|Tuesday||10:00 AM||JOLTS Job openings|
|Wednesday||8:30 AM||Core CPI|
|Thursday||8:30 AM||PPI (MoM)|
|Friday||8:30 AM||Export Price Index (MoM)|
|Friday||8:30 AM||Import Price Index (MoM)|
|Friday||10:00 AM||Consumer Sentiment (April)|
1) The USD is likely on daily cycle number four of its intermediate cycle. It is getting late in its daily cycle, and a peak is expected soon.
2) Gold reached its IC peak and is in the process of putting in an ICL. It is currently printing wave C down of an ABC correction pattern.
3) The current stock market rally has broken through some levels of resistance. By some measures, the market is overbought.
4) Oil will likely continue to follow the stock market. As the stock market breaks out, oil will probably follow suit.
5) The bull market in bonds that began in the early ’80s ended in 2016, but we don’t expect rapidly rising rates any time soon.
6) We are currently holding a cash reserve of 55%, with trades in emerging markets, small caps, industrial metals, and the energy sector.
Ray Dalio is the 79th richest person in the world. As founder of one of the world’s largest hedge funds and an accomplished investor, he knows a bit about how our economic machine works. A little over five years ago, he gave a simple presentation on what makes the economy tick. It was well done enough that rather than paraphrase it, we decided it was worth a watch for anyone interested.
Last week, we pointed to Friday’s strength and suggested it could lead to a breakout. This week, stocks were in rally mode, and the Dow ended the week less than 2% from its all-time highs. The break to new highs for the year suggests further upside, but by some measures, stocks are becoming overbought. A clear drop into a cycle low would do much to reset sentiment, but until it happens, we must respect the current price trend, which is up. This week we initiated trades in emerging markets, energy, industrials, and small caps. Let’s take a look at a chart of each.
Emerging markets tend to benefit from a falling US dollar, and the dollar is getting late enough in its daily cycle that a decline is due. In addition, EEM has been printing fairly clear cycles and is early enough in its current cycle that further upside is expected. EDC is a leveraged ETF that will magnify any gains made by EEM.
The small-cap sector has been lagging the rest of the market, in that it is still a ways from its former highs compared to its large-cap peers. It is normal for small caps to underperform early in a rally as the smart money moves first into large-cap stocks, and then retail investors arrive later to the party, looking for value. We bought TNA, a leveraged ETF, as the RUT index broke through its 200-DMA.
Base metals have been in rally mode, with ETF DBB printing an inverse head and shoulders bottom pattern and breaking to new highs for the year. Should the strength continue, industrial metal stocks such as CENX should benefit, and its chart pattern looks bullish, so we took a small position.
Normally when we look at bonds, we look at the ETF TLT, which represents bonds with a duration of 20+ years. This week, we will take a look at the five-year US bond interest rate. If we draw a long-term trendline along monthly closings for the last 32 years, we can see that the five-year yield broke its downtrend line, and is currently testing the breakout. The two-year yield is currently higher than the five-year yield. If this trendline break out holds, the yield inversion would most likely correct itself via a rise in long-term rates rather than an immediate fall at the short end of the yield curve.
The dollar is getting late enough in its cycle where we expect a decline to begin at any time. The cycle could stretch, but it is getting late enough that we are not inclined to bet on further upside before a cycle low occurs. A drop into a cycle low by the dollar could allow for a rally in gold, so we removed our DGLD trade for a small profit.
From an intermediate cycle timing perspective, we would expect further downside following the small bounce out of a new daily cycle low. We should then expect one or two more cycles that typically would be left translated.
If the dollar is going to drop into a daily cycle low, then we should expect a rally of some sort in Gold. Gold would be much easier to trade if it were to fall into a clear ICL. A drop to test its 200-DMA would be ideal, but the market owes us nothing, so we aren’t likely to get what we ask for. As it is, Gold printed an ABC correction that we had been expecting, except C is truncated and ended prematurely. At this point, this weeks price action could simply be a pause in its downtrend, but with the dollar getting late in its cycle, we no longer have a strong bearish bias.
This week, oil recovered above its 200-DMA and has been steadily marching higher. There is a bit of political chess being played between the US and Saudi Arabia, with Congress threatening to pass a bill exposing OPEC members to U.S. antitrust lawsuits. In return, Saudi Arabia is threatening to sell oil in currencies other than the US dollar, which would be a threat to the purchasing power of the dollar as its role of world reserve currency is diminished. Since the entire world uses oil, there is a constant demand for dollars worldwide. This affords the US a tremendous privilege of being able to expand the money supply without having the negative effects of inflation immediately being felt—as much of the newly created currency works its way outside of the US.
Rather than trading oil directly, we opted for exposure to the energy market via energy ETF OIH. Last December, OIH printed a double bottom that goes all the way back to its inception in 2001. OIH offers a good value, and potential leverage to the price of oil. Our OIH trade rallied 4% in the first day or so. We sent out a Trade Update to move the stop on Friday morning mentioning that if OIH could break through $18.06 it should have a good shot at making its way to our target price. So, it didn’t come as much of a surprise when it printed a high tick of $18.06 on Friday afternoon. With the strength in oil we still feel it will punch through this resistance level in the coming days, but in the meantime we’re going to move the stop up to $17.59 to be sure and lock in gains in the case of a stronger pullback.
Natgas continues to languish near its lows. We will enter a retest of support (red line that we’ve been watching closely for a few weeks now), or a clear 9/20 bullish crossover.
Despite being one of the greatest bubbles of all time, interest in Bitcoin has not gone away. Google searches for Bitcoin have tripled since its price jumped on April 2. In order for Bitcoin’s gains to continue and be sustainable, we think Bitcoin technology needs to be adopted by the masses and not just tech-savvy followers. We don’t doubt that blockchain technology will be part of our future, but its exact path is unknown to us at this time. At some point, an entrepreneur, or bank CEO, will introduce technology that makes cryptocurrencies easy enough to use that it is adopted by the masses and the cryptocurrencies will maintain a more stable purchasing power.
I started out as a mid-western boy who never gave the ocean much thought. I traded my way from the Minneapolis Grain Exchange to the Chicago Board of Trade, and then suddenly decided life had more in store—and that big blue part of the map looked interesting. Within months I was sailing off around the world in a catamaran.
A number of years later I was trading options online from a monohull on Mexico’s west coast. Today I’m trading from the Bay Islands, Honduras, in a trawler. I’ve experienced a lot of different modes of travel and have my opinions on each of them. Occasionally I like to share those thoughts. So, if you’re contemplating a life afloat, give my Trawler vs. Sail article a read through and see if it can help tip you over the edge.
I just got back from a tour of Spain and France via motorhome. I used to wonder why the motorhomes in Europe are so small compared to American RVs, until I drove through the narrow streets and navigated over thousand-year-old cobblestones. A full size, American style Class A motorhome would be useless in Europe. The campsites are much smaller, the roads are narrow, and the inner city corners are much too sharp for a full-size Class A.
That being said, the small European motorhomes are very efficient and well designed. If you are interested in motorhoming in Europe, you might want to take a look at this. Although it is sold out for this year, It is an extremely economical way to tour Europe and worth a bit of research. By helping Just Go relocate new rental units, you get a major discount and no mileage penalty. We met a small group from the US that was taking advantage of the offer, and they couldn’t be happier. Maybe we’ll see you on the road!