’s
Gold – Silver – Shares Markets
David Kerly’s
David Kerly’s - Gold-Silver-Shares-Markets - Unique - Insightful - Independent 04 April 2016
Last Friday US non-farm payrolls beat analysts’
forecasts (what’s new) of 205,000 jobs by 10,000
for March. Another month of ‘good hiring
numbers’ will raise expectations of the Fed moving
closer to another rate hike, as foolhardy as we think
that will be. We know that the US economy is
definitely not firing on all four cylinders, more
likely one and a half, and is stuck in low gear.
Though US GDP for the last ¼ of 2015 was
recently revised up from 0.7% to 1.4%, which was
still pretty anaemic when officials and economists
would like to see something around 2.5% to 3.0%,
at least. A surprise though came from the
unemployment rate which rose from 4.9% to 5.0%,
catching “analysts” off guard.
WELL, NOT QUITE THIS BAD.....................YET!
04 APRIL 2016 A monthly newsletter on gold, silver, shares, and stock markets utilising chart and fundamental analysis Issue 10
NYSE Investor negative credit balances are beginning to reverse,
but that is very bearish for stocks.
The FTSE100 Index is struggling under a massive top area.
Gold and silver still a waiting game as ‘more froth’ must be
blown off before we get ‘the green light to pile back in’.
Donald Trump’s ‘popularity’ has stunned many, but reflects
working class America’s disgust with current politicians and a
breaking down of the capitalist system.
The US unemployment rate rise from 4.9% to 5% ‘surprises
analysts’, though a 6.5 year decline was ‘skating on thin ice’.
The NEXT PLC success story is coming to an end.
Complacency has returned to stock markets after the latest
and still ongoing bear market rallies.
We were early with our call on Oil, but the trend has turned up.
David Kerly’s - Gold-Silver-Shares-Markets - Unique - Insightful - Independent 04 April 2016
CHART OF US UNEMPLOYMENT RATE
Unemployment has been falling for 6 ½ years, the
third longest since the early 1950’s. Unlike the 7 ½
years to 1968 and the 8 years to 2000, when GDP
growth was much stronger at average rates of 6.7% and
5.8%, respectively, the current average of 3.7% is
justifiably a phoney expansion. This was financially
engineered by three bouts of Q/E and ZIRP (zero
interest rate policy). If not for this the US would be in
full blown recession by now. However, as we know, as
do the bank of Japan, the FED, the UK, and Mario
Draghi if he owns up to it, which he won’t of course,
such policies do not work. They might initially have
kept things afloat after the financial crisis, but their
effectiveness now has all but disappeared. The table
below details every fall in the US unemployment rate
since 1950:
Rank Years
Unemployment
fell
US
Unemployment
low
Years
between
lows
Low
point
1st 8.0 2000 9 3.8%
2nd 7.5 1968 11 3.4%
3rd 6.5 2016 9 4.9%
4th 6.25 1989 10 5.0%
5th 4.0 2007 7 4.4%
6th 4.0 1979 4 5.6%
7th 3.5 1953 n/a 2.5%
8th 2.5 1973 5 4.6%
9th 1.5 1957 4 3.7%
Turning to the chart of the unemployment rate we can
see that the MACD (bottom of chart) has begun to turn
up. This was virtually identical to that seen in 2007 after
the rate had bottomed at 4.4%. We do however, note
that the latest “buy” signal has begun from a lower
MACD level than 2007, so is arguably less bullish for
the initial upward move. That may mean more volatility
in the rate as a result of the FED’s constant
experimentation and tinkering with economic policy.
This is really like pushing on a piece of string, given
that they have run out of ammunition to deal with a
massive economic and financial “problem”. Perhaps
this is something akin to trying to halt an oil tanker two
miles away from the rocks, which ordinarily takes 10
miles to stop. They are running out of time.
