Signs of The Times
Perspective
What a range of headlines!
The first one about "informing" is right out of Totalitarianism 101, common
to both international or national socialism. The one about banks pulling back
from lending to condo developers reminds of Mises’ view on a contraction. At
the top, the banks don’t have to call the loans, they just become nervous and
stop making them. Then there would be the reversals in the credit markets.
Mom and Pop are in the stock market and Kudlow is writing about "Rosy Scenarios".
The question is not about can it get any better?
It is about how long can it stay wonderful?
Stock Markets
Since November our theme has been "Rational Exuberance", discounting the change
from anti-business to a pro-business administration. Quite likely the most
exciting such change in US history. But last week we concluded that with the
action becoming sensational, "Rational" is no longer part of the theme. But "Irrational" seems
not yet at hand, leaving us with "Exuberance".
This, for example, has driven the Weekly RSI on the DJIA to 81, which is getting
up there. But can be seen in previous strong advances out of a deflated condition.
That was ending a year ago.
And how long can this phase run?
We will stay with the theme that the "good stuff" could run into March.
Industrial commodities, particularly crude, have been expected to be firm
into March, providing support for the stock markets. However, the firming dollar
could constrain further advances.
The other carrier of the good times has been narrowing credit spreads which
have been likely to be a positive into March. The action is somewhat overbought,
but March is not over.
The rise is encompassing most sectors and is becoming outstanding. This form
of outstanding action can run until momentum takes a break. Also, there is
the indicator attendant to extremes, and that is the "Hindenberg", which has
yet to register.
The February 16th ChartWorks outlined the possibility of an "ABC" type of
correction. This would follow the completion of the momentum move. As noted,
that would be signaled by the S&P taking out the 12-Day ma.
We used some seasonal influences to carry us this far in the rally. At times,
the NYSE Margin Debt can guide and Ross has taken his thorough approach. The
series is available from 1962 and the observation is that with the latest report
at record highs the NYSE rally has further to go. The key will be a downtick
in Margin combined with a MACD "Sell".
Nice to have another technical tool.
Currencies
The DX got overbought at 103.85 at the end of December, which was within the
ChartWorks long-term "model". A correction was possible and we have been looking
for the DX to base with the 20-Week ema. This was the case at the start of
important rallies in 2014, 2015 and 2016.
The exponential moving average has based and is turning up. The DX has been
staying above the line, which is constructive. Breaking above 102 is the next
step, which was accomplished today. Above the last high at 103.85 and the uptrend
will have resumed.
With this, the "model" provides a target of 112, which would be the best rally
since 2014.
The Canadian dollar has weakened. And given the technical arithmetic, the
20-Week ema has guided the swings down. This began following the peak with
commodities at 106 in 2011.
This week, the C$ slipped below the ema. It may take some work to fail, but
the long-term trend is down.
Precious Metals
Our February 9th Pivot reviewed that rally and noted that the gold stocks
were not outperforming the bullion price. A correction for the sector was possible.
The high for the GDXJ was 43 on February 8th and it has declined to 34.40.
This week’s drop took out the 200-Day at 39 and the 50-Day at 36.80.
The decline is down to 35 on the Daily RSI. Close to 30 would be oversold
enough to end the move.
What prompted our concern was that HUI/Gold reached a high in early February
and rolled over. We will be watching for the next low.
The gold/silver ratio has suddenly become volatile which often precedes a
change in the financial markets.
The ratio slumped from 70 on Monday to 67.8 early today. At the close it had
jumped to 70, a big move for this item.
Rising through 71 will set the uptrend and that would suggest a significant
setback in the credit markets.
Home Sales & Interest Rates
- Mortgage rates are plotted with a 3-month lead.
