NFTRH 454 (Online Edition)

Rather than go through the clunkiness of writing on Word and creating a PDF file I thought I’d pop this week’s abbreviated NFTRH 454 right onto the website as a post.

US Stock Market

The rotation theme is alive and well as small caps not only look relatively stable, but actually are bullish biased. This while SPX and Dow, with their diverse sectors, drift and the star performers of the 1st 5 months of the year, Semi and Tech, are now correcting below their 50 day moving averages.

It is important to note that these indexes had gotten too frothy and as of now, this would be a healthy correction. If that is the case this could prove to be an A-B-C correction within the up trends.

spx

Here is a weekly (log scale) view of NDX for example. All those weeks above the channel had represented excessive momentum. If the correction continues into July I’d expect a minimum downside projection to the 5400s to fill the April gap up. That is where things started to get way too jumpy (if I recall correctly our original target was 5500).

But to give you a view of how far we are away from being able to call a bear market NDX could drop all the way to 4800 and break the lower channel line (in a mirror of this spring’s upside breakout) and still be at major support to an ongoing bull market.

ndx

The linear scale (which I use most often) gives a different view. Talk about excess. A mild correction would bring NDX to the 38% Fib at 5400. That could be an opportunity to buy back big tech companies (FANGs or otherwise) for another trade. Recall for example that I’ve got AAPL on radar for around 130.

ndx

Moving on, let’s take a look at some sectors using our usual daily charts.

Financials made a good move last week after the bond market finally cracked. Our theme has all along been that such a breakdown in bonds (rise in yields) could benefit the Financials, which had been in consolidation for most of 2017. All items below look constructive.

xlf

Bonds

Let’s slip the bond segment in here for reference to the above. While there has been little technical damage to Treasury bonds, the still-bearish (contrarian) Sentiment and CoT data (as of June 27) imply that the downside can continue (or begin in earnest after another leg up), which means the bounce in yields can continue.

bonds

Here is what the yield curve and 10yr yield did last week. That was a big bounce in the curve and some day when such a bounce goes on to change the trend we’d be on high alert for changes across many markets. For now, the proximity below the 50 day average shows that the curve continues to be in an intermediate downtrend. The fact that the curve and the 10yr yield each popped implies that we had a little blip upward in inflationary spirits last week.

yield curve

And on the same message we find the TIP/IEF ratio. If these things start to break trend we’d need to reconsider commodities and various inflation trades for a more positive view. But thus far, it’s a bounce and that is all it is.

tip ief

Back on US Stocks…

yields vs. stock sectors

Per our Citi data graphic that shows sector correlations with interest rates, Healthcare and BioPharma are not well correlated to rising interest rates. So it is not surprising that this overbought sector got popped a bit on the jump in yields last week. XLV remains in a nice uptrend however, even if it were to drop to the SMA 50 (76.49 and rising). Note that that area is also where the big, blue sky breakout occurred so a test of the SMA 50 could be a good buying opportunity, or in my case a re-buying opportunity.

xlv

Medical Devices & Equipment ambles along its bullish way. Interesting looking items include TMO and SYK.

ihi

medical devices

Materials are usually positively correlated with rising yields, but not last week. Of course, it is always dangerous to be thinking 1-for-1 in real time. Sometimes divergences build and present opportunities. In other words, if yields were to breakout to the upside and Materials fail to rise, that could be a positive divergence for the sector. As another example, if yields were to drop but BioPharama continued to correct/consolidate, it would be a positive divergence for that sector.

xlb

Industrials are consolidating within the bullish trend.

xli

Market Internals

Let’s now take a ‘vs. SPY’ look at some US sectors (daily chart) and global markets (weekly chart).

Financials look good in getting above both moving averages. Energy continues its downtrend. Healthcare consolidates its recent jump to a bullish state. Industrials continue a sideways bullish bias and the Consumer items are not actionable.

sectors vs. spy

I am disappointed in Europe’s recent ‘vs. SPX’ performance, but it retains its ‘higher highs, higher lows’ stance and so remains in a year-old uptrend. I am long Europe, which has not worked so far and I am short EMs, which has also not worked so far. We’ve noted that EMs are constructive vs. SPY and simply ‘at target’ nominally, with no bearish technicals. I shorted EM as part of a pro-USD stance, which also has not (yet) come to fruition.

global

Commodities

Let’s take a look at some daily views.

