pebblewriter

Tag: gold

  • The Yield Curve Model: Dec 8, 2020

    One of my favorite market indicators is our yield curve model. It has warned us several times in advance of significant correctionsthis year.

    Warnings over the past few years have included:

    July 16, 2018: The Yield Curve Update – We were a little early. SPX closed at 2798 that day, rose to 2940 before crashing 20% by Dec 26.  The final 13% was signaled on Dec 5: The Yield Curve’s Warning.]

    April 25, 2019: The Yield Curve Model Warns Again – SPX gained 21 points over the next four sessions before quickly shedding 226 points.

    February 20, 2020: Buckle Up – SPX (which had topped out the day before) crashed by over 35% over the next month.

    August 25, 2020: Update on AAPL – We were about a week early, but the model signaled a correction which saw SPX fall 11%, followed by another 9% the next month.

    The recent breakout of the 2s10s is clearly a bearish signal – though it hasn’t yet paid off.  Is the model still working?  First, a little history. Among other things, the model holds that breakouts above significant resistance are bearish for equities.

    If we plot the 2Y and 10Y together, we can see that significant sell-offs in stocks were marked by more rapid declines in 2Y yields than in 10Y yields (i.e., a widening of the spread between the two.)

    The shaded areas below illustrate the period during which stocks experienced their most significant corrections between 2000-2013. Though the 2Y and 10Y both declined during these periods, the 2Y yields clearly fell faster.

    But, as we saw in 2015-2016 and again in late 2019, not all corrections involved a steepening. These selloffs occurred without the yield curve model signal being triggered. Did the model stop working?  Hardly. The decline earlier this year was a stark reminder of its predictive power.  What made these corrections different?  More importantly, what is the model signaling now, and how likely is it to play out?

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  • Update on Gold & Silver: Nov 30, 2020

    We noted back on July 9 [see: Moment of Truth] that GC had reached our long-held 1823.60 target well ahead of schedule.

    From a charting standpoint, it should reverse here at its .886 Fib retracement. From a fundamental standpoint, of course, the fiscal picture suggests plenty of additional upside. Remember, it broke out of two different rising channels in order to reach this price level well ahead of schedule. We have to wonder whether a reversal in GC would, as would normally be the case, result in a rally in the long-suffering DXY.

    We were still bearish on DXY, so the potential for a reversal in GC seemed limited.

    As it turned out, the fundamental picture won out. Though it took it about 9 sessions, it finally pushed above its .886 retracement, and then its former all-time highs – breaking out of rising channels in an explosion up to 2089.20.

    We got a (quite violent) backtest of 1823 as expected, followed by six weeks of sideways consolidation while pretty much everybody waited for Congress to approve another round of stimulus. Unfortunately for GC, the stimulus never came.

    Since then, GC has been settling lower in a falling channel which pointed to a rendezvous with the 200-DMA – which was breached on Friday. This is a significant breakdown which implies a troubled path forward. But, there are other factors at work.

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  • Update on Bitcoin: Nov 17, 2020

    Almost 8 months ago I posted our first outlook on BTC [see: FOMC Embraces MMT.]   We noted at the time that the FOMC was “officially in the short-squeeze business” after ES came within 19 points (trading was halted there) of our 2155 target and the Dow was set to test the Nov 8, 2016 (election day) lows.

    This was the perfect time to assess what unleashing massive amounts of liquidity might do to crypto.  We noted at the time that BTC should bounce from its triangle bottom (on the arithmetic chart) and return to test the top trend line at around 9,925. We also noted that BTC had rebounded back above a TL on its log chart – an encouraging sign that supported the fundamental outlook. We left off with the note:

    If you believe that BTC will necessarily rise (as gold will) as QE explodes, the charts support a continuing bounce. If you believe the FOMC will do whatever it takes to support the USD and crush surrogates such as BTC and GC, then keep an eye on that TL (5,000ish) as a fairly clear stop level.

