Apr. 15, 2016, Weekly summary: Equities Stay Elevated, and Gold Stays Vulnerable
Equities Stay Elevated, But For How Long?
Earnings season started this past week and, as anticipated, they were mostly down year-over-year. The table below shows a number of examples. It seems that the market was just happy to see earnings at all, and ignored the fact that they were down year over year.
| Company | Symbol | Actual EPS | Year-Ago |
| Alcoa | AA | $0.07 | $0.28 |
| Fastenal | FAST | $0.44 | $0.43 |
| CSX | CSX | $0.37 | $0.45 |
| JPMorgan Chase | JPM | $1.35 | $1.45 |
| Bank of America | BAC | $0.21 | $0.27 |
| BlackRock | BLK | $4.25 | $4.89 |
| PNC | PNC | $1.68 | $1.75 |
| Progressive | PGR | $0.44 | $0.50 |
| Wells Fargo | WFC | $0.99 | $1.04 |
| Charles Schwab | SCHW | $0.29 | $0.22 |
| Citigroup | C | $1.10 | $1.52 |
The economic data wasn’t exactly warm and fuzzy either (table below), but that too was ignored and equities climbed higher, likely accelerated by short covering (which won’t last).
| Release | Actual | Prior |
| PPI | -0.1% | -0.2% |
| Core PPI | -0.1% | 0.0% |
| Retail Sales | -0.3% | 0.0% |
| Retail Sales, Ex Auto | 0.2% | 0.0% |
| Business Inventories | -0.1% | -0.1% |
| CPI | 0.1% | -0.2% |
| Core CPI | 0.1% | 0.3% |
| Initial Claims | 253K | 266K |
| Continuing Claims | 2171K | 2189K |
| Empire Manufacturing | 9.6 | 0.6 |
| Industrial Production | -0.6% | -0.6% |
| Capacity Utilization | 74.8% | 75.3% |
| Consumer Sentiment | 89.7 | 91.0 |
The media has pointed out the important drop in industrial production, but the market wasn’t listening to that either.
Industrial Production and Utilization
Maybe that was because they were looking at the health of the newer tech industry numbers which show that it continues to grow non-stop (table below).
Or maybe the market was focused on the continuing low unemployment rate.
We doubt that the market was looking at the population-employment ratio which has yet to move above 60%. It was above 63% before the great recession.
It certainly wasn’t focused on the price-to-sales ratio for the S&S 500 which at 1.83 is the highest level in fourteen years.
S&P 500 Price to Sales Ratio
It is equally unlikely that the market noticed that the velocity of money is at its lowest level in the last six decades.
Whatever it was that the market was focused on, it caused equities to get chased higher.
Our own Price Modelling System is signalling a weak negative bias, which does not rule out a further short-term rise in prices at this point, however, there is more potential for a pull-back than there is for new all-time highs.
The chart below, high-lights the local tops on the S&P and shows how they correlate with:
- Low bear assets
- High bull assets
- High bull sentiment
- Low bear sentiment
Little has changed since last week (see purple area and thumbnail);
- bear assets dropped slightly (bearish)
- bull assets were essentially unchanged (neutral)
- bull sentiment was lower (still neutral)
- bear sentiment was up slightly, but still at very low levels (bearish).
In other words, a slight downward bias, rather than a screaming topping signal.
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We won’t bet the farm on the short side, but we won’t be chasing prices higher either.
The Bias in Gold is Down
Early this past week, gold did a head-fake to the upside, then ran downhill until Friday. To the gold-bugs, this must have felt like their love interest was teasing them; making them think that it was finally going all the way into a bull market, only to turn around and walk away.
The unusual synchronized movement of gold and the dollar continued this week (pink area on the chart) which we interpret as serious under-lying weakness in gold; if gold can’t sustain a rally during dollar weakness, then what hope does it have if the dollar strengthens?
The dollar has been in a trading range between 100.0 and 93.0 for the past year, and since it is near the lower part of its range, the probability is that it will head back up toward the upper boundary. Gold is unlikely to respond favorably to that.
Even though the FED will not raise rates as rapidly as they were predicting at the end of last year (four times), the CME FED watch tool calculates a 50% chance of at least one hike, and a 12% chance of two hikes by the end of the year. The odds of the FED cutting rates this year are zero which is supportive to the dollar and negative to gold.
Since rates are likely to rise later this year, albeit slowly, the 30-year bond should trend downward, and as the blue lines on the chart below illustrate, gold tends to move in the same direction as the 30-year bond.
The high short interest of the commercial gold futures traders spiked even higher this week.
Futures trading is a zero-sum game which means that when one side of the contract gains, the other side loses. There is a huge amount of money on the table at the moment, and one side is going to lose big-time.
The historical record shows that the commercial traders are correct most of the time. If they are wrong this time, there will be many ”firsts” involved. Not the least of which would be the magnitude of the losses (although they must be hedged with options). Odds are they are not going to be wrong.
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We wish our subscribers a profitable week ahead, and remind you to monitor your email for Trade Alerts.
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Quelle: Nicholas Gomez
