artin ring’s InterMarket Revie · Global Equities: MSCI World ETF - Below $44.25 for a negative...

InterMarket Review / Volume 29, No. 5 1

InterMarket ReviewMartin Pring’s

Commodities: CRB Spot RM – Monthly close above 526.2 for a positive 12-month MA crossover or below 525.2 for a positive 65-week EMA crossover.

Currencies: Dollar Index - Month-end close above 79.8 for a positive 12-month MA crossover; above 79.9 for a positive 65-week EMA cross.

Credit Markets: Bonds - Friday close for Barclays 20-year Trust below $117.12 for a negative 65-week EMA cross; below $121.3 for a negative 12-month MA cross.

Global Equities: MSCI World ETF - Below $44.25 for a negative 12-month MA crossover and below $44.85 for a negative 65-week EMA cross.

Precious Metals: Gold - A Friday close below $162 for a negative 65-week EMA crossover for the GLD; a month-end close below $1678 for a negative 12-month MA crossover.

US Equities: S&P Composite - Month-end close below 1346 for a negative 12-month MA crossover; a Friday close below 1330 for a negative 65-week EMA crossover.

Publishing a synopsis of the world’s Intermarket Analysis for over 20 years.

1. European and Indian ETFs emerging as relative strength leaders.

2. Several long-term commodity momentum indicators continue to suggest a bottom is at hand, but it’s possible more probing may be necessary in October.

3. Bond market spreads showing investors are willing to take on greater risks.

4. Bond market momentum suggests a secular and cyclical reversal may be at hand.

5. Dollar Index experiences a major technical breakdown.

Markets approaching important benchmarks.(These are not predictions, merely important chart points.)

Market Summary Markets Requiring Action

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Chart of the Month ..............................................................2Guidelines for IMR Asset Allocations .................................3U.S. Dollar-Based Asset Allocation.....................................5Overview and Global Financial Markets .............................6U.S. Stock Market.............................................................10Martin’s Stock Picks .........................................................14U.S. Credit Markets ..........................................................16Commodity Markets..........................................................19International Markets ........................................................34Currencies ........................................................................32Precious Metals ................................................................36

Contents

October, 2012 VOL. 29, NO. 5

Data Sources and Reuters Symbols

Amex Brokers Index .XBDCRB Spot Raw Material Index - Gold Bugs Index .HUIJOC-ECRI IP Index (Barron’s Market Lab).Goldman Sachs Indust Metal Index .GYXGoldman Sachs Energy Index .GJXGoldman Sachs precious Metal Index .GPXEurotop Index .AEURPhiladelphia Gold and Silver Share Index .XAUDow Jones World Stock Index .WIDOW

~ IMR Data Links ~You can now access links for data (economic and mar-

ket) referenced in the InterMarket Review. They can be accessed for free at www.pring.com/imrlinks.htm.

Please note our web site (pring.com) now allows you to plot the daily KST and smoothed RSI or the short, intermediate and long-term KST’s, as well as the Special K for all stocks and a variety of key indexes. By Googling other sites such as “Yahoo Finance India” “Yahoo Finance Canada”, etc. Non US subscribers can also chart local stocks.

2 InterMarket Review / October, 2012

Chart 1

The KST of the ratio between Moody’s Corporate AAA and the S&P Dividend Yield is a subtle way of looking at the Stock/Bond Ratio. The latest data shows that it has just broken in a big way for stocks. The arrows indicate that when this momentum series bottoms, equities are almost always in the process of starting a major advance. This action is really telling us that stocks have started to out-perform bonds. When that happens, it’s usually in the mid-to-late phase of Stage II of our business cycle progression. Most signals come directly after a primary bear market, but even in the 2005 situation, which did not, a good equity rally followed. Steep declines in the KST prior to the buy signal tend to generate stronger equity rallies than more anemic drops. That’s probably because such low readings refl ect a strong swing in sentiment in favor of bonds and against stocks. When the pendulum swings the other way, there is greater potential for a sympathetic move to stocks and therefore a more durable advance.

