-- Published: Monday, 4 September 2017 | Print | Disqus
Charts and commentary by David Chapman
Phone: 416-523-5454 Email: firstname.lastname@example.org
September 4, 2017
September is when leaves and stocks tend to fall;
On Wall Street, it’s the worst month of all.
- Stock Trader’s Almanac 2017
Jeffrey and Yale Hirsch
Yes, it is September. Summer vacations are over. And the kids go back to school. September in many respects almost feels like the real “New Year” as it marks a beginning. After the Labour Day, weekend portfolio managers start to clean house. Maybe that’s why September ranks as the worst month of the year for stocks. Since 1950, September has been a losing month for the Dow Jones Industrials (DJI) 40 times with only 26 winning months. On average, the loss is only 0.8%, which doesn’t sound like a lot. The worst month was September 2002 when the DJI dropped 12.4%. It is also a losing month in post-election years, which this is.
So it seemed only fitting in some respects that we started the month with a weak nonfarm payroll report in the US. The August 2017 nonfarm payrolls were reported as a gain of 156,000 while the US unemployment rate ticked up to 4.4% from 4.3%. Actually, the unemployment rate (U3) jump wasn’t as dramatic as it sounds. The July rate was 4.35% while the August rate was 4.44%--hardly a change, really. The broader U6 unemployment rate was unchanged at 8.6% while Shadow Stats unemployment rate (www.shadowstats.com) saw its rate tick up to 22.2% from 22.1%. (Note: Canada does not report its employment numbers until next Friday, September 8, 2017).
The report of 156,000 new jobs in September was below the forecast of 180,000 jobs. Further, the previous jobs reports were cut by 41,000 jobs. Private payrolls rose by 165,000 jobs. The labour force grew by 77,000 but the number of unemployed jumped by 151,000. The labour force participation rate was unchanged at 62.9%. A surprise was the average hourly earnings grew by 0.1% only when at least 0.2% was expected. The previous month’s was revised downward as well. Overall, the report was a disappointment for the market. With the weak gain in average hourly earnings that continues to help keep inflation low.
The real question that will be on many minds is what will be the economic impact of Hurricane Harvey. The personal impact will be devastating for thousands of people who have lost their homes, their possessions, and even their jobs. Harvey has the potential to become the most costly hurricane in US history, surpassing even Katrina with an estimate up to $160 billion vs. the cost of Katrina at half that amount $80 billion.
The impact on the overall economy may not be a lot estimated at tops to shave roughly 0.4% off of GDP, but the negative impact on the region will most likely prove to be horrendous. While some estimates are a lot lower, even those conservative estimates are growing. The hurricane has already sparked a spike in gasoline prices at the pump, even up here in Canada as prices at the pump jumped by at least 10%. But oil prices softened due to a potential drop in demand. One-third of US oil is carried out at the refineries along the gulf coast that are now out of commission or at best limping. One might also see a spike in jobless claims as thousands have lost their jobs. Both Katrina and Sandy sparked a spike in jobless claims. But as noted the spike would be local in Texas around Houston and in southern Louisiana.
Further pressure could be seen on auto sales as it is estimated that upwards of half a million cars and trucks will need to be scrapped. Auto insurers will be dealing with claims for weeks. Homebuilders might benefit but that could be a delayed reaction as the clean-up would most likely take weeks. The disaster would also impact new home sales and resales but again it would be localized.
However, it is ominous that we are starting September with another potential massive hurricane disaster currently building in the Atlantic. Hurricane Irma had already reached a category 3 level and is rising. Its landfall and path are unknown at this time, but could range from Northern Mexico to the North Eastern US (ala Sandy). Most likely it hits the Caribbean and into the Carolinas. By that time, it could be a category 4 or 5 hurricane. A real disaster would be if it hits Florida then rebuilds over the Gulf of Mexico and turns into another monster headed towards Texas or Louisiana. If the US is having trouble dealing with one monster, what is their ability to deal with two?
The biggest fight may take place between Congress, the Senate, and the President over funding. Many want to tie funding to the debt ceiling and/or targeted spending cuts. The President wants his wall. The reality is a divided Congress, Senate, and President could, as we have already seen in the fight over repealing and replacing Obamacare, threaten to sabotage raising the debt ceiling in time and setting a budget. That could lead to a government shutdown sometime in October and even raise the spectre of a US default. If one thinks Hurricane Harvey is a disaster, and Hurricane Irma has the potential to be a disaster one will not enjoy what would be a “hurricane” in financial markets.
