PM Monthly Market Commentary - September 2018

davefairtex
By davefairtex on Sat, Sep 29, 2018 - 6:20am

Once again, end of month fell on a weekend, so I'll be doing a monthly update rather than a weekly. I think they're more fun.

On Friday, gold rose +9.99 [+0.84%] to 1199.11 on very heavy volume, while silver climbed +0.41 [+2.91%] on extremely heavy volume. Silver's big move came out of nowhere; it wasn't driven by the other metals, not by currency, not by news – not by anything I could identify. And it was big, breaking out above the recent trading range, seemingly dragging gold along for the ride. I've been waiting for such a move, but I expected it to be triggered by some event. I saw no triggering event at all; maybe something is happening behind the scenes. I wasn't invited to the meeting though, so I don't really know.

Important events this month:

  • Trump levied tariffs on $200 billion in Chinese products; this was not as much as feared, and the markets seemed to rally in response.

  • FOMC raised rates the expected 25 bp, but the important bit came when Chairman Powell explained that rate increases would continue.

The monthly metals sector map shows a bifurcation in the group; palladium, copper and platinum have done quite well, with palladium in the lead, while the miners and gold have languished, unable to make it back above the 9 MA. Much of the move in palladium and copper came after Trump declared that 10% tariff on Chinese products – the market was expecting to see a much higher tariff level, and so prices of the “other metals” rocketed higher in relief. Silver's big (and surprising) rally on Friday was the only reason it was in positive territory this month.

Name Chart Chg (M) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Palladium $PALL 9.92% 14.50% rising rising rising rising ma200 on 2018-09-18 2018-09-30
Copper $COPPER 5.41% -5.81% rising rising falling rising ma50 on 2018-09-18 2018-09-30
Platinum $PLAT 3.96% -11.70% rising rising falling rising ema9 on 2018-09-27 2018-09-30
Silver $SILVER 0.79% -13.08% rising falling falling falling ema9 on 2018-09-28 2018-09-30
Senior Miners GDX -0.16% -20.03% rising falling falling falling ema9 on 2018-09-26 2018-09-30
Gold/Euro $GOLD:$XEU -0.58% -5.80% falling falling falling falling ema9 on 2018-09-28 2018-09-30
Gold $GOLD -0.89% -7.26% falling falling falling falling ema9 on 2018-09-26 2018-09-30
Junior Miners GDXJ -1.01% -19.24% falling falling falling falling ema9 on 2018-09-26 2018-09-30
Silver Miners SIL -1.78% -26.69% rising falling falling falling ema9 on 2018-09-26 2018-09-30

Gold fell -9.38 [-0.78%] this month. The trading range was fairly narrow; the short black/NR7 candle was unrated, but the relatively narrow move did pull the monthly +0.23 to -0.05. That's still a downtrend, but a shallow one; the pace of the decline has slowed significantly. Gold/Euros monthly is also showing signs of reversal as well. Still, positive hints are all we have; gold remains in a downtrend in all 3 timeframes.

The December rate-increase chances is at 79%.

COMEX GC open interest fell -16,490 contracts this week.

COT report shows commercial net rose to the highest level ever; commercials are now net long +7.1k contracts, having covered 8.8k shorts just this week. Managed money is not quite at a record short position, but remains heavily short at -83.7k contracts. Managed money is very seldom net short; last time was at the lows for gold back in December 2015, at about -25k contracts short at that time.

Silver rose +0.12 [+0.79%] this month, making a new low to 13.96, chopping sideways for most of the month, and then screaming higher on Friday, ending up by printing a spinning top candle (46% bullish reversal) which looked a whole lot like a hammer. Monthly forecaster jumped +0.38 to +0.03, which is a tentative buy signal for silver. Silver looks much stronger on the weekly chart; Friday's rally caused the weekly forecaster to scream higher. Silver is now in an uptrend in all 3 timeframes.

The gold/silver ratio fell -1.48 to 81.46. That's bullish.

COMEX SI open interest fell -1,011 contracts this week.

The commercial net position is down off its highs; still net long +5.4k contracts but down 7k from the highs – mostly due to long liquidation. Managed money net remains heavily short, -42.7k contracts, mostly due to a very heavy concentration of shorts. There was a bit of short covering this week (-3.7k contracts), but managed money still has 95k contracts short. That's a huge overhang, and I suspect some of that went away this past Friday.

