PM Daily Market Commentary - 10/24/2018

By davefairtex on Thu, Oct 25, 2018 - 2:16am

Gold rose +3.25 [+0.26%] to 1240.81 on moderate volume, while silver dropped -0.06 [-0.37%] to 14.70 on moderately heavy volume. The buck shot up +0.48%, which didn't help the metals at all, but the real action was in equities: SPX plunged -3.09%, losing -84 points, making a dramatic new low, while the 10-year yield fell -4.2 bp. In short, money fled risk for the safety of gold, cash, and bonds.

Gold actually dipped at around 8 am, came back, and rallied more strongly in the afternoon as the equity market plunged.  Gold did not make a new high today in dollars, but it did make a new high in Euros.  Gold's spinning top candle was a bullish continuation, and gold forecaster jumped +0.45 to +0.73 which is a strong uptrend. Gold is in an uptrend on both the daily and weekly timeframes; gold/Euros is in an uptrend in all 3 timeframes.  Gold's move today continues a steady rise in price - and this comes right alongside a rising dollar.  Amazing - and bullish.

COMEX GC open interest fell -1,678 contracts.

Rate rise chances (December 2018) fell to 69%.

Silver moved lower at 8 am, tried to recover, but then sold off into the close.  It was a fairly narrow trading range for silver today.  Silver's long black candle was unrated, while the forecaster fell –0.17 to +0.30. Currently silver is in an uptrend in both the daily and weekly timeframes. Clearly silver isn't quite the safe haven asset that gold is, although the move lower in silver was fairly mild.

COMEX SI open interest rose +1,231 contracts.

The gold/silver ratio rose +0.56 to 84.01. That's bearish; the current level for the ratio suggests PM could be at or near a long term low.

Miners fell today; GDX dropped -1.14% on on moderate volume, while GDXJ dropped -1.08% on moderate volume also. XAU fell -2.10%. Forecaster plunged -0.67 to -0.64, which is a sell signal for XAU. Even so, XAU remains in an uptrend on the weekly and monthly timeframes.  Miners look substantially weaker than either gold or silver.

The GDX:$GOLD ratio fell -1.40%, while the GDXJ:GDX ratio rose +0.07%. That's bearish.

Platinum fell -0.29%, palladium dropped -1.36%, while copper moved down -0.51%. Platinum is mostly tracking sideways, copper is moving lower, while palladium is slightly off its all time high. Given the plunge in equities, I'd say the metals did quite well today.

The buck rallied +0.46 [+0.48%] to 95.97. The buck broke out above its previous high set last month. That's a bullish sign. The long white candle is a bullish continuation, and DX forecaster jumped +0.16 to +0.34. The buck remains in an uptrend in all 3 timeframes.

Crude tried to rally today but largely failed, rising +0.26 [+0.39%] to 66.49. Mostly that appeared to be because of the plunge in equity prices – right now crude and equities seem fairly closely tied. The EIA report was ostensibly bearish (crude: +6.3m, gasoline: -4.8m, distillates: -2.3m) but after some back-and-forth, crude actually rallied more than $1 following the news. It was only when equities sold off in the afternoon that crude was dragged back down off its highs. Crude remains in a downtrend in all 3 timeframes. Based on how it performed following the bearish-looking EIA report, I'm cautiously optimistic that crude is at least approaching a near-term low – assuming equities stop plunging.

SPX cratered, dropping -84.59 [-3.09%]. The strong line candle was bearish, forecaster plunged -0.52 to -1.02. SPX has now wiped out the last 5 months of gains; I'm having to look at the weekly charts to see where support levels might be. They say markets are an escalator moving up, but an elevator moving down. Yesterday's apparent bullish reversal was just an opportunity to sell, it seems. Traders just want out. SPX is in a downtrend in all 3 timeframes.

Are we nearing some sort of capitulation point? Some new candle code I've been working on suggests that the 8-12 day forecast is for a rally in SPX. RSI-7 for SPX is at 18, which is fairly oversold.

Sector map shows that tech led lower (XLK:-4.48%) along with Energy (XLE:-3.95%) while utilities did best (XLU:+2.43%). This is a bearish sector map.

VIX rose +4.52 to 25.23.

TLT climbed +0.75%; TLT forecaster issued a buy signal. TY confirmed, rising +0.46%, but today's move was not enough to trigger a weekly or monthly buy signal. The 10-year yield fell -4.2 bp to 3.12%. TY remains in a downtrend in the weekly and monthly timeframes. Given just how bad equities did, the bond market rally was a bit feeble.