CHART OF THE MONTH: S&P Composite versus Bond Yield/ Dividend Yield Momentum


Recommended U.S. Sector ETF’sClaymore Canadian Income Energy (ENY)**14.20Claymore Timber (CUT)**$17Dow Jones Healthcare (IYH)**81Dow Jones Home Construction (ITB)**$13.50 Dow Jones Pharmaceuticals (IHE)**$74.50Dow Jones Real Estate (IYR)**$61.70Global and Platinum Miners (PLTM)**$13.90GlobalX Fertilizer (SOIL)**12.80Goldman Sachs National Resources (IGE)**$37.50Holders Biotech (BBH)**43Holders Retail (RTH)**$40KBW Regional Banks (KBW)**24.50PowerShares Building and Construction (PKB)**13.50PowerShares Nanotechnology (PXN)**$5.80S&P GlobalTelecommunications (IXP)**61Spider Consumer Staples (XLP)**$34Spider Energy (DYE)**70.86Spider Homebuilders (XHB)**19.50Spider Metal and Miners (XMI)**$41

Stocks50%

Asset Allocation Recommendations

* Dependent on market action. ** Stop is based on Friday close. **** Buy on Friday close above.

The portfolio allocations presented above for the Inter-market Review (IMR) have two functions. First, they are intended as a guide for a neutral investor; i.e., one who lies between conservative and aggressive. For example, we may recommend a 40% allocation to US stocks. An older more conservative subscriber looking for income and safety may conclude that such an allotment may be too aggressive. On the other hand, a younger investor, who has time and cash fl ow on their side, could fi nd the 40% overly conservative. The basic point is that these allocations should only be taken at face value if you consider yourself to be a neutral investor.

The second purpose of our allocations is to summarize our thinking about the markets in a practical, executable way. For example, we might conclude from the position of our indicators that infl ation hedge stocks and commodities are headed higher. In that instance, the allocation page would be used to emphasize those views by recommending infl ation driven sectors, resource based country ETF’s, such as Canada and Australia, as well as commodity index ETFs or individual commodity ETF’s. We might even include an inverse bond ETF to undermine our infl ationary expecta-tions. By the same token, if our indicators suggest a global bear market for equities, that portion of the portfolio would be greatly reduced. This equity exposure would most likely comprise defensive sectors such as utilities and consumer staples. Greater exposure to long-term bonds and cash would round out the picture.

Guidelines for IMR Asset Allocations

Various asset classes and sectors perform differently in different parts of the business cycle. Our recommendations are usually consistent with the prevailing stage as fl agged by our models. Technical factors that we take into consideration are long-term moving averages, such as the 12- month or 65-week time span, the absolute long-term KST, relative action and the long-term KST for relative action. Individual US equity sectors are compared to the S&P Composite and country ETF’s to the MSCI World Stock ETF (ACWI).

Since there is always a bull market somewhere and some investors have an insatiable appetite to be constantly active, we do, from time-to-time, recommend spreads where it’s possible to take advantage of a trend in a relationship that can benefi t regardless of the market’s direction. For example, transports tend to be an early cycle leader and energy a laggard. If the technicals were consistent, a long transports/short energy ETF trade might be appropriate.

In most instances, risk management stop losses are rec-ommended. The stop will typically be placed below a previous short-term low or more commonly under a 65-week EMA. Each month the stop levels are reviewed and where possible are raised. When a market or sector is considered vulner-able, stops will be tightened aggressively. Because markets can move strongly between issues, new subscribers should always assess the risk between current prices and stop levels to make sure that the difference is manageable. If it is not, it probably means the security in question is overstretched and you are better advised to wait for a correction.

