The Weekly Wrap – Economic Data and COVID-19 Continued to Girate the Markets

The Stats

It was a relatively quiet week on the economic calendar, in the week ending 10th July.

A total of just 30 stats were monitored, following the 74 stats from the week prior.

Of the 30 stats, 20 came in ahead forecasts, with 9 economic indicators coming up short of forecast. 1 stats were in line with forecasts in the week.

Looking at the numbers, 24 of the stats reflected an upward trend from previous figures. Of the remaining 6, all 6 stats reflected a deterioration from previous.

For the Greenback, it was a 3rd consecutive week in the red. In the week ending 10th July, the Dollar Spot Index fell by 0.54% to 96.652. In the week prior, the Dollar had fallen by 0.27%.

COVID-19 updates drew greater focus, with a lighter economic calendar unable to distract the markets.

For the U.S, the daily COVID-19 numbers continued to spike to fresh highs in the week. At the end of the week, news of progress towards a successful treatment drug delivered riskier assets with support, however.

Looking at the latest coronavirus numbers

At the time of writing, the total number of coronavirus cases stood at 12,604,895 for Friday, rising from last Friday’s 11,175,074 total cases. Week-on-week (Saturday thru Friday), the total number of cases was up by 1,429,821 on a global basis. This was higher than the previous week’s increase of 1,290,881 in new cases.

In the U.S, the total rose by 399,290 to 3,285,550. In the week prior, the total number of new cases had risen by 338,384. An upward trend was evident throughout the week once more.

Across Germany, Italy, and Spain combined, the total number of new cases increased by 7,406 to bring total infections to 743,215. In the previous week, the total number of new cases had risen by 6,464.

Out of the U.S

It was a relatively quiet week on the economic data front.

Key stats included June’s ISM Non-Manufacturing PMI, May’s JOLT’s job openings, and the weekly jobless claims.

The stats were skewed to the positive, with the U.S non-manufacturing sector expanding in June.

On the labor market front, JOLTs job openings increased from 4.996m to 5.397m. More importantly, the weekly initial jobless claims rose by 1.314m in the week ending 3rd July. This was down from 1.413m in the week prior.

While the stats were positive, COVID-19 updates from the U.S were particularly dire, providing the Greenback with some support.

In the equity markets, the NASDAQ rallied by 4.01%, with the Dow and S&P500 gaining 0.96% and 1.76% respectively.

Out of the UK

It was also a relatively quiet week on the economic calendar. June’s construction PMI, 1st quarter labor productivity, and house prices were in focus.

A sharp rebound in construction sector activity was positive, with the PMI jumping from 28.9 to 55.3.

House prices also bottomed out, with news of an adjustment to stamp duty thresholds also positive for the sector.

Ultimately, however, it was Brexit chatter that provided the Pound with support in the week.

Following the curtailed talks from the previous week, the EU hinted at a willingness to compromise, raising hopes of a deal.

In the week, the Pound rose by 1.11% to $1.2622, following a 1.19% gain in the previous week. The FTSE100 ended the week down by 1.01%, with a 1.73% slide on Thursday delivering the loss.

Out of the Eurozone

It was a relatively busy week economic data front, with Germany in focus.

Germany’s factory orders, industrial production and trade data for May were in focus in the week. On Friday, French and Italian production figures caught the market’s attention.

From Germany, the stats were skewed to the negative based on forecasts. Both factory orders and industrial production rose by less than forecast.

Germany’s trade balance came in ahead of forecasts, which provided some support.

Construction figures from Germany and the Eurozone’s retail sales figures for May had a muted impact in the week.

At the end of the week, industrial production figures from France and Italy delivered a boost.

For the week, the EUR rose by 0.46% to $1.1300, following a 0.26% gain from the previous week.

For the European major indexes, it was a mixed week. The CAC30 fell by 0.73%, while the DAX30 and EuroStoxx600 saw gains of 1.15% and 0.38% respectively.

For the Loonie

It was a relatively busy week on the economic calendar.

Key stats included June’s Ivey PMI, housing data, and the all-important employment figures for June.

The stats were skewed to the positive. The Ivey PMI jumped from 39.1 to 58.2 in June. More impressively, employment jumped by 952,900 following a 289,600 rise in May.

As a result of the jump in hiring, the unemployment rate fell from 13.7% to 12.3%.

While the stats were skewed to the positive, COVID-19 jitters and a negative monthly IEA report weighed.

The Loonie fell by 0.33% to end the week at C$1.3592 against the Greenback. In the week prior, the Loonie had risen by 0.27%.

Elsewhere

It was a relatively bullish week for the Aussie Dollar and the Kiwi Dollar.

In the week ending 10th July, the Aussie Dollar rose by 0.16% to $0.6950, with the Kiwi Dollar rising by 0.66% to $0.6574.

For the Aussie Dollar

It was a particularly quiet week for the Aussie Dollar, with no material stats to provide direction.

While there were no stats, the RBA was in action on Tuesday, standing pat on monetary policy. This was in line with market expectations, limiting any major moves by the Aussie Dollar.

In the week, the government closed down the border between Victoria and New South Wales due to fresh new cases…The latest spread pinned the Aussie Dollar back in the week.

For the Kiwi Dollar

It was also a relatively quiet week on the economic data front.

Key stats were limited to 2nd quarter business confidence figures and June electronic card retail sales figures.

While both were Kiwi Dollar positive, there was nothing impressive to give the Kiwi a major boost.

For the Japanese Yen

It was a quiet week on the data front.

Household spending figures for May delivered more bad news early in the week. Year-on-year, household spending was down by 16.2%, following an 11.1% decline in April.

Month-on-month, spending fell by 0.1%, following a 6.2% slide in April. In contrast to other economies, consumers appeared unwilling to loosen the purse strings, which will be of concern for the government.

While the stats were negative, concerns over COVID-19 delivered the upside for the Yen in the week.

The Japanese Yen rose by 0.54% to end the week at ¥106.93 against the Greenback. In the week prior, the Yen had fallen by 0.27% against the U.S Dollar.

Out of China

It was a quiet week on the economic data front, with June inflation figures in focus.

The stats were skewed to the positive, though ultimately of little influence.

A lack of chatter from Washington and Beijing allowed the markets to move beyond the recent war of words.

Tensions over Hong Kong are unlikely to abate anytime soon, however. Positive sentiment towards an economic rebound in China drove demand for equities in the week.

News had also hit the wires in the early part of the week of a reported priority to foster a “healthy” bull market.

In the week ending 10th July, the Chinese Yuan rose by 0.95% to end the week at CNY6.9994 against the Greenback.

The CSI300 rallied by 7.55% in the week, with the Hang Seng gaining 1.40%.

Why the Sky Isn’t Falling for the S&P 500

Wednesday’s efforts to break above the mid-June highs got thoroughly tested yesterday, and the stock bulls barely managed to stage a comeback. Is that a warning shot fired by the bears, or a show of strength by the bulls? I think I have an answer for that – and it might surprise you. It’s that it’s neither – neither the bears, nor the bulls did really show they were strong yesterday.

As such, I wouldn’t read too much into the rocky nature of yesterday’s S&P 500 move, or into today’s premarket ones for that matter. I would focus on the big picture – on answering whether the stock bull run is intact or not.

Was yesterday’s volume convincing in any way? How is the weekly candlestick shaping up? What about the credit markets? Any strong hints the smallscaps are sending? Does the tech still lead, or not?

These are the facts you’ll see examined in today’s article, and they still lead me to think that the stock uptrend has more chances of renewing itself than not.

The bulls are still slated to prevail in the clashing narratives and facts on the ground:

(…) I say so despite the uptrend in new U.S. Covid-19 cases that has many states stepping back from the reopening, rekindling lockdown speculations. I say so despite the Fed having its foot off the pedal in recent weeks, which makes for more players looking at the exit door.