Is this alarmist? Maybe. But the record to date of cooperation has not been great as sides harden. The divisions are deep not only in the legislatures but also on the street. Then the investigation into Trump, his financial dealings, and Russia continues. And the tensions are heightening between the US, the West, North Korea, Russia and China. Something may have to give.
MARKETS AND TRENDS
Percentage Gains Trends
Stock Market Indices
Daily (Short Term)
Monthly (Long Term)
Dow Jones Industrials
Dow Jones Transports
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
0.8070 (new highs)
118.63 (new highs)
977.10 (new highs)
3.12 (new highs)
Source: David Chapman
Note: For an explanation of the trends, see the glossary at the end of this article.
New highs refer to new 52-week highs.
It was an odd week that saw the stock market shrug off Hurricane Harvey, North Korea, the looming debt ceiling fight, and the weaker than expected job numbers as the Dow Jones Industrials (DJI) gained 0.8%. The S&P 500 did even better—up 1.4%—while the Dow Jones Transportations (DJT) jumped 2.4%. The NASDAQ actually made a new high close but not a new all-time as it fell just short of its July 27, 2016 high. The NASDAQ gained 2.7% on the week. The S&P TSX Composite joined the party but it was a more subdued 0.9%. The TSX Venture Exchange (CDNX) eked out a 1.2% gain. Small caps continued to bounce back as the Russell 2000 jumped 2.6%. Confidence, thy name knows no limits.
Overseas the results were somewhat more subdued as the London FTSE gained 0.5%, the Shanghai Index (SSEC) jumped 1.1% to a new 52-week high, while the Paris CAC 40 was up 0.4% and the Tokyo Nikkei Dow (TKN) gained 1.2%. Only the German DAX suffered a small, inconsequential 0.2% loss. Despite the gains in the European indices, their recent losses are posing questions for the North American indices that have not fallen as much.
Obviously, the bounce back has us wondering whether we might see new highs. We cannot rule that out. However, if this is the start of wave 4 as we suspect then there needs to be more work. Thus far, the corrective pullback has been too short in time and the drop has been small. The 50-day MA currently near 21,700 has proven to be a stopper. So we need to break down firmly under 21,700 to suggest lower prices ahead. Otherwise, what this might be instead is Minuette wave (iv) instead of the start of Minor wave 4. To come would be Minuette wave (v) to complete Minute wave ((v)) and Minor wave 3. The top could come as early as the first week of September a period that has seen important tops in the past most famously the September 3, 1929 top.
Here is a closer look at the last six months of the S&P 500. The March April 2017 low marked the end of what we thought was Minute wave ((iv)). That left us to form wave ((v)). So it is possible that the drop that bottomed on August 21, 2017 was the bottom for wave (iv). Note that it held the 100-day MA a level below where the DJI held at the 50-day MA. The S&P 500 has been weaker overall. A breakdown now for the S&P 500 under 2,420 and especially under 2,400 would firmly suggest the S&P 500 is headed lower. Potential upside targets could be 2,560 but it is during the 5th waves where we often see double tops or just small new highs. A return back under 2,450 would be the first sign that the trend could be reversing to the downside.
Preferences are always that markets act in sync. So it becomes important when they diverge with one another. It is one of the key tenets of the Dow Theory. The averages must confirm each other. When Charles Dow wrote the theory back the late 1880s and 1890s in a series of articles he was referring to the Industrial and Rail averages. Today the comparison is between the Industrials and the Transportations. The chart above of the Industrials and Transportations illustrates Dow Theory (it was Dow’s 4th tenet). Back at the time of the election the DJT made its low on September 15, 2017. It wasn’t until November 4, 2017 that the DJI made its low while the DJT was making a higher low. It was a classic divergence between the two indices that set in motion the ‘’Trump’’ rally. Now we may be making the opposite. The DJT made its top on July 14, 2017 while the DJI made its top on August 8, 2017 a time when the DJT was quite a bit lower. To date the DJT is off roughly 4% from its all-time high while the DJI is down only 0.4%. If the DJI were to see new highs again next week (and even if it doesn’t) it could set up a divergence at a possible top.
The German DAX already appears to be in its wave 4. The DAX has fallen and tested its 200-day MA before bouncing slightly this past week. The DAX was off 8.3% at its recent low. Not a lot but enough to grab attention when no other major index has fallen that much so far. Canary in the coalmine?
