1) Stock Market –The stock market has broken to new all-time high territory, but internal divergences and cycle timing suggest caution.
2) Bonds – US bonds likely printed at least a temporary bottom as a cycle low looks complete.
3) Currency – The dollar may have completed its ICL. It is possible that a new cycle began, but it will take more price action to be sure.
4) Gold – Gold began a correction in mid-August that will probably end this year.
5) Oil – Oil is getting late enough in its daily cycle where we expect further weakness into a cycle low.
6) We are currently holding a cash reserve of 45%.
An intermediate cycle looks much like a daily cycle, except it covers a longer time frame and has a greater price magnitude. Again, the length of time can vary and it depends on the asset, but usually an intermediate cycle lasts between four to seven daily cycles. Gold for example, tends to have two intermediate cycles per year, with each typically lasting from five to seven months in duration. To trade an intermediate cycle, we look for stocks that are breaking out of periods of consolidation and printing a fresh buy signal.
Another way to trade intermediate cycles for more active traders that are willing to take on more risk is to buy leveraged sector ETF’s as close to the beginning of the first or second daily cycles as possible. Catching an intermediate cycle early and riding it higher is the sweet spot for much of our Wanderer trades. If you have been reading these updates, then you know that we are closely watching for signs of an intermediate cycle low in gold, silver, and precious metals mining stocks. There is even a longer term cycle that is ideal for buy and hold type investments, and that is a secular cycle.
A secular cycle is made up of a series of intermediate cycles, and again, looks similar to a daily cycle except it spans a period of years rather than days. Secular cycles are ideal for long-term investors that are looking to take a position and hold it through long period of ups and downs (daily and intermediate cycles). Secular cycles last too long for options or leveraged ETF’s, so non leveraged ETF’s such as DIA, SPY, or GLD are a good choice. A good example of a secular cycle is the Dow between 1982 to 2006. From beginning to end covered a period of twenty four years.
You will likely only experience two or three secular cycles during your working years, and four or five during your entire adulthood. If you want to earn a positive return with the least amount of work possible, then study secular cycles. By getting in early and riding it to the top, secular investors can earn a solid, but lumpy return with very little effort. By lumpy we mean you will experience many drawdowns, which are simply the series of daily and intermediate cycles unfolding. If you are working full-time but still managing your own retirement accounts for example, secular cycles may be the sweet spot for you.
We bring this up because commodities have been mired in a bear market and secular timing suggests a bull market is due sooner rather than later. Oil is down 60% from its peak in July 2008, and gold remains 23% below where it was in 2011. In 2008 mutual funds and ETF’s held only $45 billion in assets, according to Morningstar. In 2009 that number nearly doubled as money fled the stock market and entered commodities. By 2012 the number had grown to $169 billion. Since then, commodities as a group have been struggling through a bear market, losing money every year from 2011-2015 and again in 2018. A $100,000 investment in the Bloomberg Commodity Index at the end of 2010 was worth less than half that amount at the end of last year.
Many investors don’t think commodities are a legitimate form of investment because they don’t pay dividends like stocks or interest like bonds do—on the other hand, they don’t go bankrupt or default either. Corn, Milk, Wheat, Copper, Oil, Soybeans, Gold, Silver, Beef, Pigs, and Iron may decline for years, but as long as people eat and build things, they won’t go to zero. In this way, commodities differ from stocks and bonds. There are plenty of companies that suffered the indignity of watching their stocks become worthless in bankruptcy, but there are no examples of commodities defaulting. Because there is and always will be a demand for commodities, extremely low prices signal opportunity rather than danger. We have been watching for signs of a major bottom in the commodity sector.
Sometimes time and price line up perfectly for an extremely high probability trade, and other times the chart offers almost no clues on what to expect next. The latter applies to the current US markets. Purely from the perspective of time, the major US indexes are due for a dip into a daily cycle low. It is possible that the minor dip last week was all we are going to get for a cycle low, but at only three down days, it seems unlikely.
Readers know that we follow both time AND price, and from the price perspective the US markets look poised to make higher highs. All of the major indexes remain above their former resistance, and the longer they remain above, the more former resistance becomes new support. When we find ourselves in a situation where time suggests one thing and price action suggest another, we become extra cautious. Currently, we have 55% of our portfolio allocated to the US markets, which is in line with our conviction that there is roughly a 50% chance that the markets could go either way from here.
Looking at our individual holdings, ILMN is a classic gap play. There is a saying on Wall street that all gaps need to be filled, and if the gap on the left side of the chart gets filled, it will result in a high reward, low risk trade for us.
