The Stock Market

     

 

 

A Chirp from the Deep Level Mines

Back in late 2015 and early 2016, we wrote about a leading indicator for gold stocks, namely the sub-sector of marginal – and hence highly leveraged to the gold price – South African gold stocks. Our example du jour at the time was Harmony Gold (HMY) (see “Marginal Producer Takes Off” and “The Canary in the Gold Mine” for the details).

 

Mining engineer equipped with bio-sensor

Photo credit: Hulton Archive

 

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A Quick Look at a few Technical Yardsticks and Comparisons

We went through numerous charts and data over the weekend to provide a snapshot of where market currently stands. This is in context with our idea that sudden downturns in the form of mini-crashes are likely to happen with very little advance warning, mainly due to market structure issues (the vast increase in systematic trading strategies) and the unique post “QE” environment.

 

Bad hair can be dangerous! Shock-haired Pete and his bro Suck-a-thumb have been traditionally used to get children in Germany and eventually across all of Europe to behave by traumatizing them with some of the most frightening horror stories ever thought up. Everybody in Europe knows these characters, and everybody was scared out of his wits by these stories as a child.

 

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A Well-Established Tradition

Seemingly out of the blue, equities suffered a few bad hair days recently. As regular readers know, we have long argued that one should expect corrections in the form of mini-crashes to strike with very little advance warning, due to issues related to market structure and the unique post “QE” environment. Credit spreads are traditionally a fairly reliable early warning indicator for stocks and the economy (and incidentally for gold as well). Here is a chart of US high yield spreads – currently they indicate that nothing is amiss:

 

As this chart shows, credit spreads do as a rule warn of impending problems for the stock market, the economy or both. Not every surge in spreads is followed by a bear market or a recession, but some sort of market upheaval is usually in the cards. Since the stock market normally peaks before the economy weakens sufficiently for a recession to be declared, the warnings prior to market tops are often subtle – usually all one gets is a confirmed breakout over initial resistance levels, at which time yields will still be quite low. At the moment credit spreads suggest that nothing untoward is expected to occur for as far as the eye can see (a.k.a. the near future). Will something intrude on that enviable and stress-free combination of Nirvana, Goldilocks and the Land of Cockaigne, where everything seems possible, especially good things? Will Santa Claus remain a permanent fixture of the junk bond and stock markets, handing out gifts to all those prepared to spice up their portfolios with bonds bereft of covenants and light in yield, triple-digit P/E stocks, or even CUBE stocks (=completely unburdened by ‘E’)? Perhaps Fisher’s permanent plateau has materialized 90 years later than originally envisaged, but we don’t think so.

 

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A Month with a Bad Reputation

A certain degree of nervousness tends to suffuse global financial markets when the month of October approaches. The memories of sharp slumps that happened in this month in the past – often wiping out the profits of an entire year in a single day – are apt to induce fear. However, if one disregards outliers such as 1987 or 2008, October generally delivers an acceptable performance.

 

The road to October… not much happens at first – until it does. [PT]

 

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A Surprise Rout in the Bond Market

At the time of writing, the stock market is recovering from a fairly steep (by recent standards) intraday sell-off. We have no idea where it will close, but we would argue that even a recovery into the close won’t alter the status of today’s action – it is a typical warning shot. Here is what makes the sell-off unique:

 

30 year bond and 10-year note yields have broken out from a lengthy consolidation pattern. This has actually surprised us, as we felt that the large speculative net short position in bonds and notes was prone to trigger a short covering rally. Alas, the opposite has happened.

 

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The Most Expensive Tweet of All Time

He finally done did it this time – this is to say, he did himself in. It was already widely known that Elon Musk sent out one tweet too many in early August. But it seems now that what he posted on that fateful day may well end up as the most expensive sequence of nine words ever blasted over the intertubes. For those who haven’t followed the story, this is the tweet in question:

 

Elon Musk’s fateful tweet – here is a link to the thread on Twitter:  Taking TSLA private fantasy.

