Time to sell Gold stocks

Stocks: Evolution Mining, Northern Star Resources, Regis Resources, St Barbara
Symbols: EVN, NST, RRL, SBM
Exchange: ASX
Date: July 19, 2018

Spot Gold

The Dollar price of gold has broken support at $1240/ounce, signaling a primary down-trend.

Spot Gold in USD

The Dollar Index continues to test resistance, consolidating in a narrow band below 95, a bullish sign. Chinese selling of the Dollar, to support the Yuan, has not materialized in sufficient magnitude to reverse Dollar strength. Breakout above 95 would spur selling of gold.

Dollar Index

The Australian Dollar has not weakened sufficiently to protect local gold miners. The All Ordinaries Gold Index (XGD) is heading for a test of support at 4900/4950. Given the circumstances, support is unlikely to hold.

All Ordinaries Gold Index

Bearish divergence on 21-day Twiggs Money Flow warns of selling pressure across all four gold stocks in the Australian Growth portfolio.

Evolution (EVN) is the weakest, having broken primary support at $3.10.

Evolution (EVN)

Northern Star (NST) broke medium-term support at $7.00 but is still in an up-trend. LT bearish divergence on Money Flow warns of selling pressure.

Northern Star (NST)

Regis Resources (RRL) respected medium-term support at $4.90 but Money Flow peaks below zero warn of strong selling pressure.

Regis Resources (RRL)

St Barbara (SBM) respected its rising trendline but Money Flow also warns of selling pressure.

St Barbara (SBM)

Conclusion

I don’t like the idea of holding gold stocks long-term when the USD price of gold is in a primary down-trend. Now is a good time to lock in profits from the last 6 months.

SELL (July 19, 2018)

Disclosure

Staff of The Patient Investor may directly or indirectly own shares in the above companies.

CPI rises but US stocks rally

June consumer price index (CPI) jumped to 2.8% but forward estimates of inflation, represented by the 5-Year breakeven rate (5-year Treasury yield minus TIPS) remain subdued at 2.06%.

CPI and 5-Year Breakeven

Core CPI (excluding food and energy) is at 2.2% while average hourly earnings (total private: production and non-supervisory employees) annual growth, representing underlying inflationary pressure, is higher at 2.7%.

Core CPI and Average Hourly Earnings: Production and Nonsupervisory

Credit and broad money supply (MZM plus time deposits) growth remain steady, tracking nominal GDP growth at around 5.0%. A spike in credit growth often precedes a similar spike in broad money supply by several quarters.

Credit and Broad Money Supply Growth

And a surge in broad money supply growth, ahead of nominal GDP, flagged rising inflationary pressures ahead of the last two recessions, prompting the Fed to step on the brakes.

Nominal GDP and Broad Money Supply Growth

Overall, the inflation outlook appears subdued, with little urgency to hike interest rates at present.

The market is also getting more comfortable with the idea of trade tariffs. The S&P 500 is testing resistance at 2800. Breakout is likely and would suggest a primary advance to 3000.

S&P 500

The Nasdaq 100 followed through above 7300, confirming the primary advance, with a target of 7700.

Nasdaq 100

This is the final stage of a bull market but there is no sign of it ending. I am wary of the impact of a trade war on individual stocks and have reduced exposure to multinationals that make a sizable percentage of their sales in China.

Financial markets are supposed to swing like a pendulum: They may fluctuate wildly in response to exogenous shocks, but eventually they are supposed to come to rest at an equilibrium point…. Instead, as I told Congress, financial markets behaved more like a wrecking ball, swinging from country to country and knocking over the weaker ones. It is difficult to escape the conclusion that the international financial system itself constituted the main ingredient in the meltdown process.

~ George Soros on the 1997 Asian Financial Crisis and the need for greater regulation of global financial markets

ASX 200 hesitates

The ASX 300 Banks index broke resistance at 8000 and is retracing to test the new support level. The index remains in a primary down-trend and only a higher low on the next correction, followed by a new high, would reverse that.

ASX 300 Banks Index

A weaker Australian Dollar has made the banks, with their high dividend yields, more attractive to offshore investors. But the sector remains squeezed by higher funding costs, falling credit growth and rising default risk.

