bond's break below major support to happen in Q2, but it happened in Q1.
This year's forecast (guess) is for an extension of the rebound that
began late last year to a top within the first four months of the year,
followed by a decline to a new 5-year low. Whereas last year's T-Bond
price weakness was driven by the Fed's tightening campaign and a small
increase in inflation expectations, this year's weakness will be driven by
fear of the veritable explosion in US federal debt that is bound to occur
during the next recession. It's likely that within the next three years
there will be a 12-month period during which the US government increases
its debt by more than $2 trillion, and that will be just the beginning of
a self-reinforcing debt spiral as rising interest rates lead to greater
deficits.
As was the case a year ago, we are anticipating a down
year for the T-Bond (an up year for long-term interest rates), but not a
large decline. Our bearishness regarding the T-Bond's prospects over the
coming 12 months is lessened by the likelihood that after the senior US
stock indices break well below their December-2018 lows there will be
another flight towards the perceived relative safety offered by Treasury
debt. This should mitigate the T-Bond's annual loss.
Also, we
expect that the T-Bond's 84-month MA, which acted as support for three
decades prior to last year, will now act as resistance during
counter-trend rallies. As illustrated below, this MA is presently in the
high-140s. We won't be surprised if there is an intra-month spike into the
150s within the first few months of this year, but on a monthly closing
basis the T-Bond's upside should be capped at 148-149.
Due to the fear of future bond supply and an increasing general
desire to hold only the most liquid debt securities, the demand for
short-term Treasury debt should rise relative to the demand for long-term
Treasury debt during 2019. This will cause a pronounced steepening of the
US yield curve.
Lastly, we reiterate that major weakness in 'risk
free' government bonds will be one of the NEXT decade's big stories.
Secular interest-rate trends turn around like fully-laden supertankers.
Commodities
Copper might have
bottomed
In our 31st December commentary, we wrote:
"We expect the copper price to do well during the first half of
2019 in response to the extremely low LME copper inventory level, a
rebound in the stock market and the temporary cessation of the US-China
trade war. In fact, the prices of all base metals are set to rebound over
the next few months for the same reasons. However, copper's price action
suggests that a spike to a new 12-month low could precede the start of a
tradable rally."
The copper price might have bottomed when it
spiked below its August-2018 low (to a new 12-month low) on 3rd January.
Oil's initial rebound is almost complete
The
oil price touched its 50-day MA on Friday 11th January and then reversed
course (see chart below). This could mean that a multi-week top is now in
place.
An immediate extension of the current up-move to resistance
at $54-$55 is possible, but as mentioned in last week's Interim Update the
next $5+ move in the oil price probably will be to the downside.
The Oil Services ETF (OIH) has strengthened in response to the price
recoveries in both the oil market and the stock market. It gained 8% over
the past week.
Despite its recent sharp rebound, on a long-term
basis OIH is still at a very depressed level. The potential is there for a
rise to at least the low-$20s during the first half of this year, but at
the same time there's a good chance that the initial rebound from the
December low has almost run its course.
Regarding the near-term
outlook for OIH, a week ago we wrote:
"We expect that the
initial rebound will end within the coming fortnight at somewhere between
the current level ($15.19) and the 50-day MA (near $17).
If OIH
makes it up to around $17 within the next several days it should be viewed
as an opportunity to take some money off the table in readiness for a
correction that could take the price back to near its December low."
This comment/suggestion remains applicable, although it should go
without saying that the initial rebound might not extend as far as $17.
Therefore, depending on current exposure it could make sense to take some
money off the table at a slightly lower price.
The Stock Market
2019 Forecast for the US
Stock Market
This was our 2018 stock market forecast,
penned at around this time last year:
"...the monetary backdrop
only turned negative about three months ago and it can take 6-12 months
for the effects of such a shift to become apparent in the financial
markets and the economy. Also, there is not yet any evidence in the yield
curve or credit spreads that the tightening of monetary conditions has
become critical. We therefore expect that the stock market will work its
way upward during the first half of 2018, although we also expect that the
advance will be 'choppy' and include a Q1 correction of 5%-10%.
At
some point during the second half of 2018 the tightening of monetary
conditions should become critical, with a 15%-25% SPX decline being one of
the most obvious consequences. Whether or not this decline marks an end to
the bull market will depend on the central-bank reaction at the time, in
that a rapid policy shift from monetary tightening to loosening could
extend the long-term advance.