The put/call ratio slightly declined, the dollar stopped materially rising in the very short run, and emerging markets aren’t exactly breaking down. Central banks are standing ready to act, and money printing remains in our future. The greatest real policy risks I see, concern lockdown miscalculations and new stimulus measures.

Q2 earnings are ahead, and Biden laid out his economic plans, calling for corporate America to pay its fair share in taxes. How would that work for E in the P/E ratio? But jobs coming back (to be seen in declining continuing claims), is a more immediately pressing matter right now.

First things first – let’s dive into yesterday’s S&P 500 performance.

S&P 500 in the Short- and Medium-Run

I’ll start with the daily chart perspective (charts courtesy of http://stockcharts.com ):

The second peek above the horizontal line connecting mid-June tops, didn’t stick, and the S&P 500 bulls had a hard time reversing intraday losses. Yet, prices closed at the resistance.

The volume isn’t sending signals that a particularly fierce battle has been fought – it looks like a rather average one. In other words, back-and-forth trading during a relatively calm week.

The weekly chart in progress highlights the short-term indecision – please visit this free article on my home site so as to see the annotated weekly chart and more. Yet, the swing structure still favors the upswing to continue – today’s close will be telling.

Whenever markets start acting jittery, it pays to remember the daily chart’s big picture:

(…) Recapping the obvious, stocks are on the upswing after the bears just couldn’t break below the 200-day moving average, which means that the momentum is with the bulls now. The daily indicators keep supporting the unfolding upswing, and volume doesn’t raise red flags either.

Until I see credible signs that the markets are getting spooked by corona, botched policy responses or anything else, there is little point in acting as if the sky is falling. It isn’t the case – to be clear, the time to turn really bearish would come, but we’re not there yet.

That was it for the illustration of zoomed out perspectives. It certainly seems premature to call for a market breakdown, given what I am going to write next.

The Credit Markets’ Point of View

Just like the S&P 500 yesterday, high yield corporate bonds (HYG ETF) opened encouragingly. Early gains turned into quite steep losses, but the beaten down bonds caught a bid to close relatively little changed.

On one hand, there wasn’t real willingness to sell more heavy, on the other hand, an upside reversal would call for higher accumulation than we have seen. Thus, we might need to go through some more of the current relatively directionless trading before seeing a decisive move. Still, upswing continuation is the favored eventual outcome here.

Investment grade corporate bonds (LQD ETF) though present a bullish chart. They have reversed Wednesday’s losses, and rose mightily, which bodes well for the HYG ETF down the road.

The caption covers it all, as the LQD:IEI ratio appears ready to lead HYG:SHY higher. Just like I said yesterday, the overreaching dynamic is one of an uptrend, which is why I look for the daily non-confirmation to be resolved with an upside move, in both ratios.

A look at the HYG:SHY chart with the overlaid S&P 500 closing prices reveals that we haven’t really seen a ground-breaking move that would have messed with the recent dynamics of their relationship.

The ratio of high yield corporate bonds to all corporate bonds (PHB:$DJCB) has ticked up yesterday, which isn’t exactly what to expect in any stock slide’s opening chapter. That increases the likelihood of the HYG:SHY upswing to reassert itself.

Credit markets are telling me that the sky isn’t falling – should I see it start to, I’ll change my mind and let you know about it. With the Fed waiting in the wings, the path of least resistance remains higher. And don’t forget about the infrastructure bill or the second stimulus check either.

Market Breadth, Smallcaps and Technology

Market breadth isn’t sending clear signals apart from moving to the bearish territory in the short run. Arguably, that makes its rebound in the coming week likely, as the late-April and late-June experience shows. I don’t see a proof that the market character would have changed.

Yes, Russell 2000 (IWM ETF) underperformance goes on, but I can’t say that smallcaps would be breaking down right now.

Yesterday’s volume doesn’t scream that distribution is here. Actually, its level isn’t out of the ordinary, and given the values seen at previous local bottoms and tops, it favors the Russell 2000 upswing to restart, as the caption says.

If I saw IWM ETF weakening while the individual stock heavyweights in the S&P 500 went higher still, that would be concerning. That’s because once the smallcaps roll over to the downside, the S&P 500 would follow eventually as the generals wouldn’t just prop it up indefinitely. And this isn’t happening.

Technology (XLK ETF) certainly isn’t going to hell in a handbasket. While prices are extended, yesterday’s session showed that buy the dip still rules. In a such a strongly bullish chart, it’s dangerous to be calling tops.

Semiconductors (XSD ETF) certainly hint at the tech upswing having further to go. It’s not merely because of their greater intraday strength yesterday – it’s that just like tech, they are also trading at new 2020 highs.

I don’t see a deterioration in this leading segment that would justify turning bearish on tech. Or on the S&P 500 for that matter.

Summary

Summing up, Thursday’s decline in the S&P 500 isn’t of a world-ending nature. Given the credit market performance, it’s most likely merely a short-term hiccup for the stock bulls to deal with. Amid the market breadth deterioration, there are encouraging signs speaking for an uptick in risk-on appetite. Technology and semiconductors certainly don’t appear to be on their last legs. Once the upswing across the corporate bonds gathers steam again, stocks would get the much needed ally to break above the short-term resistance formed by the mid-June tops.

I encourage you to sign up for our daily newsletter – it’s free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to the premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

For a look at all of today’s economic events, check out our economic calendar.

Thank you.

Monica Kingsley
Stock Trading Strategist
Sunshine Profits: Analysis. Care. Profits.

* * * * *

All essays, research and information found above represent analyses and opinions of Monica Kingsley and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Monica Kingsley and her associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Ms. Kingsley is not a Registered Securities Advisor. By reading Monica Kingsley’s reports you fully agree that she will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Monica Kingsley, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

COVID -19 Daily Cases Surge, Gold Bulls Keeping Pushing the Precious Metal Up

Gold bulls kept the yellow metal up on Friday as global investors turned their attention to safe-haven assets after a surge in the number of daily COVID-19 cases in the world’s biggest economy.

Gold futures kept it gains at 0.48% to trade $1,812 by 10:54 AM GMT, showing a higher probability of ending the week above critical support levels above $1,800 mark.

It should also be noted that as COVID-19 continues its disrupting global economies lately more than 12.2 million cases and 550,000 deaths have been reported globally as of July 10, according to data obtained from Johns Hopkins University.

The diminishing hope for further stimulus measures from global central banks continues to trigger the yellow metal on the upside.

At present levels, the outlook for gold, after surging past the $1,800 per ounce levels, has added leverage to gold buyers in pulling back some of their long positions and increase their momentum on short term profit taking especially as riskier assets like global stocks continue to accelerate in spite of the daily surge in COVID-19 cases.

For gold, longer-term technical suggest a slowing in the price momentum, with positioning pointing to a market very long on gold and implying a short-term pullback is possible, IG Markets analyst Kyle Rodda said.

After a significant psychological breach, above such critical support level, Gold is not that unlikely to break below the $1780 levels short term, as the greenback keeps decelerating and geopolitical risk strengthens around the world.

However many gold investors would not be astonished to see a sudden and deep sell-off of around 5-10% of its present price level.

A reduction in leveraged tactical longs could drive this. The “I’m long but would like to get longer” mantra has never been echoed so loud in the gold market in the 20 years + I have been active.

For a look at all of today’s economic events, check out our economic calendar.

Gold Amid Epidemiological and Economical Update

Sometimes when we observe people on the streets, when we see crowded restaurants and pubs, it seems like the pandemic has ended. But is the global epidemic really over? Not at all. Please look at the chart below. As one can see, the daily number of confirmed cases of COVID-19 in the world is still in an upward trend.

However, in the developed countries the number of daily new cases has declined and stabilized at very low levels, as one can see in the chart below. So, although the pandemic is not over, it has been contained in the West. And remember that global capital markets focus on developments in major economies and financial centers, which are precisely rich countries.