    As it turned out, BTC did return to the triangle top where, as we noted in our May 28 Update on Bitcoin that it had an important decision to make. Having reached 10,074, it had held an important trend line on its arith chart…

    …but had failed to break out above a fan line on its log chart.Our outlook at this point was that price action should determine the next move.

    Is BTC a buy here on a potential breakout? Maybe. But, given the fact that it’s barely off its April highs, cautious types might want to wait for an actual breakout. If it occurs, there would be a small opportunity loss from not getting in here.  But better to give up a few percent than lock in a trade with a lot more downside.

    The alternative for more nimble types: go long but watch that rising TL from Mar 16 on the arith chart like a hawk. If BTC drops below it, run for the hills.

    It took over three weeks, but BTC eventually broke out and, in the process, completed an IH&S pattern we’ve been watching and, just this morning, tagged the pattern’s 17,150 target well ahead of our target date in mid-December.After exploding 2.65X since Mar 23, what’s next?

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  • CPI: MIA

    Futures remained slightly lower following lower than expected initial claims (709K vs 740K consensus) and CPI – which came in at 1.2% annual and 0.0% for October.  Note that it took a plug number outlier +1.2% pop in electricity to keep CPI from going negative.

    One would think if the economy were really all that healthy, especially with the flood of liquidity still being thrown at it, we’d see at least some inflation.  But, hey, we got the 10/20 crosses we were expecting in ES, SPX and VIX. So, the rally is safe…right?

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  • There Will be Typos

    It’s a little known fact that if you’re trying to get over the pain of back-to-back knee replacements, you should have rotator cuff surgery. At least that’s what my horoscope said. As a result, my typing skills will be a little off this morning, which means my market insight might also be a bit off.  But, here goes.

    After tagging our IH&S target yesterday, ES tumbled back below the bottom of the channel which broke down back in late October. It’s sitting right there at this moment, meaning the bulls and bears have yet to sort things out.

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  • The Latest Cringeworthy Rally

    Sometimes I cringe when I place a target on a chart. Such was the case yesterday when ES reached our IH&S target at 3425. If it kept going, it was sure to backtest the intersection of the broken rising white channel at the falling channel top. Was that likely in the midst of election and pandemic turmoil?

    Apparently so, because that’s exactly where ES ended up overnight.Although I tire of saying it, this is an important threshhold for the overall market – which has benefited smartly from a rescue maneuver that wasn’t even really necessary.

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  • Election Aftermath

    Futures were all over the map last night, with ES’ 113-pt range dictated almost entirely by factors as opposed to election results – which, contrary to Trump’s declaration, are still AWOL. Note that ES tagged our IH&S neckline (also the former H&S neckline) target where it is currently running out of gas.

    As expected, the most important factor was VIX which collapsed over 18% from its overnight highs – slicing through channel midline and the 10, 200 and 20-day moving averages.

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  • GDP Beats, But…

    After the government “put $5 trillion into a $3 trillion hole,” as Ares Management’s Michael Arougheti so eloquently put it, GDP bounced back sharply last quarter. Unfortunately, it’s still down 2.9% for the year.Keep in mind that this is also the advance read for the third quarter, days before an important presidential election, and that all indications are that the pandemic which powered the initial plunge is gathering steam.

    ES is undecided on the import of the data, giving up a nice overnight bounce after slightly overshooting our next downside target yesterday.

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  • Rally Faces Another Test

    Futures have given up all of Friday’s rebound gains and then some, again testing the IH&S neckline and the bottom of the rising white channel from last March.

    At the risk of sounding dramatic, a failure of the channel would mark the end of the current rally and usher in the correction suggested by our yield curve model as detailed on Oct 12 [see: A Cure?] and reiterated this past Friday [Yield Curve Model: Correction Imminent.]

    Stay tuned…

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  • Yield Curve Model: “Correction Imminent”

    Our yield curve model is again sounding the alarm on overpriced equities. Unless the 10Y – which closed its June 8 gap this morning – declines sharply right away, the 2s10s spread signals a sharp equity downturn to finish the correction which began on Oct 12.The bad news for equities? A sharp drop in the 10Y also portends a correction.

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