|Tuesday||8:30 AM||PPI (MoM) (Sep)|
|Wednesday||10:00 AM||JOLTs Job Openings (Aug)|
|Thursday||8:30 AM||Core CPI (MoM) (Sep)|
|Friday||10:00 AM||Michigan Consumer Sentiment (Oct)|
2) Gold began a correction in mid August that will probably end in October.
3) The stockmarket turned down from critical resistance, but has not yet declined enought to suggest anything other than a routine correction is at hand.
4) We expect oil to roughly follow the path of the US stock market, but that may change with a China trade deal.
5) US bonds will likely decline as the stock market rallies out of its DCL.
6) We are currently holding a cash reserve of 55%.
In a few short years, Robinhood has grown to serve 5 million customers. That’s twice as many customers as its incumbent competitor E*trade despite it having a much more robust trading platform and 4000 employees, compared to Robinhood’s 250 employees. With valuation estimates up to ten billion dollars and rising, its business model of running a lean operation and earning interest on cash deposits as well as income from margin lending could not be ignored. (Until recently, Robinhood also earned income from selling its order flow to high-frequency traders, but after a public outcry, it discontinued the process.) Still, eliminating commissions wasn’t something that the other players were willing to do. That is, until this past week, when Interactive Brokers introduced a commission-free program.
That set the wheels in motion that resulted in TD Ameritrade, Schwab, and E*trade all eliminating their commissions in a span of thirty-six hours. No commissions is no joke. 32% of TD Ameritrade’s revenue comes from commissions, so switching to free wasn’t something they or their investors were too excited about. Other brokerages didn’t rely quite as heavily on commissions for revenue as TD Ameritrade did, and their stock price didn’t get punished quite as severely, but the pain was still widespread this week. Every once in awhile, something new comes along and completely changes the rules of the game. Commission-free stock trading is definitely a game-changer. Commissions are one of the largest expenses a professional trader must pay to operate, so eliminating them goes straight to the bottom line. It is a wonderful time to be alive.
The stock market is in the timing band for a daily cycle low. As is often the case, news seems to coincide with cycle timing to merge the fundamentals with the technicals and push the price in the direction it is supposed to go, when it is supposed to go there. This week, stocks were due for a decline, and the news came in the form of an ISM manufacturing index showing outright contraction in the manufacturing sector. The news was enough to push stocks down by enough to give up its entire 3rd quarter gains in one day. A day later, the service sector reported that it, too, was slowing down, although not yet in contraction. This spate of negative news came on day 41 of the Dow’s daily cycle, which is right in the timing band for a reversal. Often, the news will look the worst at a cycle low, and one clue that the low is in is when the stocks stop responding negatively to bad economic data. On Thursday, stocks bottomed and reversed higher despite a weak service data report. Given the timing of the current cycle, it is likely that a daily cycle low is now in place, and we are just beginning a new daily cycle.
President Trump was quick to blame the poor manufacturing report on an overly strong dollar, which has risen three percent so far this year. But a strong dollar favors imports, and they have also fallen. This comes on the back of evidence that the manufacturing sector of Germany is also slowing. Evidence is mounting that as the trade war drags on, trade is slowing around the globe. We do not believe that the impact has yet been fully felt in the price of the stock market.
Once it became evident that a daily cycle low may be complete, we added exposure to the US stock market via COST and ATVI, so let’s have a look at their charts, plus TSM, which survived the market’s drop into that low. First, a chart of TSM. After testing resistance a few times, TSM finally broke to new highs and closed near its high of the week. This is a very bullish looking setup.
Next, COST. Costco has been riding along its 50-DMA, and after reporting earnings Thursday afternoon, it printed a buy signal on Friday. This is another bullish looking chart, especially if the major markets rally out of a daily cycle low.
Finally, ATVI. Like COST, ATVI printed a buy signal on Friday. There is a large overhead gap that, if closed, will result in a very profitable trade. With all three of our holdings, we will move our stops up when and if they begin to move our way.
We continue to expect one more down leg in US bonds before the next significant rally gets underway. Bonds may print a 2B top or a slightly lower high in an ABC correction. The bond market’s performance will likely depend on the performance of the stock market. If stocks continue to rally, bonds should roll over and decline into a new low as capital flows out of bonds and into stocks.
This week President Trump accused the Fed of being “clueless” and blamed it for an overly strong dollar. Like anything else, how something looks depends on the angle you are looking at it from. If you are the holder or saver of dollars, then a rising dollar means a rise in the purchasing power of your savings. In other words, it’s a good thing.
On the other hand, if you are a dollar borrower, then a rising dollar means you are forced to pay back a currency that is worth more than it was when you borrowed it. It increases the real expense of your loan. In other words, a bad thing.
When it comes to import/exports, it also depends on which angle you view it from. If you are an exporter, a stronger dollar means foreign buyers need to exchange more of their local currency to buy the dollar to buy your goods, i.e., exports become more expensive. But if you are an importer, a rising dollar lowers the cost of the foreign currency, making imports cheaper.
One party’s benefit comes at the direct expense of the other party. Left to its own devices, the free market will efficiently choose the most effective location for manufacturing based on the value of currencies and a host of other factors. But in today’s world of manipulated currencies and central bank intervention, these signals lose their efficacy, and both sides of a trade lose.
Last week we said that we expect one more leg down in gold before the next intermediate cycle gets underway. This week, gold dropped further as expected, but then it rallied sooner than we thought it would. An ICL may be complete, but we doubt it. At intermediate cycle lows, sentiment is reset. The bulls become discouraged, and the bears are emboldened. Only then does the tide turn, and the price begins to climb a wall of worry. The commitment of traders reports shows only a mild pullback so far from its extreme bullish reading, so we expect further downside is necessary before an ICL is complete.
What was potentially the most significant oil supply crisis in nearly 50 years turned out to be a dud as Aramco states that Saudi oil production capacity as a whole is now higher than before the September 14 attack on its facility. The Saudi state oil company says not a single barrel of its delivery to customers will be affected by the attack. It says it has patched all blown pipes at Abqaiq in under two weeks, and the facility is back up and fully running. Although there is still some question as to who is responsible for the attack, it appears as if it were designed to inflict maximum visual damage, with minimal actual damage.
Oil may have printed a daily cycle low on Thursday, along with the stock market. Traders could establish a long position in the oil sector with Thursday’s low as a stop.
Bluebird is known for making school buses. Less known, but no less relevant for me, is the “Wanderlodge” motorhome division they owned. Bluebird applied their commercial bus quality manufacturing process to a line of motorhomes, and they are known for their legendary quality and durability. I found an old one for sale a couple of years ago, and couldn’t resist purchasing it.
This weekend, my old bird reverted back to her bus roots as I chauffeured friends and family from MN to MI. My son and his fiance’ came to visit from Finland. My other son and grandson came from Washington. They brought along our boy’s childhood friend who, after all these years, is pretty much our third child. We all met in Minnesota for a wedding. My bus was packed with my favorite people as I drove back to MI, making a typically boring drive an epic road trip. My Bluebird and I both smiled all the way back.
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