[6:12 pm ET Saturday] I am off to PDAC 2013 in a few hours, so this WIR is early.
The PDAC website says:
PDAC International Convention, Trade Show & Investors Exchange is the world’s leading Convention for people, companies and organizations in, or connected with, mineral exploration… The four-day annual Convention held in Toronto, Canada has grown in size, stature and influence since it began in 1932 and today is the event of choice for the world’s mineral industry. In addition to meeting over 1,000 exhibitors, 30,369 attendees from 125 countries, it allows you the opportunity to attend technical sessions, short courses as well as social and networking events… PDAC 2013 – Where the world’s mineral industry meets!
Since PDAC started in 1932, I’ve missed a few… but not many.
I jest, a bit.
I recall the days when we had fewer than 1000 attendees (including exhibitors) and the out-of-towners probably numbered 125, mostly from the Northern Ontario hinterlands of Timmins and Kirkland Lake. Today there will be people from over 125 countries, many of them exhibiting for their countries.
I happen to think I’m pretty good at world geography but a year or two ago I was in the elevator at the tiny hotel Pat and I were staying at and the person beside me, seeing we both were wearing convention badges, introduced himself as Minister of Mines of a country I had heard of but didn’t know for sure on which continent it is. Now, that wasn’t because I had consumed too much party punch, although that’s been known to happen at these things. I thought to myself how small the world has become.
So next week I look forward to writing up a few noteworthy items I come across at PDAC. I’m sure I’ll see many. I may even see some of you there as I usually do although in a crowd of over 30,000 you’ll have to call me on my mobile to ensure we connect.
http://www.pdac.ca/pdac/conv/index.aspx
Today I’ll have to be quick to review the past week in the market, following my statement in the previous two WIR’s: “I could say that perhaps the recent period of weakness is over, but there is nothing in the data that compels me to opine that – only to recommend extra caution.”
Once again there has been very little movement in equity markets along with US Dollar and US Bond strength and commodity price weakness.
As to the broad market, today the S&P 500 is at 1518.20, up +0.17% W/W from 1515.60 this week and down a tad from 1519.79 where the S&P 500 had closed two weeks ago, but almost bang on the 1517.93 close of three weeks ago.
In the equity market, there is no discernable leadership among sectors or individual stocks.
The Monthly, Weekly and Daily RSI-7 for the S&P 500 are 76.4, 74.8 and 56.5 vs (i) 76.0. 73.9. and 52.6, (ii) 76.5, 77.5 and 65.9, and (iii) 76.3, 77.1 and 67.2 in the prior three weeks. Clearly, the prices are side-tracking, which is (a) not necessarily good or bad, and (b) not likely to continue for long.
Two weeks ago in this space, amid all the stories that prices were collapsing or about to collapse, I opined:
These indicator numbers are very high, but they could go higher or the pressure could be eased should equity prices side-track for a week or so. The third possibility is that prices could start falling, but I don’t think the market is ready for a Bear run.
Two weeks ago, “there were five rising and five falling sectors, but … the moves were relatively small.” One week ago, “there were three rising sectors and seven that dropped”. This week in the US market, it was back to five rising and five falling sectors. Again on Friday there was more strength than during the rest of the week.
Hewlett-Packard (HPQ +5.0% W/W plus +12.3% on the prior Friday) was strong again, and is now up +34.2% YTD. [do you recall my recent opinion that HPQ was the likeliest double in the Dow 30 this year?]. For individual Dow 30 stock performances, there were 18 up, one flat and 11 down this week. The gains and losses were relatively small.
Again, I say: “We remain bullish but are certainly cautious.” We now hold 41% cash in the Growth portfolios and 31% cash in the All-Weather portfolios. In All-Weather we are holding zero or almost zero in Energy, Basic Materials and Financials. These are typical market leaders during Bull phases in the broad market, and we don’t see enough in the way of leadership to cause us to put more capital at risk.
