Last weekend we went away to enjoy the Canada Day holiday. It was a great three days with minimalist news coming to our phones when we had internet, which was infrequent. We were, however, probably more interested in how the Toronto Blue Jays were doing, which as it turned out, not very well. We came back hoping to be greeted by a sunnier world. But, alas, it wasn’t, and it may even have turned darker.
The stock market churned, the precious metals were hammered, the G20 met in Hamburg and it was filled with discord and disagreement—well, okay, 19 largely in agreement, one an outlier—the streets of Hamburg were filled with tear gas, water cannons, and a battle royal, threats to attack North Korea over its ballistic missiles continued, and here in Canada a polarized debate raged over the $10.5 million payment to Omar Khadr with little in the way of middle ground. Oh, and did we forget President Trump’s wrestling match with CNN? It was so successful it seems that some overly zealous Trump supporters made death threats against some CNN reporters and their families. Brought to you live, the WWE, White House version. Plus ça change, plus c'est la même chose.
We could argue the best news of the week came at the end when it was announced that June’s nonfarm payrolls leaped by 222,000. That was well above the expected 179,000 and a vast improvement on the 138,000 jobs created in May (revised to 152,000). Here in Canada they announced that 45,300 new jobs were created and while slightly less than the 54,500 jobs created in May, it was a stellar performance. The US unemployment rate (U3) ticked up to 4.4% from 4.3% but that was largely because the labour force participation rate rose to 62.8% from 62.7%. The U6 unemployment rate rose to 8.6% from 8.4%, and the Shadow Stats www.shadowstats.com unemployment rate rose to 22.1% from 22%. In Canada, the unemployment rate ticked down to 6.5% from 6.6%.
The reaction to the stellar job performance in both countries was that bond yields rose, precious metals were hammered, and the stock market churned higher—well, at least the stock markets in the US. The Canadian stock market, dominated as it is by energy and materials fell hard before rebounding. The higher than expected jobs numbers and the expectations of further interest rate hikes in both Canada and the US was not friendly for commodities as oil prices were also hammered lower although oversupply problems continue to plague that market.
So where to now? As we explain below the stock market is still looking higher even if there is another temporary pullback, bond yields should continue to rise, the Cdn$ is looking good and the precious metals (gold, silver and the gold stocks) are depressed but could be poised for a turnaround as the seasonals turn positive.
MARKETS AND TRENDS
Stock Market Indices
Daily (Short Term)
Monthly (Long Term)
Dow Jones Industrials
Dow Jones Transports
9,694.94 (new highs)
S&P/TSX Venture (CDNX)
MSCI World Index
Gold Mining Stock Indices
Gold Bugs Index (HUI)
TSX Gold Index (TGD)
Fixed Income Yields
U.S. 10-Year Treasury yield
Cdn. 10-Year Bond yield
15.425 (new lows)
Source: David Chapman
Note: For an explanation of the trends, see the glossary at the end of this article.
It is always good to sit back and look at the longer-term cycles. The longest cycle Ray Merriman www.mmacycles.com notes is the 75-year cycle. Dating from 1932, the Great Depression low, it was due in 2007. Sure enough in 2008, we had a 55% collapse. Not quite the Great Depression, but sufficient to label it the Great Recession. It lingers today. Its half cycle is 37.5 years and sure enough, we had a number of sharp ups and downs from 1970 to 1974 with the final low in 1974 shaving 45% off the markets. Its half cycle is 18.75 years and was due in 1992. There were significant lows in 1987 and 1990. From 1990, the next 18.75-year cycle low was due in 2009 coinciding with the 2007–2009 stock market collapse. If the 18.75 year cycle holds the next one is not due until 2027. Some claim there is a 90 year cycle and 90 years from 1932 is 2022 which could be within the range of a 90 year cycle low. Recall that even after the 1932 Great Depression low there was a secondary depression in 1937.
If 2009 was the 18.75-year cycle low, as well as a 75-year cycle low, we are embarking on a new long-term cycle that is just in the early stages. That should be heartening for all stock market bulls. Interim cycles that Ray Merriman notes are seen in a well-known 4-year cycle and a 6.5-year cycle with the latter being more dominant. Our long-term chart of the Dow Jones Industrials (DJI) labels these two cycles. A low does not have to mean a collapse. It could just be a lengthy period of weak market action.
