Category: US & Canada

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Tech stocks and small caps lead US advance

The S&P 500 continues to test resistance at 2800. Declining Volatility suggests a return to business as usual. Breakout above 2800, with follow-through above 2820, would suggest a primary advance to 3000.

S&P 500

Dow Jones Industrial Average is similarly testing resistance at 25400. Breakout would signal a fresh advance but buying pressure is modest and gains are likely to be slow.

Dow Jones Industrial Average

The Nasdaq 100 leads the charge, advancing towards a target of 7700 after respecting new support at 7000.

Nasdaq 100

Small caps are also out-performing, with the Russell 2000 iShares ETF testing resistance at 170 after breaking out above its January high of 160.

Russell 2000 Small Caps

Although this is the final stage of a bull market, there is no sign of it ending. I am wary of the impact of a trade war on individual stocks and have reduced  International Growth portfolio exposure to multinationals that have strong sales in China.

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Gold breaks support

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. Expect a test of 4600.

All Ordinaries Gold Index

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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

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Bull market will continue – at least for now | Bob Doll

At some point in the coming months, we think it is more likely than not that equities will break out of their trading range to the upside and post new highs.

Bob Doll – Weekly Commentary July 09, 2018

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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)

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Gold, Dollar and the Yuan

China’s Yuan fell sharply over the last 3 weeks, with the threat of US trade tariffs.

Dollar/Yuan

Risk of capital flight will force the PBOC to sell foreign reserves to support the Yuan. It took $1 trillion to stem the last fall, so expect a sizable sell-off in Chinese holdings of US Dollar assets, mainly Treasuries and mortgage-backed securities. The outflow is likely to weaken the Dollar, which is likely to strengthen Gold.

The Dollar Index encountered stubborn resistance at 95. Respect would warn of another correction.

Dollar Index

Gold found support at $1250/ounce. Respect of the primary support level would suggest another rally.

Spot Gold

The Aussie Dollar is likely to strengthen if the US Dollar falls.

AUDUSD

A stronger US Dollar is expected to be mildly bullish for Australian gold stocks, with a stronger Aussie Dollar offsetting some of the gains.

The All Ordinaries Gold Index broke through resistance at 5250, signaling a primary advance with a target of 6000. Follow-through above 5300, after the recent retracement, would strengthen the signal.

All Ordinaries Gold Index

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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

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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

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Aussie gold stocks rally as the greenback strengthens

The Dollar Index rallied to test resistance at 95 in response to the latest Fed rate hike. Short retracement is a bullish sign.

Dollar Index

Spot Gold retreated to $1280/ounce. Penetration of the rising trendline warns of a correction to test primary support at $1250. A Trend Index peak below zero warns of strong selling pressure.

Spot Gold

Fortunately for Australian gold stocks, the Aussie Dollar broke primary support at 75, warning of a decline to 69/70 US cents. The Trend Index peak below zero warns of strong selling pressure.

AUDUSD

The weaker Aussie Dollar boosted local gold stocks, with the All Ordinaries Gold Index breaking through resistance at 5100. Follow-through above 5250 would confirm another advance but expect retracement to first test the new support level.

All Ordinaries Gold Index

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