Gold10%

Commodities (DJP)10%

Cash5%

International Stocks20%

Platinum5%


U.S. Dollar-Based Asset Allocation

Our Barometers remain in Stage II, which is bullish for bonds and stocks and bearish for commodities. Some tentative improvement in the commodity model using September 26 numbers as the fi nal September 28 data was not available as we go to press, suggests that the current cycle may move to Stage III or even Stage IV within 90 days. Based on the same assumptions, the Bond Barometer also started to decline and tentatively stands at 88.5%. For its part, the Stock Barometer continues to improve and now stands at 75%.

Normal business cycle experience is that a recovery is followed by a recession. In the current situation it seems that the recession has been avoided or postponed with a slowdown in the growth rate of many economic sectors taking place instead. Not everything is positive but the latest data, on balance, appears to be offering the hope of a modest re-acceleration in business activ-ity. Most encouraging has been the strong growth in the housing sector, albeit from an extremely low level. Also, leading indicators of housing starts, such as the sales/start ratio, the Well Fargo Housing Index, housing equi-ties themselves and mortgage rates continue to point in the right direction. However, as discussed later, it is likely that interest rates are in the process of bottoming. In addition, the ECRI Weekly Leading Economic Indicator has just triggered a KST buy signal. Previous such signals since 1967, when the data is publically available, have all been followed by extended periods of economic growth. Finally, confi dence appears to have bottomed and is now improving. We can see this from trends in quality bond spreads both in the US and around the world, as well as an improvement in the St. Louis Fed Stress Index. Re-member trends in confi dence and the economy typically move together.

The problem, as we see it, is twofold. First, this “prosperity” has been purchased at the expense of ex-cessive money creation which is about to feed back into the commodity markets. Second, the capacity utilization rate is currently at 78%. If the recovery extends, that level will almost certainly rise. During secular commod-ity uptrends rises in the capacity utilization rate from current levels have consistently translated into higher commodity prices. Combine that observation with the unprecedented expansion of central bank balance sheets around the world and you have the formula for an infl a-tionary bubble and bond market collapse. Somewhere in there the secular equity bear market returns in one form or another.

While October may well see some equity weakness, we see no serious trouble until commodities really pick up on the upside and that is unlikely until some time in 2013.

AllocationsEven though our Bond barometer is still bullish, we

feel that good quality government bonds have been pushed to excessive and unsustainable levels and that downside risk far outweighs any potential reward. It’s quite possible that poorer quality sovereign and corpo-rate debt can continue to rise in price (fall in yield) for a while longer, but if the general level of bond yields rises, these lower quality areas will be living off borrowed time. Our zero allocation to bonds, outlined in our interim re-port, therefore still stands.

The US equity allocation is being maintained at 50%. Our rotational policy now calls for some infl ation hedge ETFs with a gradual liquidation of the early cycle leaders as their technical condition deteriorates.

We are also maintaining the intra-month allocation of 20% to international equity ETFs as the ratio between the S&P (SPY) and the rest of the world (EFA) continues to lose upside momentum. Specifi cally, we are recom-mending Turkey (TUR), Mexico (EWW), Australia (EWA), Singapore, Egypt (EGPT) and the Netherlands (EWN). Protective Friday close stops are being placed at $52.50, $58, $21.5, $13.30, and $16. The S&P Europe (IEV) and Indian (INP) ETFs broke out in September and 2 ½-% of the (20%) international allocation goes to each of them for a total of 5% of the overall portfolio. Friday stops are at $24.80 and $50.50, respectively.

In view of the growing technical evidence of infl ation-ary pressures, we are recommending a 10% allocation to gold (GLD), the Dow Jones UBS Commodity ETN (DJP) and 5% to the platinum ETF (PPLT). Friday close stops are being placed at $157, $41.80 and $147, respectively.