GOLD
DAILY CHART WITH COMMITMENT OF
TRADERS INDICATOR (COT)
Gold has begun its correction lower after peaking
at just over US$1280 three weeks ago. The difference
between large specs (Hedge funds) and commercials
(producers) has reached an extreme, greater than some
five months earlier, very strongly indicating a trend
reversal. This is one of the best set up indications (COT)
and once again Hedge funds have been caught napping
with massive long positions at the top while the wily old
commercials have loaded up with shorts. The Fed's
comments which were gold bullish on 16 and 29 March
triggered the rallies shown on the chart, but those rallies
have been reversed. The technical conditions are not yet
right for gold’s bull market to extend. The market needs
to go lower first to blow some more ‘froth’ away.
So far the retracement has amounted to US$64 or about
27% of the US$236.40 rise from the December low.
This does not look enough. There appears to be a top
area of some 7-8 weeks duration that seems to be
building over an approximate US$1200 neckline. The
target from this pattern would be around US$1120 as
David Kerly’s - Gold-Silver-Shares-Markets - Unique - Insightful - Independent 04 April 2016
we have shown on the chart. We had a sell signal a few
days ago from the two shorter term moving averages,
though these can whipsaw as they did through last
September and October. However, the downside
pressure building now looks to be greater than then, so
once US$1200 breaks the move should be swift. Where
it stops and reverses from we don’t know. It could stop
at the 50% level or the 61.8% level. However, given the
still very wide COT gap, it’s going to take weeks not
days. As Willian Gann used to say, “When time is up
price will reverse”.
SILVER DAILY CHART WITH COMMITMENT OF
TRADERS INDICATOR (COT)
Silver has lagged gold since January and did not
become as overextended above its 200 day moving
average at the recent high as gold did. However, since
the beginning of March silver rose by around 8% to its
peak near US$16.10 while gold only managed around
4% and silver is still above its March starting level of
US$14.88, whereas gold is not. Silver should soon start
to follow gold lower beneath the early March low, a
view clearly shared by the wily old commercials
(producers) who were very recently massively net short
to the tune of 77,242 contracts, the largest in at least five
years. We note that that gap between these and their less
savvy counterparts, the large specs (Hedge funds), has
just started to contract from an extreme (the widest in at
least five years), longer than gold which should also
start to contract.
As far as the downside target is concerned, once again
that will be hard to pin point. However, we have to note
that silver has in fact already retraced more than 38.2%
of the advance from the December low and therefore is
now dropping more than gold. We wouldn’t be
surprised to see silver test and possibly exceed the
76.4% level (US$14.214) or perhaps even to beneath
US$14.00 again. The chart of the gold/silver ratio
continues to trend higher and this shows silver at risk of
further weakness against gold. Note the MACD at the
bottom which is just turning up as the ratio bounces
from close to the rising 50 day moving average. If the
ratio makes a new peak at say 84.0 and gold corrects to
perhaps US$1120 that would put silver at US$13.33.
CHART OF GOLD/SILVER RATIO
Ultimately the deferral of an interest rate rise is bullish
for gold, though as we have said, but not just yet as a
greater downside correction needs to occur first. The
FED was very cautious in its latest statement on 29th
March given at the Economic Club of New York. Janet
Yellen expressed the view that global developments
have increased the risks to the outlook with economic
and financial conditions still less favourable than when
interest rates were hiked in December. She considers it
appropriate for the Committee to proceed cautiously in
adjusting policy. That suggests that no rate hike will
occur later this month. Stock markets took that as a clear
signal to push higher again, though we suspect that this
advance is not sustainable.
Despite rates being close to zero, Janet Yellen said “the
Fed would still have considerable scope to provide
additional accommodation”. By that she means more
Q/E and promises by the FED, or what she calls
“forward guidance” on interest rates. Well, we know
that Q/E is not the answer. If they launch a fourth Q/E
the market should, if it has any common sense, realise
that further inflating the many financial asset bubbles is
a recipe for total disaster. It might help (if that is the
right word) Wall Street in the near term, but certainly
not main street, where Donald Trump has ridden
working America’s growing miss trust of the corrupt
(what’s new) political elite.