SQ is another gap play. Going into Friday, SQ had rallied 10 days in a row and was due for at least one down day. Impressively, SQ managed to rally above its 200-DMA before pausing on Friday with a small down day. It wouldn’t’ surprise us if SQ trades sideways for a few days before resuming its ascent, and of course if it turns down, we will exit for a profit.
Having risen fifteen out of the last seventeen days, MA has been another solid performer for us. It is now approaching what will likely be strong resistance near its previous high. We have been proactively raising our stop, and any reversal here will result in us getting stopped out for a profit.
Finally, MSFT. Microsoft is an example of a break out play. After trending sideways all summer, it built enough energy to launch once if finally broke through resistance. Now, it has risen thirteen out of the last sixteen days, and it wouldn’t surprise us if it spends some time consolidating before reaching higher highs. As with our other holdings, we are in a position of strength where even if it turns down here, we will exit for a profit.
We exited our ORCL position on Friday for a 2% profit when it pulled back. This trade just could never really get going, but refused to drop either. Without any momentum in the stock we’re happy to take our small gains and look for other opportunities instead.
According to the WSJ, investors are demanding more compensation to hold the lowest-rated tier of U.S. corporate bonds than at any time in more than three years. The average extra yield investors demanded to hold CCC rated corporate bonds over US. Treasuries settled last week at 10.01 percentage points. Investors closely watch junk bonds because companies with subpar credit ratings tend to be affected by economic problems before their healthier counterparts do. This makes sense, since they are in a weaker financial position, they are not as capable of weathering an economic slowdown as a company with more cash on hand is. The current underperformance in junk bonds is a potential warning sign of a slowing economy.
Looking at the government bond fund TLT, after printing an ABC correction low, it bounced off of trendline support as expected. Although the rally to its current position was fairly obvious, its next path isn’t so clear. If the Stock market turns south here, then TLT will likely rally to higher highs, but if the stock market powers higher, TLT could pause for a bit or even drop to test its early November lows. We don’t see a high probability trade in this sector at the current time.
After printing what could be viewed as an ABC correction, (although it wasn’t an ideal ABC pattern) the dollar rallied and has since been unable to close above its November 8 high. With the C down leg as short as it was, we are not yet convinced that the ICL is in place for the dollar. A decline from here to a lower low would establish an ICL that would be more clear. We don’t see a high probability trade in the dollar at this time.
December is historically a month where a higher than average number of ICL’s are made in the gold sector. That means that each time the sector rallies at this time of year it could be the beginning of a new IC. In real time, it’s difficult, if not impossible, to know when the low is in. Sometimes there will be a long and prolonged selloff that screams ICL (like the last ICL on the chart of NEM below), but other times it can trade sideways for a while with a bunch of pop and drop false starts before finally taking off. Catching an IC near its beginning is usually a very profitable trade, so we are going to look at a few charts to get an idea of what we are looking for and what could happen.
First, the Yen is the currency that is most closely correlated with the gold sector. You can see on the two charts below that when the yen is rallying, so is gold, and when the Yen is dropping, so is gold. Also, it is normal for one to lead the other at important turning points. We’ve said several times that we would love to see gold drop to run the stops below its 200-DMA, because that would provide us with a very low risk, high reward trading opportunity. The Yen provides an example of this in play.
Notice on the left of the chart at the last ICL, the Yen ran the stops twice below its 200-DMA before rallying strongly. Now notice on the right side of the chart what is happening currently. The Yen dropped below the 200-DMA, gave a false rally, and then dropped back below the 200-DMA into what now looks like a 2B low. We’d love to see this exact same chart take place in gold, silver, GDX, and GDXJ, but we have to trade what we get rather than what we want.
Notice on the chart below, the rally and decline align with the Yen, but Gold didn’t make it down to its 200-DMA during the last ICL, and hasn’t yet during the current decline. The chart of gold shows that the price doesn’t have to reach the 200-DMA before rallying, but breaking below the 200-DMA would likely discourage the bulls, run the stops, and reset sentiment for another strong rally.
Right now we have the Yen suggesting an ICL is in place, but gold and the miners look a little premature. If the Yen were the only bullish setup, we’d still have a bearish bias, but at the moment we are neutral, and expecting to be bullish very soon. The reason is that even if the indexes aren’t yet in full bull mode, GDXJ and many of the individual miners are acting very bullishly. Take for example NEM on the chart below. Not all miners bottom or top on the exact same day. Some will bottom weeks before others. Notice NEM’s collapse in price last May as it established its own ICL before rallying sharply. That is a good example of an obvious ICL. By the time NEM hit bottom, the bulls had all but given up, only to watch in horror as it rocketed out of its lows without them.