It’s all about the FAANGs (Facebook, Apple, Amazon, Netflix, and Google). They have been the leaders of the Trump rally. Here they are over the past year. AAPL even went to new all-time highs this past week, leading the way for the others. One-year returns are Facebook 36%, Apple 55%, Amazon 27%, Netflix 80%, and Google (Alphabet) 21.5%. All that when the S&P 500 has returned only 13.5% and the NASDAQ is up 22.5% in the same period. We noted that the NASDAQ made a new all-time high close this past week but not a new all-time high as it has thus far fallen just short. Nonetheless, leaders can sometimes be leaders in both up and down markets. Given their huge weighting in the indices, it might pay be a bit cautious if you own these stocks.
We haven’t looked at the DJI adjusted for inflation in some time. The look, of course, is the same but the rises are not of the same magnitude. The current run-up has taken the DJI to new all-time highs, even with adjustments for inflation. But the look is very similar to the rise from 1990 to 2000. And we appear to have completed 4 waves up. The 1982 low was an important low given that on inflation adjusted basis the low was actually lower than the one seen on a nominal basis in 1974. Since 1982, we have embarked on a cycle wave to the upside. Wave 1 completed with the 1987 top and wave 3 was the 2000 top. Wave 2 was the 1987 crash and the next few years before the final low in 1990. Wave 4 of course was the dot.com crash and the financial crisis crash. Once this cycle wave is completed, it could suggest that we might enter a long period of depression not dissimilar to the 1930s. That period was a long down cycle wave that basically lasted from 1929 to 1949. We have never fully recovered from the financial crash of 2007–2009 and now we have conditions brewing that could result in global war and even civil war with sharp divisions in the country. The strong rise of fascism is not that much different from what was occurring in the 1920s and the 1930s.
It remains difficult to say but the iShares 20+ Year Treasury Bond ETF (TLT) may have its peak and is now starting a new wave to the downside (yields rise as yields move inversely to price). At a peak of 128.26 that level is just below the low of wave 1 at 129.74. Naturally, if we were to break to higher highs and take out that wave 1 down seen back in September 2016 then the entire pattern may need to be reassessed. The breakdown point appears to be around 125 so we’ll keep an eye on that level. Higher rates would most likely come as a surprise. But if things get dicey around raising the debt ceiling then it is possible it could raise the premium on US Treasury notes and bonds. We already know that short paper into October has seen rates spike as result of concerns of a government shutdown.
Spread watch. The 2–10 US Treasury note spread continued to narrow this past week, but only a titch, dropping from 0.82% to 0.81%. We are now flirting with the major support line that comes in around 0.79%. A firm breakdown under that level should send the spread lower. We have noted in the past that if the spread goes negative as it did before both the 2000–2002 crash and recession and the 2007–2009 crash and recession then odds would be high we could have another crash and recession.
The US$ Index tested the next key pivot zone this past week at 91.88 but even with a low of 91.55 we remain short of our targets at 91–91.10. The US$ Index quickly rebounded hitting a high of 93.31 before turning down again on Friday. It hit a low on Friday of 92.05 before rebounding strongly closing at 92.77. Our expectations are that we should see our targets of 91–91.10 before this downswing of the US$ is over. Any sharp break below 91 could target even lower down to 88. Sentiment towards the US$ is quite negative, but negative sentiment alone does not change the direction. Concern is high given the ongoing unravelling of the Trump Presidency, Hurricane Harvey and the looming budget and debt ceiling fight. Not to ignore global tensions either between the US and Russia, China and North Korea. Nonetheless, new highs above 94 would change the tone and direction and suggest the low was in.
We feel quite strongly now that we are embarking on our (C) to the upside. Seasonally, we are in a sweet spot that could last into October. Nonetheless, there are some warning signs as witnessed by the weakening commercial COT. Sentiment is not yet so rosy that we believe a top is imminent. And there remains considerable work to be done to suggest that new highs above the July 2016 high of $1,377 are about to happen. A key zone now above is seen at $1,360. A good breakout above that level would ensure that the $1377 would be taken out. The current wave to the upside has considerable potential with targets as high as $1,400 to $1,410 for the current wave. Following a further corrective period, we could see even higher levels once the 5th wave gets underway. Gold’s uptrend is good as long as we remain above $1,300 now. Even a break below $1,300 wouldn’t end it but it would dampen the growing enthusiasm. We'd now be more concerned with a break back under $1,280. Gold is now up 15.5% on the year and we continue to think we could see a 20% plus 2017. Our other note of caution is silver and the gold stocks continue to lag. Silver is only up 11.4% and while the Gold Bugs Index (HUI) is up 16.9% the TSX Gold Index lags up 7.5%.