September 28, 2012

Martin J. Pring


World Overview &Global Financial Markets

Chart 2

World Bond Index (BWX*3+AGG Spliced) and a Long-term KST

Our World Bond Index constructed from both good and questionable sovereign debt remains in an uptrend since it is above the 2001/12 secular bull market trend-line. The long-term KST has violated a major up trendline and remains below its MA, painting a negative technical backdrop. The weekly data in Chart 3 shows that the Index is just below important resistance as refl ected in the 2010/12 trendline. Since the short-term KST is mod-erately overbought, this could mark the top of the bull market. The Long-term KST for the World Index limited to higher quality US, German and Japanese instruments (Chart 4) agrees as it has started to roll over. The Index itself has violated its 2011/12 up trendline suggesting that upside momentum has defi nitely dissipated.


Chart 3

World Bond ETF Index (3xBWX plus 1xAGG) and Two KSTs

Chart 4

World Bond Index (US/GER+JAP) and a Long-term KST


Chart 5

Global Commodity Index and Three KSTs

A lot will depend on the course of global commodity prices. In this respect, Chart 5 shows the Global Index has violated its bear market trendline, but remains just below its 65-week EMA. Not enough to call a primary bull market; but pretty close. The same is true in the mo-mentum department, where the long-term KST remains bearish but tantalizingly close to an upside reversal.

Our derivative of global economic growth continues to experience a gentle rise as you can see from the lower window in Chart 6. As long as it can maintain that trajec-tory, the market is likely to move higher; a path which is also suggested by the long-term KST since this series has just crossed marginally above its moving average.

When compared to bonds and commodities, global equities are in a positive trend. Chart 7, for instance, shows that the stock/bond ratio has just broken above the trendline joining the 2010 to the 2011 peaks and all three KSTs are now in a bullish mode. That does not tell us stocks will go up because this is a relative relation-ship, but that is usually the case when the ratio is rising. Stocks also look positive against commodities as this ratio has broken out from a 3-year base. Since all momentum series are positive, stocks are the currently favored asset. That also remains consistent with the Stage II position of the three US based barometers.


Chart 6

MSCI World ETF (ACWI) and a Global Economic Indicator

Chart 7

Global Stock/Bond Ratio and Three KSTs


Chart 8

Global Stocks vs. Commodities and Three KSTs

The INTERMARKET REVIEW is published monthly by Pring Re-search, Inc., at 4830 Sweetmeadow Circle, Sarasota, FL 34238. First class postage paid at Sarasota, FL. © INTERMARKET REVIEW. Address all subscription mail orders, change of ad-dress, etc. to Circulation Dept., INTERMARKET REVIEW, 4830 Sweetmeadow Circle, Sarasota, FL 34238; phone 941-926-9664, Monday - Friday, 9:00 A.M. to 4:30 P.M. EST. The current mailing label or a facsimile should accompany subscription or change of address. SUBSCRIPTION RATES: E-mail - $75.00 introductory quarter, $100.00 quarterly renewal, (12 issues). All payments in U.S. currency only, please. Cancelations MUST be made in writing via fax or email to 941-870-0642 or [email protected], respectively. Unused months will not be refunded unless requested.

Published and all rights reserved by Pring Research. In addition to publishing the InterMarket Review, the International Institute for Economic Research, d/b/a Pring Research, also acts as a consultant on fi nancial markets and operates as an investment advisor.

Before making specifi c investments, further investiga-tion is recommended. Although information contained in this publication has been derived from sources which are believed to be reliable, they are not always necessarily complete and cannot be guaranteed. Neither Pring Research, Inc. nor any of its employees, or any person(s) or fi rm who is represented within this publication shall have any liability for any loss sus-tained by anyone who has relied on the information contained in this publication. Employees of this company may at times have positions in the securities referred to in this publication and may make purchases or sales of these securities while the publication is in circulation.


