The Dollar retreated from resistance at 97.50 and is likely to test support at 95.50.
Spot Gold, however, continues to test short-term support at $1300/ounce. Breach is likely and would warn of another test of primary support at $1180.
Dollar stirs, Gold weakens
The Dollar is testing resistance at 97.50 after poor progress in US-China trade talks. Breakout would signal an advance to 100 which would be bearish for gold.
Spot Gold found short-term support at $1300/ounce. Expect a test of support at $1250 but a fresh Dollar advance would threaten primary support at $1180.
Gold retreats
Spot Gold retreated from resistance at $1350/ounce. Penetration of the rising trendline warns of another correction. The immediate target is support at $1250.
Silver is also retreating. Breach of $15/ounce would strengthen the bear signal.
Crude oil has rallied since the start of the year but the primary trend is down and lower peaks on the trend index warn of further selling pressure. Breach of medium-term support at $52 would signal another test of primary support at $42 which would be bullish for the Dollar.
The Dollar is gradually strengthening. Breakout of the Dollar Index above its current range of 95.50 to 97.50 would be bearish for gold.
The Aussie Dollar held steady, while the All Ordinaries Gold Index retreated from its recent high above 6000. Expect a test of new support at 5400.
Gold-Oil divergence
The crude oil bounce continues but the primary trend is down. WTI Light Crude (shown here on a monthly chart) is likely to test resistance at $60/barrel, followed by another test of primary support at $45.
Weak crude tends to coincide with a weak gold price. At present the two commodities are diverging, with gold rallying as crude falls. Safe haven demand for gold, due to rising global uncertainty, is the most likely explanation.
Spot Gold is testing resistance at $1350/ounce. Breakout would signal a primary advance but gold is expected to follow oil lower in the long-term.
The All Ordinaries Gold Index broke resistance at 5400/5500, signaling an advance to 7000. Strength of the advance depends on a weaker Aussie Dollar and/or a stronger gold price in US Dollars.
Gold rallies but so does the Dollar
A long-term (monthly) chart shows Crude Oil (WTI Light Crude) has broken below its trend channel and is testing support at $45/barrel.
Weak crude tends to coincide with a strong Dollar. Breakout of the Dollar index above 97 is likely. Rising Trend index troughs indicate buying pressure.
Gold is headed for another test of resistance at $1350/ounce but a strong Dollar is likely to undermine a primary advance.
The All Ordinaries Gold Index broke resistance at 5400/5500, signaling a primary advance with a target of 7000. That will depend on further weakness in the Aussie Dollar and/or a stronger gold price.
Conclusion: We are witnessing a rally in Gold due to global uncertainty but the LT outlook, with declining crude and a stronger Dollar, is still bearish.
Retail sales fall while trade talks stall
Retail sales
Retail sales growth (USA advance retail sales excluding autos and parts) fell sharply in December, indicating that consumer confidence is fading despite strong employment figures.
The decline in consumer confidence also shows in lower January 2019 light vehicle sales.
Trade talks make little progress
Trivium provide a useful update on US-China trade negotiations:
The latest round of trade talks with the US are finishing up as we go to press. There hasn’t been much progress (Bloomberg): “As of Friday afternoon, there had been no visible progress on efforts to narrow the gap around structural reforms to China’s economy that the U.S. has requested, according to three U.S. and Chinese officials who asked not to be identified because the talks were private……Chinese officials are angry about what they see as US efforts to undermine their state-led economy.”
These are issues that will take generations to resolve. The chance of a quick fix is highly unlikely.
Stocks
The stock market continues to rally on the back of a solid earnings season.
Of the 216 issues (505 in the S&P 500 index) with full operating comparative data 154 (71.3%) beat, 51 (23.6%) missed, and 11 met their estimates; 135 of 215 (62.8%) beat on sales. (S&P Dow Jones Indices)
Index volatility remains high, however, and a 21-day Volatility trough above 1.0% would warn of a bear market. S&P 500 retreat below 2600 would reinforce the signal.
Crude prices continue to warn of a fall in global demand.
As do commodity prices.
10-Year Treasury yields are testing support at 2.50% and a Trend Index peak below zero warns of buying pressure from investors seeking safety (yields fall as prices rise).
The Nasdaq 100 shows rising Money Flow but I believe this is secondary in nature. The next correction is likely to provide a clearer picture.
My conclusion is the same as last week. This is a bear market. Recovery hinges on an unlikely resolution of the US-China ‘trade dispute’.
Concessions to adversaries only end in self reproach, and the more strictly they are avoided the greater will be the chance of security.
~ Thucydides (460 – 400 B.C.)
More signs of risk avoidance
Bloomberg: “U.S. stocks slid as investors grew anxious that the Trump administration won’t reach a trade deal with China before a March deadline for escalating the war. Treasuries surged.
The post-Christmas rally that added 16 percent to the S&P 500 came under increasing pressure amid reports the two trading partners remained far apart on a deal and that the nations’ presidents won’t meet before higher tariffs are slated to take effect on Chinese goods next month.”
S&P 500 volatility remains high. If the rally runs out of steam, a large Twiggs Volatility (21-day) trough above 1.0% would signal a bear market. Retreat below 2600 would reinforce the signal.
Crude prices retreated below resistance at $54/$55 per barrel, on fears of falling global (mainly Chinese) demand. Another test of primary support at $42/barrel is likely.
10-Year Treasury yields retreated to 2.65%. A Trend Index peak below zero warns of buying pressure from investors (yields fall when prices rise) who are looking for safety.