JNK plunged -0.45%, making a new low, falling right alongside equities. Still as these things go, it wasn't all that bad of a move for JNK debt, although it is definitely a sign of risk off.

CRB fell -0.26%; 3 of 5 sectors fell, led by agriculture (-0.98%). Given the relatively mild drop in the commodity space, it suggests that the plunge in equities is probably not macro-economic related.

I've been puzzled as to what is causing the sell-off in equities. First I thought it was about Chinese chip malware, then maybe it was about Powell and rising interest rates. While those things did seem to coincide with a drop in prices – none of those stories really lasted long enough to have caused the semi-meltdown that we saw today.

Armstrong suggests that the sell-off in equities has to do with the upcoming election; according to him, capital is concerned that the Democrats will harm the economy, reversing any good things that Trump has done just out of spite. I think he may be on to something.

Consider for a moment “the caravan.” Obama was actually pretty tough on migrants – he had deported more migrants than any President before him. He also separated children from parents. Obama was quiet about it, but he was (roughly) 80% of Trump on immigration. And there is a fair amount of video of prominent Democrats talking about common-sense policy of protecting the borders – video that pre-dates Trump, where they espoused positions that the broad base of Americans largely support. But now, if Trump is for protecting the borders, those very same Democrats appear to be for open borders and unlimited immigration. More broadly, if Trump is for something, then the Democrats have to be against it – even if the thing itself makes sense, even if Americans actually support it, and even if it runs contrary to the position that these same Democrats actually held prior to Trump's arrival on the scene!

The danger is that this policy of opposition regardless of subject matter, policy, or common sense – so that they aren't seen as “with Trump” on anything - means that areas of true common ground that we all mostly agree upon cannot happen. And the theory is, capital flees from that sort of irrationality.  Here's a Bloomberg op-ed on “The Caravan”: note my observation isn't about immigration policy, it is that this piece even needed to be written.  In an effort to oppose everything Trump, the Democrats have ended up ceding the center to him.

So why do we care? If the elections are the driving force behind the sell-off, it suggests prices may well move lower as we approach the election, but that on the day of the election, we might see a trend change. “Sell the news”, so to speak. But there is more. The virulent anti-Trump message that half the country is listening to may make it difficult for independents to answer pollsters truthfully if they are considering voting for a Republican. The FiveThirtyEight poll currently projects a 5-in-6 chance of the Democrats controlling the house. If the polls are wrong once again, as they were in 2016, due to this "shy voter" effect, and the Republicans retain the house, we could see a very strong rally in the equity market immediately following the election. That would also, most likely, cause gold to sell off hard also.  This is something we need to keep in mind.

If I were a conspiracy-minded person, I might wonder if this caravan is actually a false flag operation by the Republicans.  It is just such a perfect issue that has broad-based support amongst Americans. I'd venture to say that most voters – in their hearts - do not want to encourage “caravans” of migrants to march on the US. But since Trump is the one who talks about conspiracy theories, no self-respecting mainstream Democrat would be caught dead thinking such a thing. Anything that Trump does, or is for, immediately becomes a “third rail” for mainstream Dems. That's just where we are.  And that's why the market is selling off, or so the theory goes anyway.  It makes sense to me though: capital flees risk when chaos and irrationality appear to be on the way.  It just wants a return on investment.

Right. So I'm still not seeing general signs of weakness in the economy – except for home price sales, which are driven largely by interest rates at this point. Even the commodity complex is doing more or less all right.  This is more evidence that the equity market sell-off could be election-driven.  Money flees in anticipation of events.

Gold and bonds are really the only things with bids right now, at least that I can see. Commodities are suffering a bit from China's economic weakness, but haven't fallen out of bed just yet. If the economy were about to tip over, we should be seeing commodity prices plunge, and generally speaking that's not happening.

Be a bit careful with the mining shares. They are getting pulled lower by the strong selling pressure in equities.

Last note: MBS has vowed to “bring to justice” the killers of Jamal Khashoggi. We can all breathe a sigh of relief now that he's on the job.

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davefairtex's picture
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5787
TSLA waves a magic wand

According to Wolf Richter anyway.  Below you will find the chart that gives him pause.  Note how TSLA's P&L swings from very deep and increasing losses to a large gain, without any sign of reversing trend first.  This is something that is...unusual to see in business.

Wolf points out that TSLA's Chief Accounting Officer left abruptly in September, and that Elon Musk has had a history of making stuff up when it suited him to do so.  Example: "funding secured."