The only possible exception is the U.S., where the number of new cases has also peaked, but it stabilized at not so low level, as the chart below shows. Actually, the number of new cases is at level from the turn of March and April – and it has been even rising recently.

However, people’s reaction is different. So, although the pandemic is not over, the fear is over. At the beginning of the epidemic, people panicked (rightly or not), but after two months in quarantine, they got used to the new epidemiological situation. After all, the virus has not mutated (so far), the healthcare systems have not collapsed (luckily and partially thanks to the adopted containment measures), the mortality rates have not surged, and the world has not ended. People quickly adapted to new circumstances and they learnt how to live with the coronavirus threat.

This is very important as markets are driven not by facts and the number of daily new cases of Covid-19, but by people’s emotions and reactions to these facts and to the epidemiological threat. And now it seems that many people stopped to fret about the coronavirus.

Rightly or not. We mean here that there are some important arguments for not worrying and be optimistic about the epidemic. The worst is probably behind us and we are now better prepared to handle the pandemic (the shortages of equipment have been remedied). Moreover, in June, the scientists at Oxford University in the United Kingdom reported that the dexamethasone could be the first drug able to save the lives of Covid-19 patients (however, the study results were presented only in press release without any scientific paper).

On the other hand, the threat of the resurgence of the coronavirus is real. Many American states noted a record number of new cases (or new hospitalizations) of coronavirus in June, and Florida could be the next epicenter of the pandemic.

Meanwhile, on the other side of the Pacific, China faces the new coronavirus outbreak in Beijing. In consequence, several communities in the Chinese capital are back on lockdown. The surge in new cases in Beijing, and in other Asian cities (like Tokyo) or American states, is a clear warning to the U.S. and other Western countries: the second wave is possible.

This is, of course, positive for the gold market, as the risk of resurgence of the coronavirus and the reintroduction of the economic lockdowns supports the safe-haven demand for gold and its prices. However, investors should remember that the number of new cases within the second waves are so far limited. The autumn wave could be worse, but the situation is not out of control yet (and wearing masks can help reduce the size of a possible second wave of infection). And the key issue is that even the second wave will not trigger rally in the gold market, unless it spurs fear in the marketplace and it diminishes confidence in the US economy.

So far, the market is not worried about a large outbreak in the fall. It seems that investors believe that there will by the fall enough testing, contact tracing, drugs and R&D on vaccines. And that we will not shut down economies as deeply as we did in spring, if there is the second major outbreak in fall. This time the market might be right – however, at the beginning of the year, Mr. Market was clearly too optimistic, so correction in the risky asset markets is possible at some point this year.

Luckily, the bullish perspective for gold does not depend solely on the second wave. After all, the price of gold has not collapsed amid the optimism about the end of epidemic and economic revival. The key is what the Fed has recently said: it would take nearly two years to fully recover from the coronavirus recession. The subdued economic growth, the dovish U.S. central bank and ultra low real interest rates should support the gold prices (unless they surge suddenly).

Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today!

For a look at all of today’s economic events, check out our economic calendar.

Arkadiusz Sieron, PhD

Sunshine Profits: Analysis. Care. Profits.

Breakdown – First Crack in the Crude Oil Dam

In Oil Trading Alerts yesterday and on Wednesday, we described the reason due to which crude oil’s long and boring consolidation is likely coming to an end. This reason was the rising support line that was being tested. We precisely wrote the following:

“After failing to rally back above the upper border of the March price gap, crude oil declined and then started to slowly climb back up at a certain pace. The rising support line shows this pace.

The thing is that crude oil is breaking below this line, which means that the little momentum that crude oil had, is waning. This is bearish, because it shows that the buying power is drying up or that it’s almost gone.

This means that the consolidation – and boredom – are likely almost over. Once the breakdown is verified, the odds for a quick slide will greatly increase.

Given the fundamental news that are reaching (and likely to reach) the market – the increasing Covid-19 cases in the U.S. and globally – it seems that black gold is unlikely to have enough strength to keep pushing higher. Based on the Covid Tracking Project, the latest daily increase in the U.S. Covid-19 cases is over 50k, which is well above the previous high. 

To be precise, the situation is not yet as severe as it was in April, because back then, the number of tests conducted was about half of what it is right now. Still, the breakout in nominal terms is likely to catch media’s (and thus investors’) attention – especially once the dire economic implications become obvious. The next wave of big fear is likely to unfold in our view. And crude oil is likely to fall once again.

(…) crude oil finally moved below this line. It didn’t do so through a big decline, but rather thanks to doing… nothing. The line is ascending, so by trading sideways, the price should at some point move below it. This happened today, and while it’s not a confirmed breakdown yet, it is an indication that the move lower is likely just around the corner”

Thanks to yesterday’s and today’s pre-market decline, the breakdown in crude oil is now clearly visible. That’s likely just the first crack in the dam – this move is likely to lead to more selling as the bullish momentum appears to be gone. The upswing really ended in early June, then crude oil made another attempt to move higher – and it failed. The most recent sideways trading was just traders looking at each other waiting who will finally sell first. Someone did and others followed as the buyers were more or less absent. The short positions that we entered on June 23 are likely to become much more profitable in the following days.

Summing up, the short-term outlook for crude oil is bearish based on both the technical indications (in particular, because of crude oil’s short-term breakdown) and on the rapidly increasing Covid-19 cases in the U.S., and we see signs that the bigger decline is likely to finally start.

We encourage you to sign up for our daily newsletter – it’s free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to our premium daily Oil Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

For a look at all of today’s economic events, check out our economic calendar.

 

Thank you.

Nadia Simmons
Day Trading and Oil Trading Strategist
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Crude Oil Prices Drop, Oil Traders Growing Concerns on COVID-19

Crude Oil prices plunged heavily on Friday morning adding to more losses recorded from last trading session amidst growing concerns that renewed induced COVID-19 lockdowns following a rise in COVID-19 cases globally could weaken energy demand.

Brent crude was down 1.49%to trade at $41.72 a barrel by 0646 GMT after losing more than 2% yesterday U.S. oil also lost about 1.72%, to trade at $38.92 a barrel after plunging about 3% in the last trading session.

Brent crude seems more likely to record a weekly decline of about 2% and the West Texas Intermediate for a drop of more than 3%.

COVID-19 has been the major suppressing factor capping the price of Crude oil lately and continued to be the major macro determinant for the energy product in the foreseeable future.

As leading industries around the world resume lockdowns, products and services would be limited, demand for certain goods plummet especially those not falling under the necessity category, meaning consumer behavior is expected to change globally in the short and mid-term thereby affecting the need for energy goods in driving such global economic parameters.

In addition, while many energy analysts were expecting global economies and energy demand to bounce back from the COVID-19 pandemic, the present rise in daily cases around many parts of the world including the world’s largest economy and biggest consumer for crude oil (United States)strengthened concerns among oil traders and energy stakeholders about the pace of any economic recovery.

Economically COVID-19 has not mattered this much until Q3 2020, this is because global central banks stimulus packages seem to be waning down and the energy markets are still on a fragile footing, with the most precedence oil production cut by major oil producers implemented yet warnings from the U.S Fed Reserve officials that the recovery remains uncertain, shows that an immediate, innovative economic strategies are needed to save the world’s fragile economy from the abyss.

For a look at all of today’s economic events, check out our economic calendar.

 

European Equities: COVID-19 and Geopolitics in Focus

The Majors

It was a 3rd consecutive day in the red for the European majors on Thursday. The CAC40 fell by 1.21%, with the DAX30 and EuroStoxx600 declining by 0.04% and 0.77% respectively.

Rising COVID-19 cases across the U.S continued to weigh on demand for riskier assets.

The Stats

It was a relatively quiet day on the Eurozone economic calendar on Thursday. Germany’s trade data for May were in focus ahead of the European open.

