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
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.
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.
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]
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.
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.
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.
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.
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]
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]
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
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.
Most read in the last 20 days:
Is the Canary in the Gold Mine Coming to Life Again?
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 As we write these...
Oil Mania Redux
Positive Energy By now, late September of 2018, it has become increasingly evident that something big is about to happen. What exactly that may be is anyone's guess. But, whatever it is, we suggest you prepare for it now... before it is too late. Art auction energizer: Norman Rockwell's portrait of John Wayne. You can't go wrong shelling out top dollar for me, pilgrim, can you? [PT] Several weeks ago, if you haven't heard, an undisclosed rich guy enthusiastically...
Fed Credit and the US Money Supply – The Liquidity Drain Accelerates
Federal Reserve Credit Contracts Further We last wrote in July about the beginning contraction in outstanding Fed credit, repatriation inflows, reverse repos, and commercial and industrial lending growth, and how the interplay between these drivers has affected the growth rate of the true broad US money supply TMS-2 (the details can be seen here: “The Liquidity Drain Becomes Serious” and “A Scramble for Capital”). The Fed has clearly changed course under Jerome Powell...
The Gold Standard: Protector of Individual Liberty and Economic Prosperity
A Piece of Paper Alone Cannot Secure Liberty The idea of a constitution and/or written legislation to secure individual rights so beloved by conservatives and among many libertarians has proven to be a myth. The US Constitution and all those that have been written and ratified in its wake throughout the world have done little to protect individual liberties or keep a check on State largesse. Sound money vs. a piece of paper – which is the better guarantor of liberty?...
Fed President Kashkari Hears Voices – Are They Lying?
Orchestrated Larceny The government continues its approach towards full meltdown. The stock market does too. But when it comes down to it, these are mere distractions from the bigger breakdown that is bearing down upon us. Prosperity imbalance illustrated. The hoi-polloi may be getting restless. [PT] Average working stiffs have little time or inclination to contemplate gibberish from the Fed. They are too worn out from running in place all day to make much...
Switzerland, Model of Freedom & Wealth Moving East – Interviews with Claudio Grass
Sarah Westall Interviews Claudio Grass Last month our friend Claudio Grass, roving Mises Institute Ambassador and a Switzerland-based investment advisor specializing in precious metals, was interviewed by Sarah Westall for her Business Game Changers channel. Sarah Westall and Claudio Grass There are two interviews, both of which are probably of interest to our readers. The first one focuses on Switzerland with its unique, well-developed system of direct...
US Stocks and Bonds Get Clocked in Tandem
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...
Decapitation Strike - Elon Musk in the Crosshairs of the Bureaucracy
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...
Are Credit Spreads Still a Leading Indicator for the Stock Market?
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...
Choking On the Salt of Debt
Life After ZIRP Roughly three years ago, after traversing between Los Angeles and San Francisco via the expansive San Joaquin Valley, we penned the article, Salting the Economy to Death. At the time, the monetary order was approach peak ZIRP. Our boy ZIRP has passed away. Mr. 2.2% effective has taken his place in the meantime. [PT] We found the absurdity of zero bound interest rates to have parallels to the absurdity of hundreds upon hundreds of miles of...
How Dangerous is the Month of October?
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...
Yield Curve Compression - Precious Metals Supply and Demand
Hammering the Spread The price of gold fell nine bucks last week. However, the price of silver shot up 33 cents. Our central planners of credit (i.e., the Fed) raised short-term interest rates, and threatened to do it again in December. Meanwhile, the stock market continues to act as if investors do not understand the concepts of marginal debtor, zombie corporation, and net present value. The Federal Reserve – carefully inching forward to Bustville People...
Austrian Theory and Investment
Realtime Charts
Gold in USD:
![[Most Recent Quotes from www.kitco.com]](http://www.kitconet.com/charts/metals/gold/t24_au_en_usoz_2.gif)
Gold in EUR:
![[Most Recent Quotes from www.kitco.com]](http://www.kitconet.com/charts/metals/gold/t24_au_en_euoz_2.gif)
Silver in USD:
![[Most Recent Quotes from www.kitco.com]](http://www.kitconet.com/charts/metals/silver/t24_ag_en_usoz_2.gif)
Platinum in USD:
![[Most Recent Quotes from www.kitco.com]](http://www.kitconet.com/charts/metals/platinum/t24_pt_en_usoz_2.gif)
USD - Index:
![[Most Recent USD from www.kitco.com]](http://www.weblinks247.com/indexes/idx24_usd_en_2.gif)