Internationally, there were eight of the eleven equity markets I follow that lifted this week. Two were losers (India -2.1% W/W) and France (-0.2%), while Mexico was flat. The biggest winner was China with a gain of +2.0%, but China a week ago lost -4.9%. Hong Kong gained +0.4% but a week ago dropped -2.8%, and Brazil gained +0.3% but a week ago dropped -2.1%.
As I wrote in this space a week ago: “Those markets, in my view, are the sites where investors are most naturally nervous. One might say ‘cautious’ but I think ‘naturally nervous’ is a more accurate description.”
Judging from the anxiety shown on the Daily Blog, it looks like a matter of “Hurry up and wait!”
Despite the high levels of the equity indexes, these are tough times for traders and for the people, not just in one country, but all over the world.
Talk on the blog of suicide is unnerving to me because a few years ago, within a day of sending me a personal message of despair, one of you did commit suicide, which I only discovered after his distraught family checked his computer and found the dialogue with me.
Although depression is quite common to those who make financial and investment decisions, I have never tried to understand the subject and I can assure you I have no expertise in personal counseling in that regard. I have enough trouble trying to keep myself well balanced. One thing I have learned over the years is that the bigger the hill you wish to climb, the bigger the valley ahead, so you need to prepare for a long and sometimes challenging journey.
Others here have shown empathy to the individual who raised the topic and some have given some good ideas, for which I thank you all.
I have often thought that every family practice doctor has a better handle on the economy and the state of the capital markets than the US Congress or White House. Before he retired my family doctor would say to me he knew the economic and market cycles by the length of time his patients wanted to just talk, and by the number of prescriptions he was writing.
So, for a more accurate reading on the state of the union, I’m recommending that market analysts from one of the Humungous Bank & Broker units initiate a monthly survey of family practice doctors’ opinions. 10,000 doctors being paid $25/month to complete an electronic survey would be a pittance of cost to produce a quality information product that the Dept of Commerce couldn’t match.
In the currency war that the G20 refuses to acknowledge, this week the Euro ($XEU -1.31% W/W) plunged again, and the US Dollar ($USD +1.02%) soared again.
“The market speaks the truth. The dumb G20 Communiqué was a bad joke.”
Now to the charts that I keep in front of you each WIR.
As you know, I recommend studying certain key ratio charts in capital markets to assess “the weight of the evidence” before you firmly establish a mind-set on Bull or Bear. Most of these indicators have been bullish recently.
For these studies I look at the ratio charts of:
•US Bonds ($USB) vs the US S&P 500 ($SPX)
•Global Dow Index ($GDOW) vs US 20-year Treasury Bonds (TLT)
•MSCI World Equity ex-US ($MSWORLD) vs the US S&P 500 ($SPX)
•US small cap Index ($RUT) vs the US large cap S&P 500 ($SPX)
•Canada (EWC, in USD) vs US S&P 500 (SPY)
•US Industrials (XLI) vs S&P 500 (SPY)
•Consumer Discretionary (XLY) vs Consumer Staples (XLP)
•Euro ($XEU) vs US Dollar ($USD)
•US Treasury Inflation Protected Bonds (TIP) vs US 20-yr Treasury Bonds (TLT)
•Goldminers (GDX) vs Gold Bullion ($GOLD)
•Silver Bullion ($SILVER) vs Gold Bullion ($GOLD)
•Junior Gold Miners (GDXJ) vs Senior Gold Miners (GDX)
•Oil Services Companies ($OSX) vs Integrated Oil companies ($XOI)
•Semi-Conductor Tech Companies (SMH) vs Major Tech Companies (XLK)
With these ratio charts, the good thing is that you are looking at the market speak, not the media. You can see for yourself the unfolding of relationships – i.e., what is actually happening in the market today, and from there you can study the reasons for it, such as the corporate or industry reports, the commodity prices, interest and dividend yields, impact of regulation and government policy, and so forth. Not all charts will give you a bullish or bearish picture, at least most of the time, but you take it all under consideration and go from there. There are different time frames – short, intermediate and long – and you are trying to time your entry or exit with the simultaneous reversal of all three. Also, if the big picture gets too extreme one way or the other, the trend is not likely to last in that direction and you ought to be looking for signs of a reversal.