According to Destatis, Germany’s trade surplus widened from €3.4bn to 7.6bn in May. Economists had forecast a widening to €5.2bn.

  • Exports increased by 9.0% in May, partially reversing a 24% slump in April. Economists had forecast a 13.8% rise.
  • Imports rose by 3.5%, following a 16.6% slide in April. Economists had forecast a 12% rise.

Compared with May 2019

  • Germany exported goods to the value of €42.4bn (-29.0%) to EU member states.
  • Exports to Eurozone member states fell by 29.1% to €29.9bn.
  • Germany exported goods to the value of €37.7bn (-30.5%) to countries outside of the EU.
  • Germany imported goods to the value of €38.4bn (-25.2%) from EU member states.
  • Imports from Eurozone member states fell by 25.2% to €26.7bn.
  • Germany’s imports from non-EU countries fell by 17.5% to €34.8bn.

From the U.S

The all-important weekly jobless claims figures were in focus late in the European session. In the week ending 3rd July, initial jobless claims rose by 1.314m. While this was better than a forecasted 1.375m and previous week 1.413m, it was still sizeable.

The Market Movers

For the DAX: It was a bearish day for the auto sector on Thursday. Continental and Daimler fell by 1.31% and by 2.73% to lead the way down. BMW and Volkswagen saw more modest losses of 0.74% and 0.09% respectively.

It was also a bearish day for the banks. Deutsche Bank fell by 1.99%, with Commerzbank sliding by 4.42%.

WIRECARD AG led the way down with a 9.19% slide coming off the back of a 15.53% tumble from Wednesday.

From the CAC, it was another bearish day for the banks. Soc Gen slid by 3.57%, with BNP Paribas and Credit Agricole falling by 2.31% and 2.33% respectively.

The French auto sector saw yet more losses, with Peugeot and Renault declining by 2.28% and by 1.91% respectively.

Things were no better for Air France-KLM and Airbus SE which fell by 2.26% and by 3.96% respectively.

On the VIX Index

It was back into the green for the VIX on Thursday. Following a 4.59% fall from Wednesday, the VIX rose by 4.20% to end the day at 29.26.

COVID-19 did the damage on Thursday, which overshadowed the better than expected jobless claims figures.

The S&P500 and Dow fell by 0.56% and by 1.39% respectively, while the NASDAQ rose by 0.53%.

VIX 10/07/20 Daily Chart

The Day Ahead

It’s a particularly quiet day ahead on the Eurozone economic calendar. There are no material stats to provide the European majors with direction.

A lack of stats will leave the majors in the hands of geopolitics and COVID-19 at the end of the week.

On Thursday, this optimism had wavered as new COVID-19 cases continued to rise across the U.S. A similar trend from Thursday will be another test for the bulls.

From the U.S

It’s also a relatively quiet day on the economic calendar, with wholesale inflation figures for June due out later today.

We don’t expect the figures to have any influence on the majors on the day, however.

The Latest Coronavirus Figures

On Thursday, the number of new coronavirus cases rose by 213,647 to 12,376,273. On Wednesday, the number of new cases had risen by 222,368. The daily increase was lower than Wednesday’s rise while higher than 190,716 new cases from the previous Thursday.

Germany, Italy, and Spain reported 1,190 new cases on Thursday, which was up from 986 new cases on Wednesday. On the previous Thursday, 1,027 new cases had been reported.

From the U.S, the total number of cases rose by 59,638 to 3,218,570 on Thursday. On Wednesday, the total number of cases had increased by 62,416. On Thursday, 2nd July, a total of 48,853 new cases had been reported.

The Futures

In the futures markets, at the time of writing, the Dow was up by 117 points.

For a look at all of today’s economic events, check out our economic calendar.

Retail Traders & Investors Squeezed to Buy High-Risk Assets Again

Yes, we certainly live in interesting times.  This, the last segment of our multi-part article on the current Q2 and Q3 2020 US and global economic expectations, as well as current data points, referencing very real ongoing concerns, we urge you to continue using common sense to help protect your assets and families from what we believe will be a very volatile end to 2020.  If you missed the first two segments of this research article, please take a moment to review them before continuing.

On May 24th, 2020, we published this research article related to our super-cycle research. It is critical that you understand what is really happening in the world as we move through these major 21 to 85+ year super-cycles and apply that knowledge to the data we have presented in the first two segments of this research post.  Within that article, we quoted Ray Dalio from a recent article published related to his cycle research.

“In brief, after the creation of a new set of rules establishes the new world order, there is typically a peaceful and prosperous period. As people get used to this they increasingly bet on the prosperity continuing, and they increasingly borrow money to do that, which eventually leads to a bubble.

As prosperity increases the wealth gap grows. Eventually, the debt bubble bursts, which leads to the printing of money and credit and increased internal conflict, which leads to some sort of wealth redistribution revolution that can be peaceful or violent. Typically at that time late in the cycle, the leading empire that won the last economic and geopolitical war is less powerful relative to rival powers that prospered during the prosperous period, and with the bad economic conditions and the disagreements between powers, there is typically some kind of war. Out of this debt, economic, domestic, and world-order breakdowns that take the forms of revolutions and wars come new winners and losers. Then the winners get together to create the new domestic and world orders.”

That rather chilling statement suggests one thing that we all need to be aware of at this time: what the current and future economic cycles will likely present and how the world will navigate through this process of a cycle transition.

In our opinion, the massive cycle event that is taking place may not disrupt world order as Mr. Dalio suggests.  There is a very strong likelihood that credit/debt processes may become the “collateral damage” of this cycle transition, but not much else changes.  The world order and powerful nations across the globe are keenly aware that starting WWIII because of a credit/debt crisis is not in anyone’s interest.  The world has enough capability to address these concerns without blowing the planet to pieces in the process.

Our super-cycle research suggests we have entered a period that is very similar to 1919~1920 – a “roaring good time” most likely has already extended beyond reasonable levels.  Our research suggests a massive peak in cycle events near 2023~24 after an already substantial support cycle from 2007~08 to 2023~24.  This span of time, roughly 17 years, is very likely to be a blend of the Unraveling & Crisis phases of the super-cycle. We believe the broader Crisis phase will continue to transition throughout a span of time lasting well into 2031~2034.  This suggests we may have another 11 to 15+ years of a massive unwinding cycle throughout the globe.

SUPER-CYCLE RESEARCHER DATA FROM OUR RESEARCH TEAM

Our research team believes the COVID-19 virus event sent these super-cycles into Warp-Speed recently.  The US stock market was poised to rally early in 2020 and may have experienced a multi-year rally had it not been for the COVID-19 disruption that took place in Mid-February.  The destruction of the economy related to the COVID-19 shutdown is still playing out.  Recent news suggests 41% of businesses that closed on Yelp have shut down permanently.  Now, consider that this means for consumers and local governments related to earning and revenue capabilities?  Workers have been fired and have completely lost earnings capabilities.  Business owners now face credit/debt issues and possible bankruptcies.  Local governments have lost revenue from taxes, payroll, sales, and fees and permits.  This destructive cycle continues until the economy has shed the “excess” within all segments of core economic function.

MORE DATA & MORE PREDICTIONS

Within the first two segments of this article, we’ve highlighted numerous data points and charts to more clearly illustrate the current global market environment.  We have to consider the reality of what is happening on the ground throughout the world and, in particular, what is happening in the US and most major economies right now.  If 30 to 40%, or more, of local businesses, are closing permanently, this suggests that 30 to 50% of tax revenues for local governments will also vanish.  It also suggests that these displaced workers and business owners will need to find new sources of income/revenue over the next 12+ months.