The range for the 6.5-year cycle is 5 to 8 years. From 1982 (which was 8 years after the 1974 low) cycle lows can be seen in 1987 (5 years), 1994 (7 years), 2002 (8 years), 2009 (7 years), and 2015 (8 years). That suggests the next 6.5-year cycle low is due from 2020 to 2023.
The range for the 4-year cycle low is 3 to 5 years. It is possible for both the 4-year cycle and the 6.5-year cycle to bottom at the same time. From 1982 we note lows in 1987 (5 years), 1990 (3 years), 1994 (4 years), 1998 (4 years), 2002 (4 years), 2006 (4 years long sideways action), 2009 (3 years), 2011 (2 years or 3 years from the 2008 low), 2015 (4 years).The next 4-year cycle low is due from 2018 to 2020.
What all this tells us is we continue in the grip of the up part of the cycle that has not topped. This gives rise to our thoughts that the market could still enter a blow-off phase before it tops. In theory, that top could come in 2018 before a significant correction sets in. Those looking for a big collapse into the latter part of this year (September to November) may be in for a disappointment. However, we cannot rule it out. Much depends on market performance between now and September. A sharp increase in the market between now and September could lead a sharp correction. But continuation of a steady rise with a number of ups and downs would suggest that we are not yet ready for a major top.
It took a while but the Dow Jones Transportations (DJT) finally joined the DJI in making new all-time highs. This is significant as one of the key tenets of Dow Theory is that the averages must confirm each other. Certainly, following the final February 2016 low it didn’t take long for the DJI to make new all-time highs. The DJT lagged. A non-confirmation. But no longer. It is significant because with the two now confirming each other it suggests that this bull market remains in force and has the potential to move higher again. That would be a surprise to many, especially the bears, given the background of the “the market is in a bubble,” “it’s about to collapse,” “the biggest drop in history is coming.” From what we see the market will top when the bears are silenced.
Since topping on June 19, the S&P 500 has largely moved in a downward fashion. The top of the Trump rally was seen back in early March and has since moved in an irregular fashion that ultimately moved higher. Sentiment indicators are somewhat neutral right now. They are off their highs but they are also not indicating any huge drop either. That suggests the market has the potential to move higher. The wave count is difficult to discern as we are uncertain as to whether wave ((iv)) is complete and we are currently on wave ((v)) or wave ((iv)) is still in progress despite the higher high. A break under 2,400 and especially under 2,390 suggests the potential to move down to next support near 2,330 and an outside chance of testing the uptrend line from the Brexit panic low currently near 2,250. That would also provide a test of the 200-day MA (2,300). New highs, of course, suggest we are moving to the next potential targets near 2,500.
With the markets still in a bull phase, we expect that, even if we do have another short-term pullback, odds favour higher prices as the month progresses. Corrections should remain shallow.
It seems the corrective phase of the decline from 140.15 to the final low at 115.52 is now over. The iShares 20-Year Treasury Bond ETF (TLT) has broken a previous low and appears to be poised to break support of the uptrend line from the March 2017 low. If this is correct then odds favour a three-wave decline into a potential significant low. We have often talked of bonds cycles and there is a well-known 6-year cycle that last bottomed in 2013. The next 6-year cycle low would be due sometime in 2019. We suspect the current 6-year cycle has already topped back in July 2016. The 6-year cycle breaks down into two cycles of 3 years or three cycles of 2 years. From 2013, we did see a low in 2015 and now a second low in 2017. This suggests there will be three cycles of two years. The Fed remains in rate hike mode and now even Canada is hinting at hiking rates because of the stronger performance of the Canadian economy recently and the strong jobs report. Bonds may have fallen to a first good support zone and we are most likely overdue for a bounce. But we expect once a bounce is out of the way the downward trend should resume.
The key 2-year 10-year spread has widened again recently. It is important to note that recessions and stock market tops don’t usually occur until the 2-year 10-year spread goes negative. At 0.99% this is currently not the case. Note how the 2-10 spread went negative in 2000 coinciding with the stock market top and the two-year High Tech/Internet crash and again in 2006–2007 before the 2008 financial crash. Currently, there is little there with the 2–10 spread that would suggest that a market top is imminent. A pause maybe, but not a crash. The conditions are just not there in the bond market. Not yet anyway.