A ratio chart, which is simply the first data series divided by the second, will show you clearly what is happening in terms of market drivers over the time period I am studying. It could be Daily, Weekly or Monthly data, but until there is a market cycle reversal that may be forthcoming I’ll be using a Daily data series.
If the line is rising, the first data series is strengthening. The S&P 500 by itself is in the solid thin orange line in the background. In the case of a Bull phase for equities, which some are calling the ‘risk on trade’, the line should be rising for the particular studies that follow, and the line should be above the 8-month Exponential Moving Average.
The following short-term Daily data series charts show a definite change to ‘risk on’ in mid-November – a point in time when I noted that the pundits were over-the-top with their negative doom-and-gloom forecasts:
1. Daily US S&P 500 ($SPX) vs Daily US Bonds ($USB)—conclusion: A definte change from Bullish to Neutral with a Bearish tone.
2. Daily MSCI World Equity ex-US ($MSWORLD) vs US 20-year Treasury Bond (TLT)—conclusion: Now has moved from modestly Bearish to clearly Bearish.
3. Daily MSCI World Equity ex-US ($MSWORLD) vs US S&P 500 ($SPX)—conclusion: The Daily chart remains Bearish. The Europeans must start buying stocks for this indicator to revert to the Bull. However, CAC and the Euro were soft this week, and must strengthen before this indicator will revert to Bullish.
4. Daily US small cap Index ($RUT) vs the US large cap S&P 500 ($SPX)—conclusion: Neutral.
5. Daily Canada (EWC, in USD) vs US S&P 500 (SPY) —conclusion: Still sharply Bearish. The Cdn Dollar dropped a further -0.51% this week.
6. Daily US Industrials (XLI) vs S&P 500 (SPY)—conclusion: Neutral with a Bearish tone this week.
7. Daily Consumer Discretionary (XLY) vs Consumer Staples (XLP)—conclusion: From Neutral two weeks ago to Bearish, and now back to Neutral.
8.Daily Euro ($XEU) vs US Dollar ($USD)—conclusion: Bearish to the point of being possibly too much. A week ago I thought there might be a reversal this week, but the bearishness persisted. And it could continue.
9. Daily US Treasury Inflation Protected Bonds (TIP) vs US 20-yr Treasuries (TLT)—conclusion: From Neutral to modestly Bearish a week ago, and now more Bearish.
10. Daily Goldminers (GDX) vs Gold Bullion ($GOLD)—conclusion: This chart continues to be extremely Bearish. Every strengthening move in the Goldminers in recent months has been thwarted by sellers. This week for the second week in a row there was a strong US Dollar to explain it, but other results in past weeks leads some to believe that a major gold trading hedge fund is going under, causing forced selling. I don’t think anybody knows or at least is saying much. Today is the start of PDAC, so I’ll be asking around.
11. Daily Silver Bullion ($SILVER) vs Gold Bullion ($GOLD)—conclusion: The Daily data chart remains clearly Bearish, but again looks like it may be ready to reverse.
12. Daily Junior Gold Miners (GDXJ) vs Senior Gold Miners (GDX)—conclusion: Clearly Bearish, and showing no signs it may be ready to reverse.
13. Daily Oil Services Companies ($OSX) vs Integrated Oil companies ($XOI)—conclusion: Bearish. Rejected opportunity to go Bullish.
14. Daily Semi-Conductor Tech Companies (SMH) vs Major Tech Companies (XLK)—conclusion: From modestly Bullish, now is Neutral.
Using the ratio chart data this week, I sum up the Bull:Bear picture as having gone from 4 Bullish, 9 Bearish and 1 Neutral to zero Bullish, 9 Bearish and 5 Neutral.
Clearly these Bull-Bear technical indicators are signaling weakness, which the broad market indexes are not showing. I continue to think the big picture is due to (i) consolidation of the strong Bull run from mid-Nov to early Feb, and (ii) wariness over currency relationships and how rapid exchange rate changes are causing havoc among international traders in goods and services. Add to that the recent strength in the US Dollar and US Bonds, and it is obviously a market that is fighting an ebb tide.