A move to negative interest rates, which is already a
David Kerly’s - Gold-Silver-Shares-Markets - Unique - Insightful - Independent 04 April 2016
feature in Japan, Sweden, Denmark, Switzerland and
the ECB, was not mentioned. Suggestions by Yellen
and others that the Fed would consider such a move
have generally been taken as a sign of desperation by
Wall Street. We agree completely with that! However,
the FED, we suspect, or at least some members of it,
have become pretty desperate already.
COMPLACENCY RETURNS TO STOCK
MARKETS
We show a chart of the VIX volatility Index. This is
known by some as the “Fear Index” due to its negative
correlation to the S&P 500. Basically VIX is calculated
from a weighted blend of prices of S&P 500 Index
options (puts and calls) and measures the market’s
expectation of volatility over a rolling 30 day period.
Currently VIX is swinging back into complacent
territory as the S&P 500 rallies higher. We know
already that the overall bias for the S&P500 is down as
the falling 40 week moving average confirms. The
falling resistance line on the above VIX chart reflects
the bull market in stocks from the 2009 low. The twice
upward break of this trend line in 2015 provided a
warning that the trend was changing as more fear crept
into the market. This occurred in 2006 ahead of the 2007
market peak and also the reverse of this in 2010, but
after the 2009 market low. A return to or just under the
trend lines was then followed by the dominant new
trend, up for the VIX in 2007/2008 (down for stocks)
and down for VIX in 2009-2015 (up for stocks).
So, the stock market rallies according to this indicator
are skating on thin ice and must be treated with great
caution and scepticism. The VIX is now testing the
shallow (less steep than 2007/2008) upward trend line
we have drawn from the 2014 low. It could break under
it for a while, but we suspect it won’t last and a fresh
bout of increasing fear should begin to return to the
markets. We note also that many US corporations are
buying back their own shares, some with borrowed
money (understandable given very low interest rates),
in an effort to boost earnings per share. Clearly, growth
cannot be found organically so they are resorting to
other means. This is unsustainable.
CHART OF S&P 500 INDEX
The S&P 500 reached, and slightly exceeded, the
2025-2050 target area we were looking for in our
previous newsletter, closing at 2072.78 on Friday. The
market is still rising, so, until it reverses the bulls are in
control. However, there is clearly a lot of supply in the
2075 to 2100 region which we show on the chart, and
the MACD, while still rising too, remains overall
bearish. It may push into the bullish half of the scale,
but we suspect an abrupt reversal before long. The
market was arguably in a better position back in
September, when it posted a double bottom, to advance
to new highs. However, it failed to do so, hitting and
reversing from major supply just over 2100. Also, it did
not have confirmation from the Transport Index.
The latest rally also emanated from a double bottom
between January and February, but we also note that the
Transport Index has already started to roll over after
hitting the mid-point of supply from the 8000 to 8300
October/November 2015 trading range. This rally looks
on borrowed time, but may go into a choppy trading
range as bulls and bears battle it out.
David Kerly’s - Gold-Silver-Shares-Markets - Unique - Insightful - Independent 04 April 2016
There are some Technicians who have noted that other
indicators such as the percentage of NYSE stocks that
are above their 100 or 200 day moving averages has
been rising recently. In particular the recent break over
resistance at the 41% level.
NYSE PERCENTAGE OF STOCKS ABOVE 200
DAY MOVING AVERAGE
The break over the 41% level has completed a double
bottom on the above chart. This is now just under the
55% level, meaning just over half the stocks in the
market are above their 200 day moving averages.
However, given that the 200 day moving average for the
Wilshire 5000 Composite, which is about 90% of the
market, is falling, that is perhaps not particularly
bullish. Note also that the RSI indicator has got as
overbought as in 2003, 2009 and 2012. In the first two
instances these were at the early stages of bull markets
and the latter following the market shakeout of 2011/12.
So, again, given the lofty and very mature levels that the
market now resides, we would treat this rally with
extreme caution and doubt its durability.
The chart at the bottom of the page, we first showed in
our August 2015 newsletter, but is updated till last
month and is well worth showing again. This excellent
chart is by Doug Short at Advisor Perspectives, the
quality of which as you can see is first rate.