This is one of our concerns. This chart is a comparison between gold and silver and their recent action. Note that when gold and silver fell into the July 10, 2017 low silver plunged through taking out previous lows seen in March and May 2017. Gold did not take out those lows. This was an important divergence between the two metals (Dow Theory tenet—the averages must confirm each other or, in this case, gold and silver should confirm each other). Now gold has broken above its previous highs seen in April and June 2017 but silver has not. This one of course remains to be seen and silver could yet take out the high at $18.67. But we still have a good $1 to go.
The commercial COT fell this past week to 24% from 27% the previous week. The commercial COT is now falling into a range that could suggest that a top is coming. In some previous iterations, it still took a few weeks for the top to materialize at a higher level despite the rapidly falling commercial COT. We’d like to see the large speculators COT (hedge funds, managed futures, etc.) rise over 80% as well. For the commercial COT the short open interest rose roughly 23,000 contracts this past week while long open interest fell roughly 6,000 contracts. On the other side the large speculators COT saw long open interest rise roughly 23,000 contracts although short open interest was roughly unchanged. As gold prices we will need to keep an eye on this as well as signs of frothiness if sentiment for gold jumps to high.
While silver has failed to take out its April 2017 high of $18.66, we do appear to be breaking the downtrend line from the July 2016 high. We have also cleared over the 200-day MA, another positive sign. Still, we will feel better when silver takes out $18.66. Also we would like to see silver’s gains exceed gold’s. One of the best metals performers this year has been palladium, up an astounding 43% thus far in 2017. Copper has also made great strides gaining 24.5% in 2017. Silver’s lagging is therefore a bit of a mystery. Still breaking the downtrend line is a positive development. Like gold we believe we are embarking on a (C) wave to the upside with potential to reach as high as $23 at least initially.
As with gold, the commercial COT for silver has slipped recently. Last week it fell to 31% from 33%. The silver commercial COT unlike the gold commercial COT has not slipped sufficiently low enough for us to be too concerned. Nonetheless, the trend is downward as it is with gold. The large speculators COT at 70% is nowhere near levels for us to seriously take notice. Taking notice would be the commercial COT into the mid-20’s and the large speculators COT to 80%.
Gold stocks as represented here by the TSX Gold Index (TGD) have also finally broken their downtrend line from the July 2016 top. They have also cleared the 200-day MA. Key now is that they hold it. The TGD has some potential to rise to 290 from here. That would be an impressive move. The TGD has lagged considerably given the rise in gold and silver prices. The TGD is only up 7.5% in 2017. Given the rise in the metals, it should be up over 20%. Could it play catch-up? Everything is beginning to look positive. The previous low of 184 should not be taken out. The 200 area should now act as support going forward.
If anyone is wondering why gasoline prices at the pump have jumped sharply higher they need look no further than the spike in gasoline prices following Hurricane Harvey. But the spike so far doesn’t seem to justify the 15% plus leap in gasoline prices seen here in Toronto, Canada where we have spotted some over $1.30/litre. Nonetheless when a 1/3 of refinery processing is knocked out in the US it shouldn’t be a surprise that prices at the pump leap. Does anyone think we need more refinery capability here in Canada instead of sending it to the Gulf coast? WTI oil prices actually weakened because of a falloff in demand. If you can’t accept it at the refineries because of the hurricane then you don’t need as much oil. Although we did bounce back over the past couple of days.
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
Daily – Short-term trend (For swing traders)
Weekly – Intermediate-term trend (For long-term trend followers)
Monthly – Long-term secular trend (For long-term trend followers)
Up – The trend is up.
Down – The trend is down
Neutral – Indicators are mostly neutral. A trend change might be in the offing.
Weak – The trend is still up or down but it is weakening. It is also a sign that the trend might change.
Topping – Indicators are suggesting that while the trend remains up there are considerable signs that suggest that the market is topping.
Bottoming – Indicators are suggesting that while the trend is down there are considerable signs that suggest that the market is bottoming.