My sense: there may be some improvement in TSLA financials, but based on Musk's history, there is probably some sort of "catch" to the big green bar that we see in the chart, below.

I'm not short right now - I'm just watching from the sidelines.


Michael_Rudmin's picture
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Joined: Jun 25 2014
Posts: 1000
A possible wand material

Quick question Dave: if Musk is aware that his "profitability" stats affect his bond viability, is it possible he could structure his profit/loss to put all the losses in some months, and all the profit in other months? Or will the bonds trigger at any point in the future?

Would such structuring come with additional cost? and if so, when is Musk likely to need green bars?

Let's assume that Musk's fan is a pretty good study of Musk himself: he seems to feel that musk's debt is the way to go.

Why, Julius Caesar himself did that to secure a governorship, and eventually to secure the emperorship from a republic. Could Musk be doing something of the same?

cmartenson's picture
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Joined: Jun 7 2007
Posts: 6060
I'm with Wolf on This One
davefairtex wrote:

According to Wolf Richter anyway.  Below you will find the chart that gives him pause. 

I'm scratching my head too.  No sort of bottoming and reversing.  No steady percent-at-a-time mfg improvements to turn mfg hell into mfg nirvana (high gross margins).

Everything suddenly reversed after many years of sort of being the same.

So I'll just watch for the next two quarters or three to see if this sudden clean up of the financials doesn't have a closet or two stuffed with unwashed dishes and dirty clothes.

I'm just alergic to BS, and something in that chart makes me feel like sneezing.

I wasn't at all allergic back in the late 1990's, I was an investing genius just like everyone else.  I got burned and learned my lesson.  Here's a quick reminder:

The culture of Silicon Valley supports shady, "big boy" tactics, and Elon has a history of steadily deploying said tactics.  "420" and tweeting about burning shorts, etc.  Couple that to the suddenly empty and re-stocked financial C-suite (not often that rats flee a rising ship) and it's enough to make my nose itchy.


Snydeman's picture
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Joined: Feb 6 2013
Posts: 672
Not my wheelhouse

This isn't my wheelhouse, and I'm nowhere near as plugged in as most of you, but I would assume that profit generated by these "tent" assembly lines can not be consistently and constantly replicated without establishing some true manufacturing base from which to produce future cars. That takes serious capital investment and time to construct, right? And aren't there issues cropping up with the Tesla's made in the recent production push? Are there lawsuits or anything pending? Is Tesla building factories to replace its hastily-constructed tent manufacturing centers?


I dunno. It seems too good to be true, and that usually is enough for me to send up the yellow flag.

Cold Rain's picture
Cold Rain
Status: Gold Member (Offline)
Joined: Jul 26 2016
Posts: 385

For some reason, Tesla and Musk have protection from the government.  He obviously thinks it gives him the right to say and do whatever he wants, even if it’s fraudulent.  And he can.  For now.  One day, we’ll find out the truth.

Oh, and mining shares seem to be going back to the drawing board.  Another fake breakout.  Overall, re: stocks, I doubt they let the S&P finish the week underneath it’s 200dma.  Betcha it’ll juuuuuust retake it by tomorrow afternoon.  And have you seen the effort to keep DB above the niner handle?  They’re throwing everything but the kitchen sink at it.  I mean, the DOW was dropping hundreds of points yesterday afternoon and DB was staying right on $10/$10.01.  Yeah right.

Eannao's picture
Status: Silver Member (Online)
Joined: Feb 28 2015
Posts: 179

Maybe he'll chop his own head off.

Luke Moffat's picture
Luke Moffat
Status: Gold Member (Offline)
Joined: Jan 25 2014
Posts: 385
Gold in GBP and EUR

Although gold in dollars might not be getting any attention, gold in both GBP and EUR is above it's 200 DMA. I think we're seeing the start of currency deterioration in the UK and Europe. Naturally it'll be 'Brexit' and 'Italian budget' grabbing headlines but here in the UK our consumer economy is hitting some serious headwinds (or walls). Store closures are becoming a frequent thing with even our biggest names announcing planned store closures - Debanhams (50 stores closing from a total of 165) and House of Fraser (31 stores closing from a total of 59).

Naturally we have to say that retail is moving to online sales because we can't admit that the consumer is broke.

My take is that the investor confidence is evaporating in the UK as households can't borrow any more money to spend on luxury goods even at these super low interest rates. That means no UK economy, so goodbye GBP and hello 25% - 40% interest rates!

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