Investor negative credit balances, which logically will
always be at their worst (or most) at market peaks, when
optimism is generally at its highest (what could possibly
go wrong!), has been reducing since the first half of last
year. The extent of these balances is eye poppingly
higher than at the tech bubble peak in 2000 and the
market top in 2007. Only when these balances return to
positive levels, i.e. go green, will the market reach a
bottom and that is clearly a very long way off.
CHART OF NYSE MARGIN DEBT & THE S&P
500 (ADJUSTED TO PRESENT DAY DOLLARS)
Margin debt on the NYSE reached a
record US$500 billion in 2015 but has
now turned sharply lower as in 2000 and
2007. The S&P 500 has also begun to turn
down, though the latest rally is not shown
on this chart which is to the end of
February and is again by Doug Short at
Advisor Perspectives.
Note also, that time wise we appear to be
due for another recession with the current
“economic expansion” if you could call it
that having run now for a historically long
period, now approaching seven years. The
signs are that we are very close to the
onset of the next one, which will take both
margin debt and the stock market lower in
the years to come.
David Kerly’s - Gold-Silver-Shares-Markets - Unique - Insightful - Independent 04 April 2016
CHART OF THE FT ALL WORLD INDEX
We revisit the chart of the FT All World Index that we
showed in our last newsletter. Then we were looking for
the Index to rally a further 5% to the 260 area. It closed
at 261.09 on Friday and has started to falter. However,
as with US stocks, there may be a bit more upside to
come before a significant reversal is seen. We have
drawn in on the chart a band of resistance in the 265 to
270 area which looks pretty strong and may begin to
reverse the market. The MACD, like the S&P 500
MACD is bearish overall, though is slightly more so,
being further below zero on the scale. The two year head
and shoulders top remains the dominant feature and the
right shoulder at 275 would need be cleared on a weekly
close basis to lessen the risk of a return to weakness.
US$ GOLD versus FT ALL WORLD INDEX
Gold demonstrated a major bullish reversal earlier this
year against the FT All World Index by breaking the
five year downtrend as well as a triggering a golden
crossover buy signal from medium and longer term
moving averages. This led to a test and subsequent
pullback from major pivotal resistance at the 5.25 level,
the July 2009 low and the March 2014 high. The MACD
confirming the bullish move by entering further into the
bullish half of its scale, though a near term sell signal is
almost upon us. That ties in with the need for gold itself
to correct further and a possible further near term bear
market rally in World stocks. We look for a higher low
to form on the relative chart once the respective
component moves have concluded. The key event to
watch for later will be a break over the key 5.25 level,
for that should trigger the next big upside move for gold
and corresponding fresh decline for world stock
markets.
HUI INDEX versus THE FT ALL WORLD
STOCK INDEX
Similarly, unhedged gold shares as measured by the
HUI Index broke their five year downtrend, but several
months earlier. The percentage gain was of course far
greater than for gold in absolute terms and also relative
to gold against the FT All World Index. The MACD
has unsurprisingly also gone positive and entered the
bullish half of the scale but, once again, a corrective
pullback is called for. The moving averages, while both
having turned up, are yet to see a golden crossover.
David Kerly’s - Gold-Silver-Shares-Markets - Unique - Insightful - Independent 04 April 2016
In absolute terms and relative to world stock markets,
gold shares have a long way to recover, and on a relative
basis their next major target is the pivotal resistance line
which sits at 0.98, or thereabouts. Such a move from the
current level of 0.69 (though we’d expect the next major
upswing to begin lower down, say around 0.55) would
give upside outperformance of 42%.
WHY HAS DONALD TRUMP BEEN SURGING
AHEAD IN THE POLLS?
Well could it just be that working class America is fed
up to the back teeth with the raw deal they have been
getting for decades from politicians and paying for
years of Wall Street mistakes, particularly 2008,
bankers salary cheques and bonuses to the cost of their
own meagre existence in many cases. Lord Adair
Turner, the former head of the Financial Services
Authority thinks that the advance of extreme politics in
the US and Europe is an “inevitable consequence” of a
breakdown in capitalism.