As much as we would like to think a “V-shaped” recovery is highly likely, it’s not going to happen is 30 to 50% of the US economy is suffering at levels being reported currently.  Yes, you could have investors pile into the US stock market because they believe the US economy is the most likely to develop a strong recovery in the future, but that will likely happen after the excess has been processed out of the economy through a business/credit contraction phase.  The current stock market valuation levels seem to ignore the fact that consumer and business activity has likely collapsed by a minimum of 25 to 45% (or more) over the past 90+ days – and may not recover to levels anywhere near the early 2020 economic activity levels.

Still, if you listen to the news and watch the data related to the real estate market, you would think there has been no disruption in the US economy.  Supposedly, homes are still selling quickly and the market is very robust.  The Case-Shiller 20 city home price index is well above 220, the highest levels ever reached for this index.  This suggests home prices have risen to levels that are likely 15% to 30% higher than the peak levels in 2006-2007 – yet we’ve just experienced a massive economic disruption across the globe where 25% to 45% (or more) of our economic earning and income capability has vanished.  Read between the lines if you must – something doesn’t seem to be reporting valid data at the moment.

The Consumer Price Index has recently started falling.  The only times in history where the CPI level has initiated substantial downward trends are throughout major recessionary or contraction economic phases.  It is very likely that the decrease in the CPI level is reflecting a supply glut pricing effect as a result of the COVID-19 shutdown process.  When consumer activity drops dramatically while supply channels continue as normal, a supply glut happens.  When this happens, price levels must adjust and address the over-supply of goods and raw materials stacking up in warehouses, containers, and ships.

If the consumers earning and spending capabilities are disrupted long enough, the manufacturing and supply side of the equation can’t react fast enough to the immediate decline in demand.  Therefore, the supply glut continues for a period of time as manufacturers attempt to scale-down the production levels to address for proper demand levels.  Obviously, lower demand equates to lower sales volumes and lower-income levels for manufacturers and sales outlets.  This translates into layoffs at the factories, sales outlets, and all levels in between.  The cycle continues like this until an equilibrium is reached between supply and demand.

This translates into lower-earning expectations for much of the US and foreign markets compared to previous expectations.  While the S&P 500 stock price levels have recovered to nearly the early 2020 price levels, it seems rather obvious to us that Q2 earnings data will likely shock the markets with dramatically lower results and forward expectations – in some cases these numbers may be disastrous.

When Nike released their Q4 (May 2020) earnings and showed a nearly $800 loss because of the early COVID-19 shutdown, this should have presented a very real understanding of how all levels of retail, manufacturing, and consumer services would also likely show a dramatic economic contraction taking place.  Currently, we are watching for news of new US businesses entering the bankruptcy process.  This recent article suggests business bankruptcies are skyrocketing higher – yet are still below the 2008~09 levels.  Please keep in mind that we are only 90+ days into this COVID-19 virus event – so this data is still very early reporting.

Still, the numbers are very telling…

“US filings totaled 3,427 on June 24, according to data from Epiq seen by the Times. The reading also closes in on the financial-crisis reading of 3,491 companies entering bankruptcy in the first half of 2008. “

If you are reading the same data I read from that statement, the difference between the 2008 levels and current levels is only 64 additional bankruptcies in the US – less than a 2% difference in total bankruptcies.

The reality of the current market conditions is that we are only 90+ days into this processing of all this new data and attempting to understand what is likely to become a new operating norm for global economies.  In 2008-09, the unwinding process took place over a full 12 to 16-month process.  The recovery process too much longer – more than 5+ years.  Currently, the unwinding process of the COVID-19 collapse took less than 30 days and the recovery process took a little over 90 days.

If our research team is correct, the speed at which the current recovery took place is nothing more than a reactionary recovery to a problem that was sudden and full of uncertainty.  The Q2 data will likely solidify the uncertainty and unknowns into very real economic values (losses) and may shock the US stock market into a downward price reversion phase.

We believe one of the best hedging tools any skilled technical trader can use right now is Gold and Silver (Precious Metals).  We continue to urge our friends and followers to maintain a portion of our portfolio in precious metals as a hedge against risk and unknowns throughout most of 2020 and beyond.  If the Q2 data does what we believe it will do, shock the markets, then a moderately violent and volatile downside price move is pending.  Simply put, you can’t destroy 25 to 45% of an active economy and displace millions of workers while sustaining high price valuations – unless you have a bubble-like euphoric investor mentality.  That, ladies and gentlemen, is exactly what we believe is happening right now.

The super-cycle event that took place between 1920 and 1929 was nothing more than a euphoric bubble-like event where investors and traders had “no fear”.  Everyone was leveraging everything they could to try to jump into the markets because they believed nothing could stop the rally.  Keeping this in mind, you may want to read this recent research post about parabolic bubbles we published on June 23, 2020.

When bubbles burst, most commonly done when investors suddenly come to their senses in terms of real valuation expectations, the downside price moves can be extremely distressing.  We urge you to properly understand that may happen with Q2 earnings data and new announcements.  We also urge you to understand the COVID-19 virus event may have moved the super-cycles into some type of “warp-speed”.  If our research is correct, we could be speeding towards a massive unwinding/crisis cycle phase very similar to 1929~1945.

Please read all the previous segments of this article and please properly position your portfolio to protect your assets.  There will be lots of other trades in the future for all of us.  These bigger price moves are not suddenly going to end because of Q2 or Q3 data.  Be patient and stay protected.  Q2 data is almost here and we are about to see some realization of the COVID-19 economic destruction process.

Get our Active ETF Swing Trade Signals or if you have any type of retirement account and are looking for signals when to own equities, bonds, or cash, be sure to become a member of my Passive Long-Term ETF Investing Signals which we are about to issue a new signal for subscribers.

For a look at all of today’s economic events, check out our economic calendar.

 

Chris Vermeulen
Chief Market Strategies
Founder of Technical Traders Ltd.

NOTICE: Our free research does not constitute a trade recommendation or solicitation for our readers to take any action regarding this research.  It is provided for educational purposes only.  Our research team produces these research articles to share information with our followers/readers in an effort to try to keep you well informed.

 

The Renewed S&P 500 Upswing Is Knocking on the Door

As expected, the S&P 500 closed back above the mid-June highs resistance yesterday. The volume slightly rose but I wouldn’t read too much into it – after all, the early June highs of around 3230 should provide for a bit stiffer battle. How the market reached the current 3160-ish levels, is what counts more.

And after the daily ride higher throughout the Independence Day week, we’re experiencing a shallow sideways correction now. When we look in retrospect, will it remind us of bullish flag? In other words, can we expect the market to power higher and soon?

I think so. Higher stock prices are likely despite the high yield corporate bonds having lagged yesterday, or the investment grade corporate bonds suffering a rare daily decline. Market reaction to today’s unemployment claims won’t probably support the bulls to a great extent, yet I expect the push higher in stocks to continue.

In today’s analysis, I’ll cover the reasons why, and also discuss the non-confirmations that I would like to see resolved constructively.

I think the breakout will be confirmed shortly, and that the bulls will prevail in the clashing narratives and facts on the ground:

(…) I say so despite the uptrend in new U.S. Covid-19 cases that has many states stepping back from the reopening, rekindling lockdown speculations. I say so despite the Fed having its foot off the pedal in recent weeks, which makes for more players looking at the exit door as the rising put/call ratio shows.

The dollar is taking it on the chin, and emerging markets are seeing stellar gains, boding well for the U.S. markets. V-shaped recovery being real or not, corona vaccine hype or not, stocks love little things more than the central banks standing ready to act. And the punch bowl isn’t about to be removed any time soon.

The only policy risk is a lockdown miscalculation – did you see how the ASX 200 Composite (take that as Australia’s S&P 500) took to Victoria’s 6-week lockdown institution? Thankfully for the U.S. economy, Larry Kudlow (speaking for Fox Business) is in no mood for a second nationwide lockdown.

Yes, corona cases are rising, but testing has risen too. What about deaths? As the below CDC chart seen on OffGuardian shows, any news of their spike would be an exaggeration, as Mark Twain would probably say.