Miners fell -1.60% on the month, which resulted in a southern doji candle print; that was not a reversal bar. Monthly forecaster moved up +0.17 to -0.39. Miners did print a swing low on the weekly, but didn't really follow through. Miners ended the month in an uptrend on the daily, but a downtrend on both weekly and monthly timeframes.  Miners are lagging behind both gold and silver.

The GDX:$GOLD ratio rose +0.62% while the GDXJ:GDX ratio fell -0.85%. That's neutral.

USD

The buck fell -0.07 [-0.07%] this month, with the doji candle rated as neutral. Forecaster dropped -0.10 to +0.03, which leaves the buck barely in an uptrend. While the daily ended the month in an uptrend due to a strong rally this past Thursday, the weekly forecaster issued a sell signal 4 weeks ago. The buck is thus torn; uptrend on the daily and monthly, with a downtrend on the weekly. If not for Thursday's rally, the buck probably would have ended the month with a sell signal.  Buck right now is in no-mans-land as far as trend.

US Equities/SPX

SPX rose +12.46 [+0.43%] to 2913.98, making a new all time high. The trading range was narrow, however; the short white candle being neutral, while monthly forecaster fell -0.14 to +0.43, which is still a fairly strong uptrend. SPX sold off over the past week, which resulted in a drop below the 9 MA, as well as a sell signal on the daily. SPX is in an uptrend on both the weekly and monthly timeframes.

The sector map shows more losers than winners; homebuilders, REITs, and financials were all hit, while defense and sickcare did best. This suggests to me the impact of the Fed rate increase, as well as the expected negative impact of a move higher in long rates.

VIX ended the month at 12.12.

Name Chart Chg (M) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Defense ITA 4.32% 21.95% rising rising rising rising ema9 on 2018-09-28 2018-09-30
Healthcare XLV 2.55% 17.11% rising rising rising rising ema9 on 2018-09-12 2018-09-30
Energy XLE 1.75% 10.59% rising rising rising falling ma50 on 2018-09-18 2018-09-30
Industrials XLI 1.69% 10.75% falling rising rising rising ema9 on 2018-09-24 2018-09-30
Cons Staples XLP 0.28% -0.17% falling rising falling rising ma50 on 2018-09-25 2018-09-30
Cons Discretionary XLY 0.23% 30.62% rising rising rising falling ema9 on 2018-09-26 2018-09-30
Gold Miners GDX -0.16% -20.03% rising falling falling falling ema9 on 2018-09-26 2018-09-30
Technology XLK -0.36% 28.33% rising rising rising rising ema9 on 2018-09-27 2018-09-30
Telecom XTL -1.05% 9.52% rising rising rising rising ema9 on 2018-09-26 2018-09-30
Utilities XLU -1.53% -0.83% falling falling falling rising ema9 on 2018-09-19 2018-09-30
Materials XLB -2.26% 1.99% falling falling falling falling ma50 on 2018-09-26 2018-09-30
Financials XLF -2.65% 7.15% falling rising falling rising ma50 on 2018-09-26 2018-09-30
REIT RWR -3.95% 0.81% falling falling falling falling ma50 on 2018-09-24 2018-09-30
Homebuilders XHB -3.95% -2.90% falling falling falling falling ma50 on 2018-09-21 2018-09-30

Gold in Other Currencies

In this (weekly) chart, gold was split just about evenly.

Rates & Commodities

TLT plunged -3.08% this month, falling for most of the month. TY fell too, dropping -1.30%, sending the forecaster down -0.45 to -0.29, which is a sell signal for bonds. The 10-year yield ended the month up +19 bp to 3.05%. While the monthly and weekly forecasters are both deep in downtrend territory, the post-FOMC bounce on Wednesday pulled the daily back into an uptrend. Will this week's bounce lead to anything? That monthly chart seems pretty emphatic about the sell signal.  My guess is: probably not.

JNK rose +0.14% this month; it sold off fairly briskly, and then recovered all its losses and then some, making a new closing high just on Friday. JNK is in a slow but steady uptrend. Less-junky BAA corporate rates are heading higher, however, which isn't great news for junk debt prices; BAA rates rose +11 bp to 4.89% this month, although the monthly DBAA chart has yet to issue a buy signal. BAA.AAA differential is climbing slowly higher; it is generally bad news when this happens, but the move is quite slow as of right now.