The US$ Index may have completed a five-wave pattern to the downside that started from the top on March 2, 2017. If correct, this may complete wave 3 or a possible wave C to the downside. Sentiment has been weak for the US$ Index with most expecting further US$ weakness. Conversely sentiment is high for the Euro that makes up 57% of the US$ Index. What’s key for the US$ Index is the recent 95.22 low. As long as that holds then odds favour higher prices. The US$ Index would look better if it can regain above 96, and above 97.50 odds favour a test of the upper end of the channel near 99.
The long correction in the Cdn$ that occurred from May 2016 to May 2017 appears to be over. The Cdn$ topped at 80.25 and may have made its final low at 72.54. The breakout of the channel suggests a potential move to around 83.50. An improving Canadian economy and the potential for the BofC to hike interest rates as early as this week when the Bank meets for its monthly rate decision on July 12 are conducive to a higher Cdn$. Noteworthy is that the Government of Canada 10-year bond has moved from around 1.40% to over 1.80% recently. Rising interest rates, at least in the early part of the cycle are a positive force for the economy even as they might help turn down the Canadian economy later. The Cdn$ has some resistance between 78 and 79 and again at 80, but if new highs are seen over 80.25 then odds favour the potential target of 83.50. Only a reversal and a breakdown under 75.50 could change this potential scenario. If oil prices were also to improve that would help the Cdn$ even more.
It has been a long haul of a bear market for gold and silver over the past five years or so. Recent declines in gold prices have brought out the cries of the “market is manipulated” in spades. Maybe it is. But does it matter in the end? A gold smash as occurred on July 3 and again on July 7 in thin markets is a market event. Manipulation can occur in both up and down markets. So a question for the gold manipulator crowd is: is a sudden sharp rise in gold prices any less of a manipulation then a big smash? Manipulation occurs in all markets. And the thinner the market the more the odds favour some degree of manipulation.
Gold supplies are tight. But the gold market is not dominated by physical gold—it is dominated by paper gold. And there is a lot more paper gold then there is physical gold. There are ongoing lawsuits against manipulation of the London gold price. The current US White House administration is gold-friendly and there are some, including the current President, who have advocated a return to the gold standard.
The current collapse appears to be a setup for a sharp move to the upside. Sentiment is nearing extremes. Silver in particular has hit extreme bearishness in sentiment. Also, there is now a huge divergence between gold and silver as silver prices plummeted to new 52 week lows this past week at $14.34 breaking the December 2016 low of $15.68. Gold on the other hand at around $1,210 remains above its December 2015 low of $1,124. Both gold and silver remain well above their December 2015 low of $1,045 and $13.62 respectively.
The commitment of traders (COT) report is become more bullish (see below). And that is positive for gold going forward as well. Cycle-wise, we have often pointed out how gold has a long-term cycle of roughly 7.8 years according to Ray Merriman www.mmacycles.com. Major gold lows were seen in 1976, 1985, 1993, and the double bottom of 1999 and 2001. The last major 7.8 year cycle low occurred in 2008 so that targeted the current 7.8 year cycle to occur somewhere between 2015 and 2017. Thus far the low was seen in December at $1,045. It may well be the effects of that cycle have remained with us for the past two years. If the cycle is correct, then we should soon be due for a sharp rise.
The 7.8-year cycle breaks down into either two roughly 4-year cycles or three 32-month cycles. Counting from the October 2008 low we note important lows in December 2011, December 2014, and the third low could be due sometime in 2017 although it could stretch into 2018. There is no rule that says the low has to be lower than the previous low, just that we observe an important low. Once this next low is out of the way gold should embark on a strong up move.
The wave count from the 2011 top suggested a five-wave decline into the December 2015 low. Since then we have seen an A wave up and a B wave down that appears to have bottomed in December 2016. If a C wave unfolds we could see a spectacular one that could even approach the 2011 high of $1,920 or even higher. At a minimum the wave should carry to the $1,500 zone.