It’s certainly been looking a bit shaky recently,
particularly with plunges in world stock markets during
January and February, including banking stocks,
notably Deutsche Bank in Germany, and terrorist
attacks in Europe. He also pointed out that wage earners
on the lower end of the scale "have seen no increase in
the US for 25-30 years" and in the Eurozone wages "are
significantly below where they were" before the 2008
financial crisis. The political gains for far-right parties
in Europe, and Donald Trump's surprise success in the
Republican primaries, spring from voter anger on being
overlooked by the free-market.
Trump is controversial, but a lot of voters want change
from corrupt politicians and being short-changed for
years. However, they may be jumping out of the frying
pan and into a different sort of fire. Trump wants to see
America get back on its feet, but it sounds like he’d
bring in a whole raft of protectionist tariffs to goods
made outside the US that are sold in America. If he wins
the Republican nomination global markets are likely to panic and take a massive nosedive.
NINE YEAR CHART OF THE FTSE 100 INDEX
We have covered the FTSE100 Index several times in
our newsletters in recent months and for good reason.
As is clear from the chart, the uptrend from the 2009
low gave way firstly in 2014, then more spectacularly
in the autumn of last year. Between those two down
moves a classic false upward break above the key 6900
resistance took place which set up the subsequent
declines, so far back to the 5500 area for a drop of well over 20%, the markets definition of a bear market.
That false upward break is one of the key drivers for the
market decline, which has a lot further to go because of
it. A false break is a major emotional shift for market
participants caught the wrong side of it and will more
times than not trigger a move to the opposite side of the
trading range that the market was in when the false
break occurred. So, the 6100 area was the approximate
bottom of the range that was in force when the false break occurred, and that target was met and exceeded.
There is now another, but much larger false upward
break that occurred between 2013 and late 2015. A
massive three year top pattern. The lower side of the
range that preceded it sits around 4800, the 2010 and
2011 lows. That is the next big downside target, though
before it are the 50% and 61.8% retracement levels of
David Kerly’s - Gold-Silver-Shares-Markets - Unique - Insightful - Independent 04 April 2016
5290 and 4860, respectively. Between those two sits the
5000 round number level which will begin to be touted
by market commentators as that level is approached. As
if those were not enough, there is another false upside
break downside target of 3278-3460, the 2003 and 2009
lows. This was the bottom of a 20 year trading range,
the high point before the false upward break (which
reached 7122) being the end 1999 high of 6950. That
last one will most likely take some considerable time,
but potentially at some point during 2017.
NEXT - A STYLE INNOVATOR AND MARKET
FAVOURITE FOR SO LONG, BUT THE
CRACKS ARE STARTING TO SHOW
All good things must come to an end and so it seems
with Next. The company almost went bust in 1991 but
a new head, David Jones who joined a year or so before
had other ideas. Grattan its successful mail order
business was sold to Otto Versand of Germany which
wiped out its massive debts and left it with all of its
many stores, but which were all owned by the company.
It launched its own mail order business, Next Directory,
which went from strength to strength as did the high
street stores. However, nearly 25 years on and problems
began to surface last year. Though sales and profits are
still growing they are slowing down. Also, accounting
irregularities, though dismissed by the company have,
along with a slowdown, clearly rattled the market and
the chart of the share price unfortunately looks to be
paving the way.
There are five clear Elliott waves since the 2009 low
and these are labelled on the chart. The false upward
break came at the end of the fifth which set up the return
to prior trading range lows, firstly at 6750p, then around
5800p, near the bottom of wave 4, which has recently
been taken out. The four bear
divergence warnings from the RSI
would have alerted investors to the
danger, as would the fact that the final
fifth wave had been completed, of a
potential price decline and the signal to get out.
While we note that the shares are
oversold and approaching a potential
bounce point – the 38.2% level at
5209p, the fact that the MACD has
plunged so far into the bearish half of
the scale warns that a major downtrend
has just begun. We would use rallies to
get out if one is not already. We doubt
whether 7000p, or possibly 6500p, will
be seen again.