Food for thought and inquisitive minds. Sticking with the markets, let’s check upon yesterday’s S&P 500 performance.

S&P 500 in the Short-Run

I’ll start with the daily chart perspective (charts courtesy of http://stockcharts.com ):

On Wednesday, prices rose back above the horizontal line connecting mid-June tops, on a not so extraordinary volume. But is that a necessarily bearish omen? I don’t think so – the swing structure gives the bulls the benefit of the doubt. Please note that in the latter half of May (when stocks were peeking above the late April highs), the volume on those days wasn’t outstanding either.

Such were my yesterday’s thoughts as to the daily indicators:

(…) Both the CCI and Stochastics keep supporting the upside move – it’s only the RSI that feels tired. This doesn’t concern me that much – it’s not flashing a bearish divergence, it isn’t languishing at an extreme reading. In short, it doesn’t preclude the rally from going on once the current breather is over.

And until I see credible signs that the markets are getting spooked by corona, botched policy responses or anything else, there is little point in acting as if the sky is falling. It isn’t the case – to be clear, the time to turn really bearish would come, but we’re not there yet.

Whenever markets start acting jittery, it pays to remember the big picture:

(…) Recapping the obvious, stocks are on the upswing after the bears just couldn’t break below the 200-day moving average, which means that the momentum is with the bulls now. The daily indicators keep supporting the unfolding upswing, and volume doesn’t raise red flags either.

Let’s check the credit markets’ message next.

The Credit Markets’ Point of View

Yes, high yield corporate bonds (HYG ETF) scored an upswing yesterday, but are still trading below Monday’s closing prices. Please visit this free article on my home site so as to see more of the discussed charts. To justify turning more bullish on stocks, renewed animal spirits in the junk corporate bonds arena would be needed.

And not only in junk corporate bonds – it’s that the investment grade ones (LQD ETF) have wavered yesterday. But similarly to the HYG ETF move, the volume in LQD ETF hasn’t been remarkable, which is why I am not jumping to conclusions (and definitely not bearish ones) just yet.

The respective ratios (HYG:SHY and LQD:IEI) mirror that short-term indecisiveness perfectly. A daily increase in one, and a daily decline in the other. The overreaching dynamic is though one of an uptrend, which is why I look for the daily non-confirmation to be resolved with an upside move.

Encouragingly, the ratio of high yield corporate bonds to all corporate bonds (PHB:$DJCB) has turned higher yesterday. That’s a gentle nod in favor of the HYG:SHY ratio’s upswing.

As said, I don’t see a proof that the sky is falling – should I see one, I’ll change my mind and let you know about it. With the Fed waiting in the wings, the path of least resistance remains higher. And don’t forget about the infrastructure bill or the second stimulus check either.

If you look at the HYG:SHY chart with the overlaid S&P 500 closing prices, you’ll see that stocks didn’t really get more extended than they were since the late June bottom. While this condition might not last all too long into the future, I don’t expect stocks to be brought immediately down courtesy of this factor alone.

From the Readers’ Mailbag

Q: Although SPX and NDX keep rallying as you predicted, RUT is not participating much and most of the stocks other than major stocks are not rising with the index. Does that concern you? When do you think RUT will participate in the rally in significant way? Does it have to wait until COVID second wave is resolved in some way or after the second quarter reports are out?

A: Thank you, technology (XLK ETF) has indeed reached new 2020 highs yesterday, and it’s leading the index higher. In a sign of confirmation, semiconductors are also challenging their early June highs.

Russell 2000 (IWM ETF) has been indeed underperforming since the March 23 bottom. But the caption says it all – both indices have been climbing higher nonetheless. Of course, the S&P 500 outlook would be more bullish if e.g. IWM ETF traded also above its 200-day moving average.

Given the unfolding S&P 500 upleg and recovering risk appetite (see e.g. the PHB:$DJCB ratio, or the room for growth in XLF:XLU and XLY:XLP), I think it’s a question of time when Russell 2000 breaks above its 200-day average too.

But this isn’t strictly about the underperformance for any S&P 500 investor to get spooked by. I would focus on whether I see signs of distribution in the IWM ETF. There are none currently.

If I saw IWM ETF weakening while the individual stock heavyweights in the S&P 500 went higher still, that would be concerning. That’s because once the smallcaps roll over to the downside, the S&P 500 would follow eventually as the generals wouldn’t just prop it up indefinitely. And this isn’t happening.

I think the Covid-19 second wave fear is a distraction – smallcaps can rise regardless. Any policy missteps would be more concerning for small- and medium-sized businesses. The same goes for the Q2 earnings and the usual games around bringing down previously upbeat expectation in order to have a better chance to exceed them. In other words, it’s the P that counts for more in the P/E ratio.

Summary

Summing up, Tuesday’s decline in the S&P 500 was indeed merely of short-term nature, and the credit markets tentatively support the stock upswing to go on. Market breadth isn’t at daily extreme readings, emerging stocks are outperforming, and the dollar isn’t an obstacle to further stock gains. I look for the breakout above short-term resistance formed by the mid-June tops to succeed shortly as the rally’s internals including technology, semiconductors and risk-on metrics are improving.

I encourage you to sign up for our daily newsletter – it’s free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to the premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

For a look at all of today’s economic events, check out our economic calendar.

 

Thank you.

Monica Kingsley
Stock Trading Strategist
Sunshine Profits: Analysis. Care. Profits.

* * * * *

All essays, research and information found above represent analyses and opinions of Monica Kingsley and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Monica Kingsley and her associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Ms. Kingsley is not a Registered Securities Advisor. By reading Monica Kingsley’s reports you fully agree that she will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Monica Kingsley, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

People Worry Again. Will They Buy Gold?

The U.S. is still knee-deep in the first wave of Covid-19. So, gold should be still knee-deep in the bullish wave.

“Really not good.” This is how Anthony Fauci, the U.S. leading infectious disease expert and the member of the White House Coronavirus Task Force, described the current state of the epidemic in America.

Fauci is right. Please take a look at the chart below. As one can see, the number of new daily confirmed cases of Covid-19 has surged recently, surpassing the April peak and jumping above 50,000. Since the beginning of the pandemic, almost 3 million Americans have become infected with the coronavirus and more than 130,000 people already died in the U.S. because of it.

The surge in U.S. coronavirus cases has made people worry again. Raphael Bostic, Atlanta Fed President, said on Tuesday:

We are hearing it more and more as we get more data. People are getting nervous again. Business leaders are getting worried. Consumers are getting worried. And there is a real sense this might go on longer than we have planned for.

Indeed, more and more states and countries are rolling back the economic re-openings or even re-imposing lockdowns. For example, Melbourne, Australia’s second biggest city, ordered its residents to stay in their homes for six weeks amid the resurgence of infections. In the U.S., New York expanded its travel quarantine for visitors from three more states, while Florida’s greater Miami area rolled back its reopening.

However, the White House pushes the country to fully reopen, as President Trump said on Tuesday that the U.S. is “not closing, we’ll never close”. Given the resurgence in new cases, such calls are controversial. The full lockdown is, of course, absurd, and the incidence of deaths from Covid-19 are declining, but this is because the new infections occur mainly among young people. But if the coronavirus spreads wider, the daily number of deaths may rise again.

Implications for Gold

What does it all mean for the gold market? Well, data shows that current pandemic will remain active for longer than many people anticipated. As Fauci noted, America is “still knee-deep in the first wave and unlike Europe, U.S. communities never came down to baseline and now are surging back up.” This is great news for gold prices. The longer the outbreak of Covid-19 lasts, the longer the safe-haven demand for gold will remain elevated. Moreover, until the health crisis is fully resolved, the economic activity will be subdued, while both the Fed and the Treasury will stick to the ultra-easy monetary and fiscal policies. After all, a resurgence in coronavirus cases makes Americans more cautious, hampering consumer spending and GDP growth. It will also make the disconnect between the real economy and financial markets even larger. Importantly, some of the government stimulus programs will expire at the end of July, so either the U.S. economic growth will slow down or we will see more fiscal and monetary measures. Given the upcoming presidential elections, the new round of support is likely, which should raise worries about the level of the U.S. fiscal deficit, federal debt and inflation, supporting the gold prices.