There is considerable patience required here. Manipulation or not, horrible sentiment, a commercial COT shifting positive and wave counts and cycles suggest that we are getting close. Gold also appears to be following once again its yearly seasonal cycles where the second half of the year is stronger than the first half of the year. Look for a low of some importance this month, possibly even this week. If gold takes out $1,250 it would be the first good sign that a low could be in. $1,200 is an important support zone and it is acknowledged that a firm breakdown under that level would be unnerving. There remains some potential for a test of $1,170 to $1,180 for a final low. But extreme bearish sentiment and an improving commercial COT suggest we are near a bottom and not about to see the “bottom” fall out.
The commercial COT improved sharply this past week to 35% from 31%. Five weeks ago, it was at 25%. The large speculators COT (hedge funds, managed futures, etc.) fell to 63% from 69% and 74% five weeks ago. The commercial COT saw short open interest fall by roughly 29,000 contracts while long open interest rose about 14,000 contracts. This is an encouraging development. We view this development as bullish for gold.
What an ugly day for silver on Friday. The reason for collapse was given as a “fat finger.” In other words, it was an error. How else does one explain a flash crash that took silver down to a low of $14.34 followed by a sudden rebound back up to around $15.90 and a final close at $15.43. It was roughly a 10% smash at the opening followed by a 10% rebound. It leaves one breathless. The collapse in silver prices took it below the December 2016 low of $15.68 but it remained above the December 2015 low of $13.62. Action like this is usually associated with the end of a move, and not suggestive of a further downward smash. Silver diverged with gold in that silver did make new 52-week lows while gold did not.
Still, silver needs to regain above $16 and above $16.75 to confirm that a low is in. A breakout over $18 would be quite bullish. Physical silver remains in short supply. Canadian silver maple leafs are being offered at Silver Gold Bull www.silvergoldbull.com at premiums of $2 over spot silver. The silver commercial COT is turning bullish as well. Sentiment for silver has fallen under 10%. The action on Friday was more in keeping with the end of a move and not a suggestion that further losses could be expected.
As with the gold commercial COT the silver commercial COT jumped from 35% to 38% this past week. Five weeks ago it was at 29%. The large speculators COT fell to 58% from 62% and five weeks ago it was at 74%. As the large speculators bail, the commercials are buying. We like to follow the commercials.
It has not been a pleasant week for the gold/silver stocks as the TSX Gold Index (TGD) fell another 4.7% and has now gone from up to down on the year. The Gold Bugs Index (HUI) is following the same pattern as it too fell 3.7% this past week and is now down 1.9% on the year. Misery thy name is gold. Thus far both the TGD and the HUI have held above their December 2016 low so no new 52-week lows. But at 185, the TGD is getting close to the 172 low recorded in December 2016. The TGD could be setting up for a double bottom but we won’t know for sure until we break above the neckline currently near 215. A firm breakout over 215 with no new lows for the TGD could suggest a powerful move to potential targets up around 275. We await.
We will try and end on a happy note despite all the pessimism surrounding gold, silver, and the gold stocks. This is the Gold Miners Bullish Percent Index. Above 75 is happiness. Gold stocks are soaring, everyone is making money, and everyone is happy. Below 25 is depression. Gold stocks are falling, no one is making money and everyone is becoming depressed, seeking drugs, and kicking their dog. The GMBPI or BPGDM has now fallen to 17.85. We are in depression territory. No, this does not mean that a bottom is imminent. Maybe the index will fall lower. But it has entered bear territory where a low could occur. In 2008, 2014, 2015, and 2016 the index fell even lower. They all turned out to be key buying zones. When there is blood on the streets, it is the time to buy. Blood is showing up on the streets.
Copyright 2017 David Chapman
David Chapman is not a registered advisory service and is not an exempt market dealer (EMD). We do not and cannot give individualised market advice. The information in this newsletter is intended only for informational and educational purposes. It should not be considered a solicitation of an offer or sale of any security. The reader assumes all risk when trading in securities and David Chapman advises consulting a licensed professional financial advisor before proceeding with any trade or idea presented in this newsletter. We share our ideas and opinions for informational and educational purposes only and expect the reader to perform due diligence before considering a position in any security. That includes consulting with your own licensed professional financial advisor
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