U.S. Stock Market

S&P Composite and the New Stock Barometer

Chart 9

We will not have the fi nal numbers until the close of September 28, but it looks as if the Stock Barometer will improve to a 75% reading this month. No doubt it is looking at the ECRI Weekly Leading Economic Indicator in Chart 10 because the KST for this series has tenta-tively crossed above its moving average. If this is a valid crossover, and ultra-leading indicators such as housing starts suggest that it is, history tells us that it is signaling an extended period of recovery. Normally, such action develops as, or just after, a recession has ended. This is fl agged by the vertical green arrows. Note also that the indicator itself is close to a major down trendline. The data used here is tentative as the chart plots the last Friday of the month. That means that a reading in excess of 126 will result in a positive violation.


Chart 10

S&P Composite and Two Indicators

Chart 11

ECRI Weekly LEI and a Long-term KST


Chart 12

S&P Composite and Three Indicators

One useful indicator that has just gone bullish is the KST for the ratio between Corporate AAA and the S&P dividend yield (Chart 1). The arrows show that upside reversals in this relationship have resulted in excellent cyclical buy signals for equities since it’s a subtle way of showing that stocks have begun to out-perform bonds. We can also see this in Chart 11, where the actual ratio has broken a down trendline in favor of stocks and looks as though it’s about to trigger a KST buy signal. Arguably one of the most important technical developments in the last month is the breakout in the government/corporate BAA bond market confi dence ratio in Chart 12. This series has now moved back above the neckline of a head and shoulders top as well as the trendline joining the head with the right shoulder. That tells us that the downside break was a whipsaw and that we should now expect confi dence to improve. The two rising KSTs in the lower panels of the chart support this view. The implications are for higher stocks and commodities and in a bond market relative strength sense, superior performance by higher risk instruments. Chart 13 also shows that confi dence is on the up and up as the intermediate KST of the ratio

between the S&P to the relative action of the defensive S&P Food Group continues to move higher with no signs of a reversal.

Also, our Intermediate Health Indicator in the bottom of Chart 14 typically leads the KST for the Dow itself as you can see from the arrows. This broad-based diffusion series is still rallying and is therefore offering no sign of hesitation.


S&P Composite and Two Indicators

Chart 13

DJIA and Two Indicators

Chart 14


Martin’s Potential Buy Candidates

Each month we introduce several technically attractive looking stocks. The basis for the selection is that the long-term KSTs are usually below, or close to, zero and above the their EMA’s. Some times the stock will have broken out and is an immedi-ate buy, while others will need to be stalked for a short-term correction. Finally, some may appear to be form-ing bases, but have not broken out. These situations will usually have a short-term KST buy, just requiring the price to confi rm. Such stocks are recommended in anticipation of a breakout.

Conservative investors may wish to wait for the long-term chart entry point to be achieved, and traders can use the lower numbers on the short-term charts. Some stocks may already be owned by the editors or their clients.

Chart a-2

Smith Micro Software, Inc. and Two Indicators - Symbol: SMSI

Smith Micro Software, Inc. and Three Indicators - SMSI

Chart a-1


Chart b-2

CytRx Corporation and Two Indicators - Symbol: CYTR

Chart b-1

CytRx Corporation and Three Indicators - Symbol: CYTR


Chart 15

U.S. Credit Markets

The Bond Barometer fell to a tentative 87.5% read-ing in September due to a rally in the CRB Spot Raw Industrials. However, this is not the end of the month number we use. If the published number on Saturday October 1 is less than 526.3, the Barometer will remain unchanged. Other components are starting to dete-riorate so we are anticipating a primary bear market sell signal by the end of the year. Sometimes these sell signals come close to the fi nal turning point in the bond market, as short rates often lead the cycle higher. This time the Fed will most likely hold short rates down for a longer period than normal, but the bond market will likely anticipate the growing infl ationary pressures and move fi rst. If so, we may well fi nd out that short rates will move up sooner than is currently being indicated by the Fed. All-in-all, we expect that bonds could be quite vulnerable prior to a bearish Barometer signal.

iShares Lehman 20-year Trust (TLT) vs. the Bond Barometer


Chart 17

Government 20-year Yield and an 18-month ROC

Chart 16

5-year Yield (Inverted) and Three KSTs


Chart 18

Barclays 20-year Trust and Three KSTs

The uptrend in the (inverted) 5-year yield (Chart 16) remains intact but it is apparent that all three KSTs have started to roll over. The arrows show that the two previous long-term KST sell signals were followed by large intermediate moves, but this time something more signifi cant is likely to develop as there are signs that the secular decline in yields is coming to a close.