Not surprisingly, gold has been gaining recently. As the chart below shows, the price of the yellow metal has jumped above $1,800 yesterday (the chart paints future prices, but spot prices also surpassed this important psychological level).

Of course, it remains to be seen whether the price of gold will stay above $1,800 for long. But even if it retraces some gains in the near future, the further march upward is a matter of time in the current macroeconomic environment.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

For a look at all of today’s economic events, check out our economic calendar.

 

Arkadiusz Sieron, PhD

Sunshine Profits: Analysis. Care. Profits.

Ford Motor’s China Vehicle Sales Rebound 3% in June Quarter as Coronavirus Restrictions Ease

Ford Motor Co, an American multinational automaker, said that its vehicle sales in mainland China rebounded in the June quarter, growing 3% from the same period last year, driven by strong demand following the lifting of COVID-19 pandemic restrictions.

That would be the first time in nearly three years, the automaker has registered a rise in quarterly sales. Total of 158,589 vehicles were sold during the second quarter, representing a 3% growth year-over-year and 78.7% sales increase compared to the first quarter of 2020.

Transit commercial vehicles experienced solid y/y growth of 60.9%, as did Lincoln luxury vehicles on gains of 12.0%, the company said. In the U.S., where business has been hit hard by the coronavirus pandemic, Ford’s sales fell more than 30% during the quarter.

On the other hand, Ford’s rival, General Motors’ sales declined 5.3% during the quarter in the world’s second-largest economy. Ford’s sales plunged 26% in 2019 and 37% in 2018.

Ford outlook and price target

Eleven analysts forecast the average price in 12 months at $6.24 with a high forecast of $8.00 and a low forecast of $3.50. The average price target represents a 2.46% increase from the last price of $6.09. From that eleven, three analysts rated ‘Buy’, six rated ‘Hold’ and two rated ‘Sell’, according to Tipranks.

Morgan Stanley target price is $8 with a high of $12 under a bull scenario and $4 under the worst-case scenario. Ford Motor had its price target lifted by UBS Group from $4.30 to $6.70. UBS Group currently has a neutral rating on the auto manufacturer’s stock. JP Morgan raised the target price to $7 from $6. Ford Motor was given a $7.50 price target by analysts at Jefferies Financial Group Inc. The firm currently has a buy rating on the stock.

It is good to hold now as 50-day Moving Average and 100-200-day MACD Oscillator signals a selling opportunity.

Analyst view

“We raise our 2020 Ford EPS forecast to ($0.90) vs. our prior forecast of ($1.30), while for 2021 and 2022 our EPS rises to positive $0.75 and $1.25 vs. our prior forecast of $0.30 and $0.80 respectively. On our revised price target of $8, Ford trades at just over 10x our 2021E EPS. Currently, the stock trades at just over 9x our revised 2021 EPS forecast,” Adam Jonas, equity analyst at Morgan Stanley noted in June.

“We raise our 3Q N. American Ford volume forecast to negative 12% Y/Y vs. down 15% previously. Our 4Q volume is revised to down 3% vs. down 5% previously. This slight upward adjustment reflects stronger than expected US SAAR, a rebound in used vehicle prices, and more supportive auto credit vs. our prior forecasts,” he added.

European Equities: Economic Data and COVID-19 to Test the Majors

Economic Calendar:

Thursday, 9th July

German Trade Balance (May)

The Majors

It was another bearish for the European majors on Wednesday, with no stats or positive news to shift the mood from Tuesday. The CAC40 fell by 1.24%, with the DAX30 and EuroStoxx600 declining by 0.97% and 0.67% respectively.

Rising COVID-19 cases across the U.S drew more attention than normal, as the number of cases rose to beyond 3m.

Reuters also published an article reporting that the WHO acknowledged “evidence emerging” of the airborne spread of the virus.

The accelerating spread of the virus brings into question the market’s optimistic outlook on economic recovery. All of this before earnings season kicks in next week…

The Stats

It was a particularly quiet day on the Eurozone economic calendar on Wednesday. There were no material stats to provide the European majors with direction.

From the U.S

It was also quiet through the U.S session, with no major stats from the U.S to shift sentiment late in the day.

The Market Movers

For the DAX: It was another mixed day for the auto sector on Wednesday. Continental slid by 2.54% to lead the way down. Daimler and Volkswagen saw more modest losses of 0.52% and 0.86% respectively, while BMW bucked the trend, with a 0.41% gain.

It was also another mixed day for the banks. Deutsche Bank rose by 0.89%, while Commerzbank slipped by 0.94%.

WIRECARD AG slid by 15.53% to partially reverse a 32.51% gain from Tuesday.

From the CAC, it was a bearish day for the banks. BNP Paribas and Soc Gen fell by 2.39% and 2.23% to lead the way down. Credit Agricole ended the day with a 1.42% loss.

The French auto sector struggled after a bullish start to the week. Peugeot and Renault slid by 4.20% and by 4.61% respectively.

Air France-KLM and Airbus SE fell by 2.21% and by 2.18% respectively, following on from a pullback on Tuesday.

On the VIX Index

A run of 2 consecutive days in the green came to an end for the VIX on Wednesday. Partially reversing a 5.33% gain from Tuesday, the VIX fell by 4.59% to end the day at 28.08.

After a bearish start to the day, the major U.S indexes bounced back to wrap up the day in positive territory.

Hope overshadowed the dire COVID-19 numbers from the U.S on the day, with no economic data to influence. Tech stocks led the way, delivering the NASDAQ with a solid gain on the day.

The S&P500 rose by 0.78%, with the Dow and NASDAQ ended the day with gains of 0.68% and 1.44% respectively.

VIX 09/07/20 Daily Chart

The Day Ahead

It’s a relatively quiet day ahead on the Eurozone economic calendar. May’s trade figures for Germany are due out later this morning.

We won’t expect too much influence from the numbers, however, which are now dated.

With the stats unlikely to garner too much attention, expect updates on Brexit and COVID-19 news to remain key drivers.

From the U.S

It’s also a relatively quiet day on the economic calendar, though we do expect the weekly jobless claims to influence.

Following a record jump in nonfarm payrolls in June, we have yet to see the weekly claims fall back to sub-1m levels.

With a number of the most populous U.S states hitting pause on reopening, this week’s figures could be alarming…

Anything under 1m initial jobless claims and the markets may breathe a sigh of relief.

The Latest Coronavirus Figures

On Wednesday, the number of new coronavirus cases rose by 222,368 to 12,130,571. On Tuesday, the number of new cases had risen by 227,176. The daily increase was lower than Tuesday’s rise while higher than 210,499 new cases from the previous Wednesday.

Germany, Italy, and Spain reported 986 new cases on Wednesday, which was up from 776 new cases on Tuesday. On the previous Wednesday, 1,062 new cases had been reported.

From the U.S, the total number of cases rose by 62,416 to 3,162,416 on Wednesday. On Tuesday, the total number of cases had increased by 67,655. On Wednesday, 1st July, a total of 51,607 new cases had been reported.

The Futures

In the futures markets, at the time of writing, the DAX was up by 127 points, while the Dow was down by 28 points.

For a look at all of today’s economic events, check out our economic calendar.

The Renewed S&P 500 Upswing

The S&P 500 recovered from yesterday’s premarket slump and tried reaching for Monday’s highs again before losing altitude. Have we seen a daily reversal, and if so, how serious is this?