Now look at the right side of the chart where again NEM fell sharply to its 200-DMA before rallying strongly. The chart of NEM in isolation looks very bullish. It bottomed in the timing band for a cycle low, and has since managed to work its way above its major MA’s. Another potentially bullish looking chart is GDXJ. Friday’s price action was bullish. The problem is, it is a holiday weekend, and trading volume was much lighter than usual. It’s possible the professionals will return on Monday and sell GDXJ back down below its 50-DMA, but right now we have a buy signal and a strong weekly close above all of its MA’s.
Finally, let’s take a look at a chart of GDX. During Oct and Nov, GDX rallied four times out of what looked like could be ICL’s. Each time, it was rejected at its 50-DMA, only to drop to lower lows. Therefore, we would take a decisive, as in at least two consecutive days of a close above the 50-DMA as evidence that the final low is in. We may enter this sector before we get that double close above the 50-DMA, though. We’ll just have to monitor the sector to see when it looks like the right opportunity.
We want to be careful not to enter this sector too early, as the final drop into an ICL can be particularly severe. But the nice thing is that since the miners bottom at different times, there will be some opportunity near the lows once it becomes more obvious that the low is in.
Last week, we wrote “Oil is getting late enough in its daily cycle that we need to be cautious of a decline.” We drew the red curves on the chart below a few weeks ago to show our expectation of what we thought oil would do in the current cycle. On Friday morning, we were finally forced to edit the final cycle line a little to the right to accommodate oil’s refusal to drop into a cycle low. As so often happens, when a cycle’s time is up and the price doesn’t drop, the pressure builds until the drop becomes severe. In this case, oil dropped enough on Friday to undo the previous seven days of price action in one day. At this point, oil’s current daily cycle is extremely right translated. In other words, unless the price action continues to be severe, there isn’t a lot of time for a further drop before the rally into the next cycle is due.
Several oil stocks are trading at bargain basement prices. We will be looking for opportunities at the next daily cycle low in oil.
When Chinese leader Xi Jinping touted blockchain technology last month the price of bitcoin surged. Searches for “blockchain” on one of China’s biggest search engines soared and shares of related companies jumped.
Since then however, the price has faded and last week Bitcoin fell to a new six month low. Like it is with Cannabis, it seems news will re-ignite the fire, only to find little staying power as the price begins to fade again. In this case, China reaffirmed its tough stance on companies involved in cryptocurrency trading and fundraising. That wiped out the gains that followed a statement by Mr. Xi that China should speed up research into blockchain technologies.
Though China’s central bank is developing its own digital currency, crypto trading on local exchanges is still banned as is fundraising for digital currencies. On Friday of last week, the Shanghai headquarters of the People’s Bank of China and an arm of the local government pledged to continue to target exchanges and warned investors not to confuse blockchain technology with virtual currencies.
Bitcoin printed a 2B low, so we will see if it is a low that will hold for some time, or if this is just a “dead cat bounce.” For now, BTC has some work to do to get back above its MA’s and really turn this chart around again.
Your editor spent most of the week recovering from a 7 hour time difference after a quick trip to Finland. On average, it takes one day per hour of change for the human body to adapt. Having arrived home late Sunday night, I am finally beginning to feel normal again.
If you like sunshine, Finland isn’t the best place to visit in late November. It’s cold, cloudy, and most of the time it’s dark. Still, we had a wonderful time as wedding bells rang for our son and our new-daughter-in-law. We explored quite a bit of Helsinki, which is a beautiful city and more diverse than most parts of Finland where most of the residents are 100% Finnish.
Finland is an extremely low crime country and litter is almost non existent. Despite being much further north than where we live in the UP of MI, there was no snow and the temps were more mild than what we usually experience at this time of the year. Finnish people are known for being reserved. Walking down the street, almost nobody makes eye contact and there is a sense of seriousness, with very few smiles. That’s not to say the people aren’t friendly. They are very kind and friendly. They are just different than Americans in the way they avoid casual conversation, especially with strangers.
This year, we rented a motorhome and travelled much of Southern Europe, so next summer we plan to return to Finland, rent a motorhome, and explore the Scandinavian countries. If you are looking for a northern city to visit that has beautiful architecture, incredible food, and friendly, although mostly quiet, people, then Helsinki deserves a spot on your list.
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|Wednesday||8:15 AM||ADP Nonfarm Employment Change (Nov)|
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|Friday||8:30 AM||Nonfarm Payrolls (Nov)|
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