With retracing banks and weaker prospects for miners, the ASX 200 hesitated. Expect another retracement to test 6150, but respect is likely and would confirm the primary advance. Target is the October 2007 high at 6750.

ASX 200

Technical signals suggest a primary advance while economic indicators warn of rising headwinds and a potential bear market. So I remain cautious, with close to 30% cash in the Australian Growth portfolio.

S&P 500 and Nasdaq relief

June average hourly earnings growth came in flat at 2.74% for Total Private sector and 2.72% for Production and Non-supervisory Employees. This suuports the argument that underlying inflation remains benign, easing pressure on the Fed to accelerate interest rates.

Average Hourly Earnings Growth

The S&P 500 rallied off its long-term rising trendline. Follow-through above 2800 would suggest another primary advance with a target of 3000.

S&P 500

The Nasdaq 100 respected its new support level at 7000, signaling a primary advance. The rising Trend Index indicates buying pressure. Target for the advance is 7700.

Nasdaq 100

The Leading Index from the Philadelphia Fed is a healthy 1.51% for May. Well above the 1.0% level that suggests steady growth (falls below 1.0% are cause for concern).

Leading

Our estimate of annual GDP growth — total payroll x average weekly hours worked — is muted at 1.91% but suggests that earnings growth will remain positive.

Real GDP Estimate

Personal consumption figures for Q1 2018 show growth in consumption of services is slowing but durable goods remain strong, while nondurable goods are steady.

Consumption to Q1 2018

Declining consumption of nondurables normally coincides with a recession but is often preceded by slowing durable goods — below 5.0% on the chart below — for several quarters.

Consumption to Q1 2018

Conclusion: Expect further growth but be cautious of equities that are vulnerable to escalating trade tariffs.

We live in a global economy, but the political organization of our global society is woefully inadequate. We are bereft of the capacity to preserve peace and to counteract the excesses of the financial markets. Without these controls, the global economy, is liable to break down.

~ George Soros: The Crisis of Global Capitalism (1998)

Banks lift ASX 200

The ASX 300 Banks index continues to test resistance at 8000. Respect remains likely and would indicate another test of primary support at 7300.

ASX 300 Banks Index

Rising banks lifted the ASX 200. Follow-through above 6250 signals another primary advance, with a target of the October 2007 high at 6750.

ASX 200

This leaves me in a difficult position. Technical signals suggest a primary advance, while economic indicators warn of rising headwinds and a potential bear market.

Banks

The banking sector is being squeezed by higher funding costs, falling credit growth and rising default risk.

Gerard Minack from Minack Advisers warns that the current credit contraction could cause a significant fall in housing prices:

Most houses are bought on credit, so the demand for housing is a function of the supply of credit. Consequently, housing loan approvals have historically led house prices. New loan approvals have fallen by around 20% year-over-year several times over the past 25 years. If the current credit contraction is more severe – say, a decline of up to 30% – then nationwide house prices could fall high single digits over the coming year.

….All this suggests that a high single-digit decline in house prices would put a material dent in domestic demand. If prices were to fall by, say, 15%, and if consumer income growth was as tepid as it now is, there would be a good chance of recession.

Resources

A falling Chinese Yuan highlights the threat of trade tariffs to the Chinese economy.

CNY/USD

Commodity prices have responded, falling to test primary support levels.

DJ-UBS Commodity Index

Including iron ore.

Iron Ore

The ASX 300 Metals & Mining index is testing medium-term support at 3800. Breach is likely and would warn of a correction to test the rising trendline.

ASX 300 Metals & Mining

My approach is to sit with one foot either side of the fence. Focus on growth sectors. Stay away from Banks. Stay away from Resources but stay in Gold. And keep a healthy percentage of the Australian portfolio in Cash and reasonably secure interest-bearing investments. Definitely not hybrids.

Be Data-driven not Fear-driven

A few months ago, markets feared a nuclear war on the Korean peninsula. Those fears have now largely dissipated but been replaced by fears of a massive trade war with China. There is always a small probability that our fears may be realized but most market fears are not.

Unless you want to follow in the footsteps of some media-driven forecasters, and anticipate ten of the next two recessions, you need to focus on the data and not on your fears.

I have always used Fedex as a bellwether of economic activity in the USA. Shipments of goods are an excellent barometer of the economic climate — and closely tied to quarterly earnings which in the long-run drive prices.