My conclusion is the same as last week. This is a bear market. Recovery hinges on an unlikely resolution of the US-China ‘trade dispute’.
The secret of happiness is freedom and the secret of freedom is courage.
~ Thucydides (460 – 400 B.C.)
Gold and the Dollar direction
Crude Oil (WTI Light Crude) respected support at $45/barrel, with turmoil in Venezuela raising concerns over supply. Breakout above $55 would signal another rally but declining peaks on the Trend Index warn of selling pressure. Expect another test of $45. Breach of support would signal a decline to test the 2016 low at $26/barrel.
The Dollar index is weakening. If China continues to support the Yuan, we may see a correction to test support at 92. A lot will depend on trade talks in the next two weeks but I expect continued Dollar strength and Yuan weakness.
The PBOC increased support for the Yuan over the last month, leading up to the US-China trade talks, causing the Dollar to weaken.
Gold has ranged below resistance at $1350/ounce for the past five years. Expect another test of $1350 if the Dollar weakens. Breakout would signal a primary up-trend but LT Dollar strength is likely ….and a correction to test support at $1200.
A weakening Australian Dollar has helped Aussie gold stocks. The All Ordinaries Gold Index broke resistance at 5400, signaling a primary advance with a target of 7000. But that depends on further weakness in the Aussie Dollar (< 70 US cents?) and/or a stronger gold price (> $1350?)
Conclusion: We are witnessing a rally in Gold due to global uncertainty but the LT outlook, with declining crude and a stronger Dollar, is bearish.
Gold: Bull or bear?
Gold is testing resistance at $1300/ounce and is likely to follow-through to the long-term (LT) ceiling at $1350. Trend Index on the LT monthly chart displays a large triangular consolidation, indicating uncertainty. Upward breakout would signal a primary up-trend but this is unlikely, for three reasons. First, this is a bear market. A decline is more likely for that reason alone. Target for a decline is the 2015 low at $1050/ounce.
Second, a strengthening Dollar is likely to weaken Gold. I have inverted the LT chart of the Dollar Index (and Trend Index) below so that it is easier to relate to gold. As the Dollar strengthened, denoted by a LT fall on the inverted chart, Gold has weakened. The Dollar index shows a broadening consolidation since 2015, with bull and bear traps, again indicating uncertainty. At present, the Dollar is testing resistance at 97 but is likely to follow through to test LT resistance at 100. Rising Trend Index troughs above zero (remember the scale is inverted) signal buying pressure.
Third, falling Crude Oil prices are bearish for Gold. The LT chart below compares spot crude to spot gold, both adjusted for inflation to bring earlier peaks into proper perspective. The LT relationship is clear: gold and crude tend to rise and fall together. Crude prices have recently tumbled, exerting downward pressure on Gold.
Conclusion: We are witnessing a rally in Gold because of global uncertainty but the LT outlook is bearish.
Significant divergence
Market commentators are sifting through the data, looking for reasons to explain the sharp sell-off in stocks over the last two months. But everything they examine is likely to be shaded by their bear-tinted spectacles after the S&P 500 broke primary support at 2550.
The Nasdaq 100 also broke primary support, confirming the bear market.
Of the big five tech stocks, Apple and Google are both testing primary support, threatening to follow Facebook into a primary down-trend. If the two break primary support, that would further strengthen the bear signal.
Volatility (21-day) is now close to 2% but the key is how volatility behaves on the next multi-week rally. If volatility forms a trough above 1% that would confirm the elevated risk.
Divergence? What Divergence?
Why do I say there is a significant divergence? Look at the fundamentals.
Fedex has just released stats for its most recent quarter, ended November 30. Package volumes are rising, not falling.
Supported by a very bullish Freight Transportation Index.
Consumption is strong, with Services and Non-durable goods rebounding. No sign of a recession here.
Light vehicle sales are at a robust annual rate of 17.5 million.
Retail sales growth (ex motor vehicles and parts) weakened in the last month but is still in an up-trend.
Housing starts and authorizations are still climbing.
Real construction spending (adjusted by CPI) is strong.
Manufacturers new orders (ex defense and aircraft) have rebounded after a weak 2015 – 2016.
Corporate investment is growing at a faster rate than the economy, with rising new capital formation over GDP.
The Fed is shrinking its balance sheet which is expected to impact on liquidity. But commercial banks are running down excess reserves on deposit at the Fed at a faster rate, so that Fed assets net of excess reserves (green line) is actually rising. Hardly a drain on liquidity.
Market pundits are watching the yield curve with bated breath, waiting for the 10-year to cross below the 2-year yield.
In the past this has served as a reliable early warning, normally 12 to 24 months ahead of a recession. But the St Louis Fed Financial Stress Index is well below zero, signaling an accommodative financial environment.
Why the mismatch? Fed actions — QE, Operation Twist, and even steps to shrink its balance sheet — have all suppressed long-term interest rates. We need to be wary of taking signals from a distorted yield curve.
Why have stocks reacted?
This is not a Pollyanna outlook. Never argue with the tape — we are clearly in a bear market. So why are stocks diverging from the economy?
The answer is China.
The impact of a trade war with the US would most likely cause a recession in China. Oil prices are already plunging in anticipation of falling demand.
Commodities are likely to follow.
The impact of a Chinese recession would be felt around the globe. Europe has its own problems and could easily follow.
The US is likely to emerge relatively unscathed but Wall Street is going to be exceedingly cautious until some semblance of normality is restored.
I do not suggest selling all your stocks but make sure that there is enough cash in the portfolio to take advantage of opportunities when they arise.