Crude rose +3.86 [+5.56%] to 73.33, making a new high to 73.56. Last month it looked as if crude's rally might be running out of steam, but the new high this month fixed that impression handily. To me, it was a combination of factors: sanctions on Iran appear to be seriously reducing Iranian exports, while at the same time OPEC + Russia decided not to increase production, with Saudi Arabia opining that $80 was a fine price for oil – seemingly ignoring Trump's plea to raise production. There is chatter about $100 oil; BofA/ML says yes, Goldman says no. North American rig counts actually fell this month, with oil at 4-year-high prices. That's certainly a bullish sign.  The 15-month uptrend appears to remain firmly in place.

Physical Supply Indicators

* The GLD ETF tonnage on hand fell -12.93 tons with 742 tons in inventory.

* ETF Discount to NAV:

 PHYS 9.55 -1.88% to NAV [increase]
 PSLV 5.31 -3.82% to NAV [increase]
 CEF 11.68 -4.47% to NAV [increase]

* Bullion Vault gold (https://www.bullionvault.com/gold_market.do#!/orderboard) shows a $7 discount for gold and no premium for silver.

* Big bars premiums were: gold [1kg] 0.88% and silver [1000oz] 3.34%.

Grey Swans & Geopolitics

  • Ebola: total cases 151, with 101 deaths. The number of new cases continues to drop slowly, but ongoing low intensity conflict in the region continues to make efforts to trace contacts and treat infected people more problematic than in prior outbreaks. It turns out that stopping an Ebola outbreak in a war zone is a very difficult challenge. http://www.who.int/csr/don/27-september-2018-ebola-drc/en/

  • Turkey: the 10-year yield fell -81 bp to 17.31%, the lowest level since mid-July. USD/TRY fell from 6.28 down to 6.06; while the currency is recovering also, it is happening a lot more slowly than the bond yields. Is Turkey out of the woods? Maybe. It will ultimately depend on the inflation rate readings, but for now, things seem under control. The recent massive rate increase by the central bank seems to have resulted in a cautious vote of confidence from the markets. I really didn't think Erdogan had it in him; it goes to show, you just never know.

  • German Government/Migration: no news.

  • Italy – Migration: The Italian government passed a decree designed to limit “humanitarian asylum”, a particularly popular option for migrants which is not tied to war or political persecution. The decree also widened the range of criminal offenses that trigger the stripping of asylum privileges either applied for, or already granted. https://www.reuters.com/article/us-italy-politics-immigration-security/italy-to-narrow-asylum-rights-in-clampdown-on-immigration-idUSKCN1M41R8

  • China – Tariffs & Debt: no news this week.

  • Yield Curve Inversion: the 1-10 spread widened +9.5 bp to 49.5 bp this month. Long rates rose much faster than short rates this month.

  • US Congressional Elections, 2018. The generic ballot shows Democrats 49.6% [+8.7%] vs Republicans 40.9%. Democrat win → impeachment proceedings. https://projects.fivethirtyeight.com/congress-generic-ballot-polls/

  • North Korea: DPRK security officials are allegedly concerned following South Korean President Moon's recent speech, which was apparently viewed by some North Koreans as heartfelt, sincere, compelling and therefore worrisome to the security services. Do we believe Radio Free Asia's anonymous sources? https://www.rfa.org/english/news/korea/speech-09272018143257.html

  • Mueller Investigation: apparently, Bob Mueller is having problems with his Macbook Pro; he and his wife were spotted at a Genius Bar in Georgetown. One of the comments might hold the key to the puzzle: “So, I’m trying to edit this indictment and I keep getting a ‘you can’t indict a sitting president’ error message.” https://twitter.com/politiCOHEN_/status/1045050011971702784