Fedex

Unfortunately Fedex stock price is likely to become less reliable over time as an indicator of economic activity, with the entry of a new competitor: Amazon.

But Fedex produces excellent quarterly statistics of parcel shipments which remain a useful gauge of economic conditions.

Fedex Express Parcel Statistics

Parcel shipments for the quarter ended May 31, 2018 are up 1.1% on the same quarter in 2017. And the annual average is rising. Not fantastic but a step in the right direction, suggesting that earnings for the next quarter will improve.

The S&P 500 is testing its long-term rising trendline. Respect of support at 2700 would suggest another advance. Breakout above 2800 would strengthen the signal.

S&P 500

The Nasdaq 100 retraced to test its new support level at 7000. Bearish divergence on the Trend Index hints at selling pressure. Breach of support would warn of another test of primary support at 6300. Lengthy consolidation would be likely. Respect of 7000, while less likely, on the other hand, would signal a fresh advance.

Nasdaq 100

Discount the obvious, bet on the unexpected.

~ George Soros

ASX 200: China threat

A rapidly falling Chinese Yuan highlights the threat of trade tariffs to the Chinese economy.

CNY/USD

Expect another sell-off of foreign reserves by China, as in 2015 to 2016, in attempt to stabilize the Yuan and head-off a major capital exodus. The sell-off would weaken the Dollar and Chinese exports.

China Foreign Reserves

Significant monetary easing by the PBOC is also likely, to stimulate domestic demand. Driving the Debt-to-GDP ratio into the stratosphere.

The Aussie Dollar would act as a shock-absorber, following the path of the Yuan.

AUD/USD

Cushioning the blow to Australian exporters.

So far, Resources stocks are unfazed. The ASX 300 Metals & Mining index is consolidating below 4000.

ASX 200

The ASX 300 Banks index ran into stiff resistance at 8000. Expect another test of primary support at 7300 but this is not related to trade tariffs.

ASX 300 Banks Index

The ASX 200 appears unperturbed by the international turmoil, retracing calmly to test its new support level at 6150. Respect would signal another primary advance, with a target of the October 2007 high at 6750.

ASX 200

S&P 500 retraces while Shanghai shudders

The S&P 500 retreated from resistance at 2800. Retracement is modest and I expect support above the rising trendline (2700). Volatility (Twiggs 21-Day) is below 1.0%, indicating that market risk has returned to normal levels.

S&P 500 and Twiggs Volatility

The tech-heavy Nasdaq 100 is in a stronger position, making a new high at 7300, but is now likely to retrace to test the new support level at 7000. I am wary of Twiggs Money Flow as a lower peak would signal bearish divergence. A lot will depend on how buyers react at the new support level.

Nasdaq 100

China’s Shanghai Composite Index, on the other hand, broke support at 3000, signaling a primary decline. Initial target is the February 2016 low at 2700.

Shanghai Composite Index

Hong Kong’s Hang Seng Index weakened in sympathy. Breach of support at 29000 would signal a primary down-trend.

Hang Seng Index

ASX 200: Bold play for Aussie Banks

The ASX 300 Banks Index jumped sharply this week as investors made a bold move into the big four banks. Banks have been under the pump for months, with plenty of negative publicity from the Royal Commission accompanied by media coverage of falling house prices. The Aussie Dollar also rallied, suggesting the buyers were offshore.

Have they got it right? Only time will tell. Trying to catch a falling knife is a hazardous endeavor. What looks cheap at the time often ends up being very expensive with the benefit of hindsight.

Bulls would say that the banks are a dominant oligopoly, generating strong cash-flows and un-threatened by international competition. Bears would say they are under-capitalized, poorly managed and sitting atop the mother of all housing bubbles. Technical analysts would say that the Banks index remains in a primary down-trend and this is most likely nothing more than a secondary bear market rally.

ASX 300 Banks Index

But there are broader implications. The bank rally lifted the ASX 200 through resistance at 6150, signaling another primary advance. A Trend Index trough at the zero line flags buying pressure. Target for the advance is the October 2007 high at 6750.

ASX 200

This looks like a bold play by a long-term value investor, taking advantage of the weak Aussie Dollar and strong bearish sentiment towards banks. Where one leads, others are likely to follow.