As I opined a week ago: “I don’t think it’s fair to conclude that the global equity market has gone Bearish, but there are clearly weak spots now. Caution is urged.”
We are doing just that as in our Growth portfolios we are over 41% in cash and in the accounts where we balance equities with bonds, we are presently at over 31% in cash and over 17% in bonds.
Now it’s time to look at what happened this week with the US economic reports, which, this week, were plentiful and the data was quite mixed.
For an objective presentation, here is the US summary and the headlines from the Econoday analysts:
The bottom line: There was plenty of economic news this past week. Some numbers were volatile due to special factors, including personal income. But after averaging the volatile series and including other news, the economy is making gradual progress—especially in housing. And manufacturing is regaining strength. It still is not robust, but the recovery is gaining traction. The big question is whether a sequestration fix will happen soon enough to keep it that way.
For this week, the econ headlines were as follows:
•Fed chairman’s testimony soothes markets
•Q4 GDP growth turns positive but not as much as expected
•Personal income fell on fiscal cliff effects
•Motor vehicle sales in February hold strong
•Consumer confidence and sentiment unexpectedly go up
•New home sales unexpectedly jump in January
•Pending home sales jump in January
•FHFA and Case-Shiller home prices rise further in December
•New durables orders swing back down in January
•Markit and ISM manufacturing readings still positive
… Looking Ahead: Week of March 4 through 8 — The highlight is the February numbers for the employment situation on Friday. This will give the Fed an update on progress on unemployment—one of its new goalposts for guidance on rates. Earlier in the week, the Beige Book will hint on whether the Fed might move up unwinding easy policy.
From recent weeks, the econ headlines were as follows:
•FOMC minutes reflect debate on unwinding
•Housing starts ease in January but permits gain
•Existing home sales slow on limited supply
•Markit flash PMI for Feb. at 55.2 vs 55.8 for the final Jan. reading
•Philly Fed contracts faster in February
•CPI inflation soft at headline but may be temporary
•PPI inflation rebounds in January on food prices
•Leading indicators slow but stay positive in January
•Retail sales slow in January after strong November & December
•Consumer sentiment bounces back—somewhat
•Industrial production slips in January after two strong months
•Empire State manufacturing rebounds in February
•Business inventories remain lean in December
•Import prices point to higher headline CPI for January
•Trade gap narrows sharply in December, reversing November
•ISM non-manufacturing slips but still moderately positive
•Productivity plunges while labor costs spike in Q4
•Consumer credit continues moderately strong growth
Because of the track-record of independence and objectivity, I encourage you to read the Econoday reports on the US economy. If we had more time in a day, we’d also be looking at the econ data for the rest of the world – at least more of it.
As for our studies this week, we’ll first look at the detailed economic data for the week that passed and the one ahead. Then we’ll get into the market prices, and the trends and cycles of Currencies, Bonds, Equities, Commodities and Precious Metals.
One final point before we get into our weekly study of markets, when it comes to trading equities I believe that the term “stock-picking” is inadequate and misleading. Instead, since a company is not a stock – i.e., a stock is just a price — you need to be “company picking” and “market timing”. I cannot stress that more.
While pure traders might disagree, I strongly believe that investor success is a consequence of asset allocation and portfolio management as much or more than simply trading execution.
Global Economics Review
Global Report from Econoday Chief Economist Anne Picker:
Focus globally last week was on appointment of new Bank of Japan governor and the Italian election — and the resulting political gridlock. Fed Chairman Ben Bernanke’s Congressional testimony also received rapt attention from investors. The Chairman relieved investors’ fears saying that QE was not going to end soon. ECB President Mario Draghi also reassured financial markets that stimulus, thanks to lower inflation, would not end soon. It was astonishing to me that markets paid no attention to U.S. fiscal gridlock given the complete absence of visible progress. A heavy dose of global economic data also gave investors something to think about.
Econoday’s Global Perspective is written by chief economist Anne Picker.