That view is based on the fact that the 18-month ROC of the 20-year yield looks as though it has bottomed out from an extreme reading of around 50%; the exact opposite of the previous record in the other direction at the peak of the post WWII secular bull. The arrows also show that reversals in excess of 20% have typically been followed by primary trend reversals of some kind.

From a trend aspect, the key number to look for is a break by Barclays 20-year Trust, the TLT, below its 2011/12 up trendline and 65-week EMA at around $116. Taken individually, the line and the EMA are not that formidable, but when combined they are, especially as the long-term KST is on the cusp of a sell signal.


Commodity Markets

Chart 19

CRB Spot Raw Industrials and The New Commodity Barometer

The Infl ation Barometer improved a tad to a 37% reading due to a rally in the commodity CRB Spot Raw Industrials. Please note that these numbers are tentative because they are based on the close of September 26, not month-end data. The number to beat is 126.3.

We know that excessive money growth sooner or later fi nds its way into higher prices but the trick is being able to time it. This is where the velocity of circulation comes in. If the money is held in bank accounts or under beds, it’s obviously not got the same infl uence as if it is circulating at a fast clip. The series in Chart 20 takes M2 and makes an adjustment using its velocity of circulation. The raw data is then expressed as the momentum series in the lower window of the chart. It may be possible to debate the theory, but there can be no mistaking the close relationship between this series and business cycle

associated trends in commodity prices. In this respect, the solid arrows indicate that upside reversals in the in-dicator from a sub-zero reading typically develop close to primary bear market lows in commodity prices. The dashed arrows represent failures and you may notice that they all developed under periods when the secular trend was of the trading range variety; not in a secular bull market as is currently the case. Last month this velocity series bottomed and is clearly warning that a new cyclical bull market may be underway.

Chart 21 offers a simple technical technique in the form of an 18-month ROC. The arrows indicate when it has reversed from an oversold level, this has typically been associated with a new bull market. Last month it ticked up, but not enough to be confi dent that a bottom is in place. Since the October calculation will be compared


Chart 20

Chart 21

CRB Spot Raw Industrials and M2 Ad Vel (18/6e6sma ROC)

US Commodity Prices and an 18-month ROC


Chart 22

JOC ECRI Industrial Products and a Commodity Diffusion (24/9) Indicator

Chart 23

CRB Spot Raw Industrials and Two Momentum Indicators


to the April 2011 high, it is unlikely that the ROC will fall much further if indeed it does.

The third leg on the stool is a momentum measure of confi dence in the bond market; represented in Chart 22 by the blue oscillator, which is calculated from the ratio between good quality government and Moody’s BAA corporate bonds. A rising series indicates growing confi -dence as bond investors shun the safety of governments for the higher (riskier) yields of corporates. It’s fairly evident that momentum in the commodity pits is closely related to confi dence on bond trading desks. Indeed, in most cases bond momentum is the leader. Last month this series ticked up from an extremely overstretched level on the downside. It told us two things. First, bond investors are extremely pessimistic and second that a trend towards optimism may be underway.

Finally, our diffusion indicator measuring a basket of commodities and indexes above their 9-month MA’s is still declining but at a very overstretched reading on the downside. It may very well be close to an upside rever-sal and if so, the arrows suggest this would be a reliable signal of a new bull market.