 

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A Rebound Gets Underway – Will It Have Legs?

Ever since the gold indexes have broken below the shelf of support that has held them aloft since late 2016 (around 165-170 points in the HUI Index), the sector was not much to write home about, to put it mildly. Precious metals stocks will continue to battle the headwinds of institutional tax loss selling until the end of October, to be followed by the not-quite-as-strong headwinds of individual tax loss selling in the final weeks of the calendar year – a fairly regularly recurring script in recent years. Nevertheless, recent developments make it worthwhile to take another look at the situation. Here is a daily chart of the HUI:

 

The HUI daily, plus two proxies for gold investors shortly after looking at their end-of-August statements. As the annotation indicates, one reason to take a closer look is the recent strong divergence between prices and momentum oscillators such as RSI and MACD. But that is not the only thing that is of interest.

 

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A Lengthy Non-Confirmation

As we have frequently pointed out in recent months, since beginning to rise from the lows of the sharp but brief downturn after the late January blow-off high, the US stock market is bereft of uniformity. Instead, an uncommonly lengthy non-confirmation between the the strongest indexes and the broad market has been established.

The chart below illustrates the situation – it compares the performance of the DJIA (still no new high since January, although it has come close), the NDX (one of the best-performing indexes, along with the Russell 2000/ RUT) and the NYA (our proxy for the broad market):

 

DJIA vs. NDX vs. NYA – this rather glaring and very lengthy divergence is a symptom of a narrowing market. The vast bulk of the uptrend in benchmarks such as the S&P 500 was due to the surge in the “FAANG” stocks (FB, AAPL, AMZN, NFLX, GOOGL) – but even this group of stocks is no longer in uniform tracking mode, as FB has fallen out of bed and NFLX and even GOOGL have begun to look wobbly lately. File under interesting trivia: AMZN and AAPL, the two strongest stocks of the group, reached their highest closing levels to date on September 4, the day after Labor Day  (the year-to-date closing high in the NDX was recorded on August 29). In 1929, Labor Day fell on September 2 and the DJIA topped out on September 3.

 

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The Biggest Crashes in History Happened in September and October

In the last installment of Seasonal Insights we wrote about the media sector – an industry that typically tends to perform very poorly in the month of August. Upon receiving positive feedback, we decided to build on this topic. This week we are are discussing several international markets that tend to be weak during September and will look at what drives this recurring pattern.

 

Mark Twain, a renowned specialist in how not to get rich, opines on dangerous months to invest in the stock market. We should mention that he didn’t have access to the Seasonax app. [PT]

 

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Financial Potemkin Village

A rising stock market has the illusory effect of masking the economy’s warts and blemishes.  Who cares if incomes are stagnant when everyone’s getting rich off stocks?  Certainly, winning wealth via the stock market beats working for it.

 

Learning from history, 2018 style [PT]

 

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Alternating Seasonal Patterns

In the last issue of Seasonal Insights we have talked to you about biotech and pharmaceutical companies as industries that withstand the traditional summer weakness in stock markets. Six weeks ago, we have shown that gold is an asset one can purchase in the summer months to offset this phenomenon.

 

Warning: don’t let the media mesmerize you in the summer months – the stocks of media companies are a veritable seasonal minefield in August to October. [PT]

Illustration via crabo.ru

 

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Data Interpretation Problems

Oddly enough, these days it has become more difficult to interpret positioning data. We get more granular data than before, such as e.g. the disaggregated commitments of traders reports (CoT – even if they are still released with a three day delay), but at the same time the goal posts in futures markets have shifted greatly. Former extremes in positioning have been left in the dust with the advent of QE (and the associated desperate “hunt for yield”) and the adoption of large scale systematic trading. Here is a glaring example illustrating the point:

 

Speculator net positions in crude oil futures: after decades in which net long positions rarely exceeded 100,000 contracts, a new post GFC era record has been set in the speculative position at 740,000 contracts net long in early February 2018.

 

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