We expect that commodity-related
stocks will be among the best performers during the first half of the
year, but that all sectors of the stock market will suffer large declines
during the second half with the possible exception of the gold-mining
sector."
The annual forecast (educated guess) we made in
early-2018 turned out to be very close to the mark.
Here is this
year's educated guess:
It isn't yet certain that the stock market
decline that unfolded during the final quarter of last year was the first
leg of a bear market, but arguing in favour of a bear market is:
a)
The fact that the G2 monetary inflation rate has been in 'bust territory'
since September-2017.
We noted a year ago that it can take 6-12
months for the effects of a substantial negative shift in the monetary
backdrop to become apparent in the financial markets and the economy. It
is now 15 months since the negative shift and the effects are readily
apparent. Moreover, with the Fed still intent on withdrawing money from
the economy via its balance-sheet 'normalisation' program there is no
reason to expect a meaningful up-turn in the 'liquidity' situation in the
near future.
b) The widening of credit spreads that began last
October.
c) The pronounced reversal in NYSE Margin Debt from
expansion to contraction.
d) The SPX/euro ratio's monthly close
below its 20-month MA in December-2018.
However, some early-warning
signs of a bear market are still missing, chief among them being a yield
curve reversal from flattening to steepening.
In any case, there is
no requirement to make the big forecast (bear market or not). This is
because there is a high probability of the December-2018 lows being
decisively breached during 2019 regardless of whether or not a bear market
has begun.
Getting more specific, over the past three weeks we have
written that the SPX probably would form a multi-month 'W' bottom,
involving an initial rally from the December low followed by a decline to
test the low and then a longer/larger rally. We continue to expect
something along these lines to materialise during the first half of the
year, with reduced US-China trade friction being one of the
'justifications' for the rally. If it does it will set the stage for a
multi-month decline to well below the December-2018 low.
Our guess
is that the SPX will end the year with only a single-digit percentage
loss, but that there will be a 15%-25% decline from the first-half peak to
the second-half trough. We expect the large decline from the first-half
peak to be driven, in part, by rising long-term interest rates.
Current Market Situation
The SPX's initial rally
from its December low had the potential to reach resistance at 2600 (the
October-2018 low). The following daily chart shows that this resistance
was tested during the final three days of last week. The resistance held,
but whether or not it will continue to do so is an open question given
that there hasn't yet been a downward reversal.
By the way, the
lower section of the following chart shows the NYSE Advance-Decline Line
(ADL). The ADL's current message is neither bullish nor bearish, since
this measure of market breadth has moved in synch with the SPX over the
past couple of months.
For all intents and purposes, the position of the Dow Industrials
Index is identical to that of the SPX. Like the SPX, the Dow has rebounded
to resistance defined by its October low.
The US stock market is not 'overbought' according to short-term
momentum indicators, but the fact that important resistance levels are now
being tested by the senior stock indices is one reason to be concerned
about short-term downside risk. Another reason for such concern is that
the TSI Put/Call Indicator (TPCI) is now as near as dammit to a new sell
signal. The TPCI, which is shown in the bottom section of the following
chart, generates a sell signal when it drops to 0.30 or lower and a buy
signal when it rises to 0.80 or higher.
The TPCI's last four
signals have been very good. Specifically, the buy signals in
mid-January-2017 and May-2018, the sell signal in late-September-2018 and
the buy signal in late-December-2018 were all very timely.
The one significant plus for the market is the McClellan Oscillator
(MO) moon-shot discussed in last week's Interim Update. An MO surge of the
magnitude that occurred last week suggests the sort of internal strength
that usually is followed by only minor setbacks over the ensuing few
weeks.
The MO surge tempers our enthusiasm for short-term bearish
speculations, but we are still interested. In particular, we still like
the idea of buying SPY March-2018 $245 put options. These options ended
last week at $3.36. For a little more safety at the cost of a little less
leverage, the SPY April-2018 $245 put options are also worth considering.
These options ended last week at around $5.00.
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]
Date | Description |
Monday Jan-14 | No important events scheduled |
Tuesday Jan-15 | PPI |
Wednesday Jan-16 |
Retail Sales Import Prices Business Inventories |
Thursday Jan-17 |
Housing Starts Building Permits |
Friday Jan-18 |
Industrial Production Consumer Sentiment |
Gold and the Dollar