Chart 24

CRB Spot Raw Materials Index and Two KSTs

We really need to see these indicators move more de-cisively in an upward direction before concluding beyond a reasonable doubt that commodities have bottomed. In addition, it would be nice to see the Index (530) move more decisively above its 12-month MA at 526 (see the latest data here.) However, with our Global Gold Index (a commodity leader) at a new high, and gold breaking out against bonds, it makes sense to give the commodity secular bull market the benefi t of the doubt.

Further evidence that industrial commodity prices are headed higher comes from Chart 24 which shows that the CRB Spot has violated its bear market trend-line. The Index also marginally above its 65-week EMA, but the buoyant showing by the two KSTs indicate that it will probably will experience a more decisive positive


Chart 25

iPath DJ UBS ETF (DJP) and Three KSTs

Chart 26

iPath Metals ETN (JJM) and Three KSTs


Chart 27

DJ UBS Agriculture (JJA) and Three KSTs

crossover.The more broadly based Dow Jones UBS Commod-

ity ETN has broken above the resistance fl agged by the two converging trendlines in Chart 25. It currently faces a critical technical test. If it can continue to hold recent gains, the long-term KST will undoubtedly go bullish. Failure to hold above these extended lines will likely to result in a test of the June lows, as any weakness from here will be compounded by a relatively overbought short-term KST.

One sector that has pulled back from the brink is industrial metals, the ETN, shown in Chart 26. The price recently broke back above the neckline of a head and shoulders top and the line joining the head with the right shoulder. Since the short- and intermediate KSTs are both positive, there is a very high probability that the head and shoulders has failed and prices will move much higher.


Chart 28

Commodity/Bond Ratio (CRB Spot/TLT) and Two KSTs

Chart 29

Commodity/Bond Ratio (CRB Spot/TLT) and Three KSTs


Chart 30

Infl ation/Defl ation Ratio and Three KSTs

Infl ation/Defl ation WatchThe Commodity/bond ratio (Chart 28) almost nudged

through its 12-month MA in September and the two KSTs appear to be stabilizing, suggesting an infl ationary reversal may be at hand. Further evidence in this direc-tion comes from the fact that the ratio has decisively violated its bear market trendline and that the short- and intermediate KSTs are bullish. Our ratio between infl ation and defl ation sensitive equities in Chart 30 is just below a key trendline, but the positive short- and intermediate KSTs suggest that it soon will.


Finally, the Gold/Bond Ratio (Chart 31) recently broke down from a head and shoulders top but has since moved back above the neckline and the line joining the head with the right shoulder. This looks like a defl ationary whipsaw. Since whipsaws are typically followed by above average moves in the opposite direction, it seems highly likely that gold has begun a period of superior performance and that strongly implies infl ation down the road.

Chart 31

Gold/Bond Ratio and Three KSTs


International Markets

Chart 32

S&P (SPY) RS EAFE (EFA) and Three KSTs

US vs. The Rest of the WorldThe ratio between the US and the rest of the world,

featured in Chart 32, continues to deteriorate. Not only has the relationship itself completed a top and violated an up trendline, but so too has its Special K. We do not know how far and how long this trend will continue, but given the overstretched nature of the SPK, we think the rest of the world’s will at least match the performance of the US market in the months ahead, most probably out-performing it.

EuropeIronically, the much maligned European region is

emerging as a global leader. Chart 33 shows that both the absolute and relative strength of the S&P Europe ETF, the IEV, have violated down trendlines. Since the two KSTs have also started to turn up, it is diffi cult not to overlook the positive technical picture.

Asia Ex JapanThe Asia Ex Japan ETF, the EPP, has also broken out

on an absolute basis with a marginally positive long-term momentum. However, its relative action remains in a trading range and the relative KST has so far failed to move above its EMA.