CRB is on another of those hard bounces after getting deeply oversold. Before getting at all bullish here people should want CRB to at least get above the 50 day averages. It is no coincidence that commodities are bouncing with the inflation expectations graphs above.

crb

Crude oil is bearish but bouncing.

wtic

Copper made good on the bullish look we noted last week. Industrial metals are bouncing as well. If these go bullish it would be a positive signal on the global economy.

copper

The REE fund is making a hint that it wants to do what copper did. If you are an REE-head, you might give it a try with a stop loss below the June low.

remx

The uranium fund is pinned below the declining SMA 50 but has the look of a flag that could see another pop. The 1st resistance point is the sideways-going SMA 200 (currently 13.84), which halted the last bounce. If this gets above 14 be on alert for a new, extended U trade.

ura

Precious Metals

We have reviewed gold vs. commodities (mixed), stocks (still bearish) and bonds (now bearish-biased) lately, but not gold vs. currencies. That is because currencies are so unstable (subject to volatility created by jawboning and/or absurd policy actions by US Fed, ECB, BOJ, etc. officials) that there often seems little point in chasing this around as long as confidence in these macro engineers remains intact.

But for what it’s worth gold in USD and Yen is neutral and bearish vs. everybody else. That does not look like a sign of stress on the macro. We’ll take a look at the British Pound in the Currencies segment. It could be an interesting play.

gold vs. currencies

The daily nominal view shows no items looking good, and most items looking pretty bad below the SMA 50.

precious metals

The weekly is really no better.

precious metals

I continue to hold a few because either their charts have told me to hang on and get roughed up as needed (with periodic hedging) or they have been beaten to a pulp already (hello KLDX). Had I not done this, KL.TO for example would not have burped up what is now a 50% (+/-) profit. But the sector is at downside risk based on the broad indexes and ETFs.

However… we have noted the positive divergence of stocks like KL.TO, RGLD, FNV, KGC, SBB.TO, etc. That divergence seems to be smart or least early money buying either quality or perceived forward value.

We have also viewed a monthly chart of HUI that says while there is plenty of downside potential in any month, the picture is intact for a real rally out ahead. Huey did close June at a slight negative to the Bollinger mid-point, and this could be a warning of further downside to come in July.

hui

For an idea of how such downside could present, take a look at December 2016 on the daily. The index took a harsh drop and a whipsaw reversal. The dumb monthly chart above filtered out the drama and remained intact. I’ve been waiting for the monthly Stochastic RSI to get as oversold as on previous occasions before considering a bullish view. It’s creeping closer to that oversold reading.

hui

So, the monthly view is like a big, dumb view that is stable. It is and has been a minor positive in the background. Let’s finish up with some other positives we’ve been noting lately. First, the pretty picture of the HUI/Gold ratio’s 1999-2001 analog.

hui/gold ratio

The other is the still-improving (as of June 27) Commitments of Traders situations for both gold and silver.

gold cot

silver cot

The bottom line on the precious metals is that short of a break upward above the daily SMA 200 (on HUI) and then the June, April and February highs I’d like to see a real breakdown to relieve the pressure of this aimless, bear-biased meandering to wash out the cling-ons. At the same time the CoT data would likely wrap up their trends to a bullish alignment and sentiment would be pervasively bearish. That could be a big buying opportunity… for an extended trade if not a new bull market.

Currencies

Let’s just note that my bullish view on the US dollar index is looking silly as there is no daily technical milestone saying ‘be bullish’. USD/Yen is however, looking constructive. Uncle Buck is in free-fall vs. the others.

currencies

The weekly shows that it is now time to find support or the pro-USD view will be proven wrong. Is USD/Yen leading something?

currencies

I will plan to replace USD/CHF with USD vs. the British Pound on the above charts going forward. I don’t think the Swiss Franc has the (sound currency) indicator value it once had, while the British Pound has had a lot of fundamental inputs over the last year.

Here is XBP’s daily chart showing a bottoming pattern. The pattern targets the 133 area, at which point it would be getting overbought.

british pound

The weekly chart has gone MACD and RSI positive and shows that a pullback to the 128s would be a buying opportunity in XPB. Alternatively, a break above 134 sets an uptrend to a new bull cycle.

british pound

Market Sentiment

Smart & Dumb money are still clustered together with Dumb having been smarter since the US election. Smart is playing catch up and it is still valid to wonder whether the two have switched roles in the post-election environment. Trump euphoria did launch the dumb money and thus far, the market has maintained its Trump euphoria.

The market’s vulnerability would be in either getting its timing wrong (as policy gets hammered out through congress) or worse, getting its expectations of eventual policy wrong. The Fed is, after all, in (monetary) policy withdrawal mode.

sentiment

Short-term sentiment extremes are not threatening at this time. We had noted it was elevated last week, but the resumed technology volatility addressed that.

sentiment extremes

The general risk backdrop… mostly vanilla with Sentimentrader’s data supporting our bearish bond view.

sentiment

Wrap Up

A supposedly abbreviated report is already longer than I would imagine the normal lengths of some publications are. So I am going to clip it here and simply wish my American friends a happy 4th of July and everyone a good week.

I would be interested to know if you have any objection to reports either being done in this format on occasion or even more routinely, as opposed to the PDF format. No real plans for it yet, just thinking aloud…