    Perhaps more importantly, Deputy AG Rod Rosenstein allegedly spoke of wearing a wire and brought up the 25th amendment in a May 16, 2017 meeting attended by both Andy McCabe and Lisa Page – according to notes taken by one of the people at the meeting. This leaked notes-tidbit caused a bit of a kerfuffle; if not for the Kavanaugh hearings, no doubt it would have been the top story this week. Rosenstein, a heartbeat from being canned, denies having done this. Who leaked this tidbit, and why? I conclude: its a deep game; someone desperately wants Rosenstein to be fired. (n.b. when Nixon fired Watergate special prosecutor Archibald Cox, it was an important turning point in Watergate because it made Nixon look guilty in the court of public opinion, which is the only court that matters in impeachment proceedings. “Someone” here has read history, and is definitely trying to re-run the Watergate playbook). Rosenstein will meet with the President in the next few weeks to sort things out. http://www.foxnews.com/politics/2018/09/28/house-gop-deputy-ag-rosenstein-agree-to-meet-to-discuss-wire-report.html

Summary

One shoe dropped in the tariff wars; it wasn't as bad as feared, and the "other metals" promptly rallied hard. In spite of Trump's prodding, the Fed seems dead set on raising rates at least three more times. This will almost certainly lead to a recession – which is no doubt why Trump isn't so pleased. Its tough to get re-elected during a recession. That's especially true if you are Trump, and you've patted yourself on the back about “your” strong economy for months and months. The reaffirming of Fed rate-increase plans momentarily interrupted the steady rise of long rates this month; in spite of the recent rally, the 10-year is now back above the 3% line-o-death. If rates really take off and break out to new highs, I expect the economy to encounter trouble within the next six months.

And then there's silver. I don't have an explanation for Friday's very strong $0.41 rally. Perhaps "they" noticed me dumping my futures contracts in the days prior. Sigh. At least I still have my PSLV.

Big bar gold premiums remain low, silver premiums are normal, while ETF discounts are high. My supply indicators suggest there is no current shortage of physical gold.

The gold and silver COT reports shows net positions remain at near-historical levels; this is very bullish, as commercials are very seldom net long silver or gold, and they are net long both gold and silver at the moment. Managed money continues to run near-record short positions in both metals.

I kept going on and on about the gold/silver ratio – now having retreated to “only” 81.46 due to silver's rally on Friday – and it seemed as though someone finally paid attention to all my chatter. Silver got bought.  Is there something afoot behind the scenes? A COMEX default, perhaps? The long, long awaited COMEX default? A failure to deliver? The end of the paper markets?

I suspect not. But who knows?  I still think silver is a good deal down here at 14 and change.

Last thing I'll leave you with are a pair of macro quarterly charts: PPIACO (producer prices), as well as INDPRO (industrial production).  You can see that PPIACO may be starting to slow down, while INDPRO remains strong.  Both of these very long-lived series (dating back to 1920) are inputs to my recession detector, which has yet to show any signs of danger.  Note that the plunge in both INDPRO and PPIACO led directly to the non-recession of 2015-2016.

And INDPRO:

Current Trends – Monthly:

Uptrend: palladium, DJIA, crude, SPX, silver, BAA corporates, USD.

Downtrend: miners, 10-year treasuries, copper, Gold/euros, gold, platinum.

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2 Comments

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5585
TSLA short

FWIW, I covered my short just before market close on Friday.  I'm just guessing that Mr Musk will re-think his reluctance to sign a settlement agreement with the SEC after the latest stock price plunge.  I'll re-short on the next rally.

It really is true.  Shorts are the ones who "buy the dip" after a big plunge - because they're (gleefully?) ringing the cash register!

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5585
from my lips

Ok, I know we're all concerned with the End of the World (and legitimately so) but this is just too perfect.  Friday at 3:58 pm I feel the urge to close my TSLA short after a huge down day.  I ring the cash register, thinking that Musk is probably going to settle with the SEC sooner rather than later.  Now, on Saturday evening, I see the following at Wolf Richter's site:

https://wolfstreet.com/2018/09/29/musk-settles-booted-as-tesla-chairman-sec-forces-tesla-to-control-his-lie-tweets/

That didn't take long.  What, 24 hours?  Any guesses what happens to TSLA on Monday morning?

In this era of preparing for disaster, and world-ending running-out-of-oil, I am reminded that we are, all of us, given guidence all the time.  Do we listen?  Well that's up to us.  The guidance can be about things that are trivial, like this, or things that are important, like where to live, what to do, etc.

I am reminded of something one of my teachers likes to say: "things are always working out for me."

While "on average" things may get more difficult, you don't have to hew to that average.  Especially if things are always working out for you.

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