Chart 33

Europe 350 (IEV) and Three Indicators

Chart 34

MSCI Asia Ex Japan (EPP) and Three KSTs


Chart 35

iPath India (INP) and Three Indicators

Chart 36

iShares Hong Kong (EWH) and Three Indicators


IndiaOne of its components, the Indian ETF (symbol INP),

looks as though it may be leading the way since the price and relative strength line have broken to the upside. The two KSTs have reversed, so they, too, are likely to go positive soon. The Hong Kong ETF has also experienced a breakout as has its RS line. If the Asia Ex ETF is going to turn more positive on a relative basis this is one of the areas that looks to us as if it might join India as a leading indicator.

ChinaShanghai made a new bear market low in September

on both an absolute and relative basis. Obviously, there are two very good trendlines to monitor, but at the mo-ment the patient is showing no signs of life.

Chart 37

Shanghai Composite and Three Indicators


Chart 38

US Dollar Index and a Long-term KST

Dollar IndexThe Index failed two important tests in September.

The fi rst was the inability to rally above the neckline of a potential 9-year inverse head and shoulders pattern as shown in Chart 38. The second was a failure to hold above the neckline of the 2010/12 inverse head and shoulders in Chart 39. Since the short- and intermediate KSTs are bearish and failed breakouts are often followed by above average moves, these might be serious developments that lead to new all-time lows. The other possibility is for an extension to the potential base in Chart 38, but one thing we can rule out is that the Dollar is unlikely to move to new post 2011 highs in the immediate future.

Currencies

EuroThe Euro has a large weighting in the Dollar Index

so it’s not surprising that its price action has recently been a mirror image of it. The currency looks to be a bit overextended on a short-term basis, so a digestion of recent gains is likely. However, given the below zero but bullish trajectory of the intermediate KST, higher ultimate prices are likely.


Euro and Three KSTs

Chart 39

Chart 40

US Dollar Index and Three KSTs


Chart 41

Japanese Yen and Three KSTs

Chart 42

Canadian Dollar and Three KSTs


Chart 43

Australian Dollar and Three KSTs

Japanese YenThe recent fl at action being experienced by the three

KSTs refl ects very quiet trading in the currency itself. We think the two benchmarks to monitor are fi rst, the February high around 13,100 and second the 2010/12 up trendline at 12,600.

Canadian and Australian DollarsThe Canadian dollar has broken above a 1-year resis-

tance trendline and since all three KSTs are in a positive mode higher prices are likely.

The technical position of the Aussie dollar is a bit more problematic because of the mixed message being sent from the KSTs. We continue to look at the overhead resistance at $1.09 and support at 96c, fl agged by the two trendlines, whose violation will decide the direction of the next major move.


Precious Metals

Chart 44

Global Gold and Two KSTs

Our Global Gold Index, constructed from dollar, euro and yen denominated gold, reached a new all-time high in September. Since both KSTs are in a positive mode it is likely that prices will continue to advance in the period ahead.

New York spot gold has violated an important down trendline, but more importantly, the 52-week ROC has achieved a similar distinction. Chart 45 shows that on two previous occasions when a joint trendline break took place, the price followed with a worthwhile exten-sion to the rally. The positive action by the intermediate KST certainly supports that view.

Gold certainly looks like a better bet than indus-trial commodities at the present time. That’s because the Gold/CRB Spot ratio in Chart 46 has broken to the upside and is being supported by a positive set of KSTs.

The Platinum ETF (PPLT) also looks positive as it has violated a down trendline and crossed above its 65-week EMA. Positive short- and intermediate KST action suggests higher near-term price action and the probability of a long-term KST buy signal in the period ahead.

The monthly long-term KST in Chart 48 has started to hook up and that suggests that there is a strong probability that the price will be able to move above the key 2007/12 down trendline in the not-too distant future.


Chart 45

Spot NY Gold and Two Indicators

Chart 46

Gold/CRB Spot Raw Material Index and Three KSTs


Platinum (PPLT Spliced) and Three KSTs

Chart 47

Chart 48

Platinum (PPLT Spliced) and a Long-term KST

Date post:	02-Aug-2020
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