OIL POSTED THE BOTTOM IN
FEBRUARY AT US$26.05
We had said in our January newsletter
that oil prices would rebound strongly.
Well we were right about that, oil rose
by 60% from the February low of
US$26.05. However, we were 7-8
weeks too early in that call because we
thought the price had bottomed at US$34.25 in December.
There were five Elliott waves down
from the August 2014 high of
US$112.24 at that point but we misread
the extent that this final fifth wave
would travel. Also, very significant
bullish divergence on both the RSI and
MACD indicators was evident at the December low.
The low points for these indicators had occurred at the
end of wave three back in January 2015 when oil
reached US$43.56. So, a year of bull divergence before
the bottom was reached. Anyway, now the recovery is
underway, albeit having recently taken a breather near
US$42. We note the recent correlation of the oil price
with stock markets, but suspect that this relationship is
only temporary as the main direction of trend for the
latter has shifted to the downside, despite the recent
David Kerly’s - Gold-Silver-Shares-Markets - Unique - Insightful - Independent 04 April 2016
rallies, whereas for oil it has shifted to the upside. We
should see oil push higher again after dipping further
back, possibly to between US$32.00 and US$34.00,
close to 50% and 61.8% retracements of the recent 5-6
week advance. Upside targets are the October and May 2015 highs at US$50.92 and US$62.58, respectively.
CHART OF CRUDE OIL
FURTHER ON THE UK HOUSING MARKET
BUBBLE
From Cornwall The Observer:
Like many idyllic spots, St Ives is facing the gradual
decline of its community as local people are priced out
of the property market by outsiders buying up second
homes. With the situation approaching what many
residents see as breaking point, they have decided to do
something about it.
Next month St Ives will vote in a referendum to approve
a neighbourhood plan. If the plan is approved, there will
be a legal requirement to ensure that all new housing in
the area is for principal residence, with the owners’
status checked against the electoral roll and doctors’
registers. While out-of-towners will still be able to buy
second-hand houses as second homes or holiday lets, all
newly built property will be reserved exclusively for the
locals.
“When we were looking to buy we couldn’t afford St
Ives,” says Melanie Uys, who runs an art gallery in the
town. “There are no family homes at affordable prices.
My friends who rent are always in a vulnerable position
because landlords can bring in twice as much money for
the summer months, so they only get very short-term
lets. It’s steadily got worse. St Ives looks so perfect, but scratch the surface and it’s got a lot of problems.”
Andrew Mitchell a local councillor, says if you’ve got
the money to buy two houses, then I’ve got no problem
with that, but there has to be a position to say enough is
enough. The second-home market creates misery for
people in St Ives by pushing up house prices artificially.
It’s a ‘financial cleansing’ of the local people. My
concern is that in another generation St Ives will only
be open for the summer because the local population
will be living somewhere else.”
Cornwall County Council has been so alarmed at the
effects of second-home ownership that it has sought a
change in regulations to oblige anyone wishing to turn
their property into a second home or holiday let to apply for planning permission.
Finally, seen in the Sunday Telegraph this weekend:
The 4th best-selling book in the 4 weeks to 26 March
was – Ambition: Why it’s good to want more and
how to get it by Rachel Bridge with 2,452 copies sold.
…and the 3rd best-selling book was – The Big Short by
Michael Lewis with 5,167 copies sold.
So more than twice the number of people want
to go short than get long. Ironic really isn’t it!
And for those of you who were wondering…the
best-selling book was….. The Chimp paradox
by Steve Peters with 6,030 copies sold.
DISCLAIMER
Gold-Silver-Shares-Markets expresses our views and
opinions on precious metals, shares and other financial
markets and are subject to change without notice. Trading or
investing in stocks or any other financial market carries a high
degree of risk and it is possible that an investor may lose part
or all of their investment. The information in this newsletter
is expressed in good faith, but is not guaranteed. A market
service that is completely accurate100% of the time does not
exist. Please ask your broker or investment advisor to explain
the risks involved before making any trading and investing
decisions.