Given for example the weak showing in high yield corporate bonds yesterday, I think that it’s now the bears who have the opportunity to show us what they’re made of. The price action before the closing bell certainly validated my earlier decision to take the nice long profits off the table.

So, stocks have declined below the mid-June tops, yet are kissing that line again in today’s premarket trading. A little breather following the string of five consecutive days of solid gains wasn’t really unimaginable, but isn’t close to over now?

Birthing troubles or not, I still think the unfolding rally has legs enough to confirm this breakout shortly.

Such were my yesterday’s reasons why:

(…) I say so despite the uptrend in new U.S. Covid-19 cases that has many states stepping back from the reopening, rekindling lockdown speculations. I say so despite the Fed having its foot off the pedal in recent weeks, which makes for more players looking at the exit door as the rising put/call ratio shows.

The summer months will be one heck of a bumpy ride, and the bullish picture is far from complete as the lagging Russell 2000 shows. But emerging markets are on fire, not too far from their February’s lower high already – Monday’s boon in the China recovery story keeps doing wonders. That’s wildly positive for world stock markets, including the U.S. ones.

V-shaped recovery being real or not, corona vaccine hype or not, stocks love little things more than the central banks standing ready to act. And the punch bowl isn’t about to be removed any time soon. Let’s take the most recent Fed policy step, which was the decision to start buying individual corporate bonds. So far, less than half a billion dollars has been deployed to this purpose – but the corporate bond market is firmly holding up nonetheless, with the Fed waiting in the wings.

With the exception of emerging markets consolidating gains yesterday, the above points remain valid also today – and likely throughout this data-light week too.

But let’s check upon yesterday’s market performance so as to form a momentary, spot-on picture.

S&P 500 in the Short-Run

I’ll start with the daily chart perspective (charts courtesy of http://stockcharts.com ):

Monday’s breakout has given way to yesterday’s close back below the horizontal line connecting mid-June tops, but the conviction behind the move lower isn’t there at this moment. That’s what the low daily volume says.

Both the CCI and Stochastics keep supporting the upside move – it’s only the RSI that feels tired. This doesn’t concern me that much – it’s not flashing a bearish divergence, it isn’t languishing at an extreme reading. In short, it doesn’t preclude the rally from going on once the current breather is over.

And until I see credible signs that the markets are getting spooked by corona, botched policy responses or anything else, there is little point in acting as if the sky is falling. It isn’t the case – to be clear, the time to turn really bearish would come, but we’re not there yet.

Whenever markets start acting jittery, it pays to remember the big picture:

(…) Recapping the obvious, stocks are on the upswing after the bears just couldn’t break below the 200-day moving average, which means that the momentum is with the bulls now. The daily indicators keep supporting the unfolding upswing, and volume doesn’t raise red flags either.

Let’s check the credit markets’ message next.

The Credit Markets’ Point of View

High yield corporate bonds (HYG ETF) have broken the string of quite a few daily gains in a row, and closed not too far from their Friday’s finish. For a meaningful reversal though, I would like to see much higher volume – it’s evident that yesterday’s desire to sell doesn’t compare to the late June buying spree.

This goes to highlight that Tuesday’s setback likely has a limited shelf life.

Notably, the ratio of investment grade corporate bonds to longer-dated Treasuries (LQD:ÏEI) hasn’t turned lower yesterday. Neither have the investment grade corporate bonds themselves (LQD ETF). Please visit this free article on my home site so as to see more charts – feel free to let me know should you wish to see them included in full here, on the site you are reading this analysis now.

The action in investment grade corporate bonds is thereby telling me that the credit markets’ setback yesterday isn’t turning into a full blown concern.

On the surface, this is a concerning chart. It’s true that the ratio of high yield corporate bonds to all corporate bonds (PHB:$DJCB) has seen better days. Will the breakdown attempt below the rising support line connecting its March, April and May intraday bottoms succeed? And if so, will it drag the S&P 500 lower?

Since mid-April, stocks have refused to follow the ratio much lower, and that’s an understatement. Stocks are not diving or starting to dive as they did back in February while the ratio was already trending lower. Looking at the real world situation back then and currently, we’re better prepared to deal with the challenges now, once the lockdown costs in terms of economic activity and human toll have become apparent. There is less appetite for that, thankfully.

Therefore, I think that once we see policy misstep risks removed (it’s not just about the Fed returning among the buyers. Trump’s Mount Rushmore speech helps recall the values and inspiring successes of prior generations, so I naturally wonder about the upcoming stimulus plans), the ratio will turn higher again so as to support the stock upswing that got a little ahead of itself recently when viewed by this metric alone.

Smallcaps, Tech and Other Clues in Focus

The Russell 2000 (IWM ETF) keeps underperforming, and turned lower yesterday to a greater degree than the S&P 500 did. That doesn’t bode well for the short-term.

Technology (XLK ETF) also turned down yesterday, yet the downswing’s volume was lower than that of the preceding upswing. Coupled with the semiconductors not having retreated to such a degree, that’s a short-term bullish sign, and it does outweigh the Russell 2000 non-confirmation.

Volatility ($VIX) has slightly risen yesterday, but the dollar having again stalled is supportive for stocks.

Such were my thoughts about the short-term flies in the bullish ointment:

(…) Nothing unsurmountable, and definitely not overshadowing improving market breadth in the S&P 500 or the still very low bullish sentiment that can power stocks higher – you know what they say about the times when everyone moves to the same side of the boat…

Summary

Summing up, yesterday’s decline in the S&P 500 appears merely of short-term nature, as the credit markets show there is no real willingness to sell. Investment grade corporate bonds are trending higher, and the one-day decline in high yield corporate bonds has only so much power to rock the bullish boat. I look for the breakout above short-term resistance formed by the mid-June tops to succeed shortly, and the rally’s internals including emerging markets, semiconductors and the dollar keep supporting more gains to come.

I encourage you to sign up for our daily newsletter – it’s free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to the premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

For a look at all of today’s economic events, check out our economic calendar.

Thank you.

Monica Kingsley
Stock Trading Strategist
Sunshine Profits: Analysis. Care. Profits.

* * * * *

All essays, research and information found above represent analyses and opinions of Monica Kingsley and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Monica Kingsley and her associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Ms. Kingsley is not a Registered Securities Advisor. By reading Monica Kingsley’s reports you fully agree that she will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Monica Kingsley, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

COVID-19 Cases Hit 3m in the U.S and the Numbers Are Set to Continue Rising

In the U.S, a new milestone of 3m infections was hit in the battle against the COVID-19 pandemic.

There has been nothing positive on the news wires for some time in relation to the coronavirus.

While there had been the hope of an effective vaccine, the virus appears to have more havoc to wreak on the U.S and the global economy.

The U.S in Contrast

At the time of writing, the total number of COVID-19 cases in the U.S sits at 3,097,538. According to Tuesday’s figures, the U.S accounted for more than a quarter of the world’s total number of infected.

Not only has the U.S been most severely affected but also has recorded the largest number of COVID-19 related deaths. As of Tuesday, the U.S had recorded 133,991 COVID-19 related deaths.

To put this into perspective, Brazil has the 2nd largest number of infections at 1,674,655. Brazil also has the 2nd largest number of COVID-19 related deaths, currently standing at 66,868.

To make a stark comparison, the percentage of the U.S population infected stands at 9.4%, while just 0.8% of Brazil’s population has been infected.

When looking at the mortality rate, the U.S mortality rate sits at 4.3%, versus Brazil’s 4.0%.

These figures ultimately reflect the success of the respective governments in curbing the spread of the virus.

The Administration and the Polls

Trump’s decision to push U.S states to begin reopening will be considered a grave mistake by many.

For the U.S administration, an about-turn on the reopening of the U.S economy could end Trump’s chances for office.

Looking at the FT’s interactive Calculator and polling data, Biden still looks set for an easy win in November. He has seen his share of the electorate college vote slip marginally, however.

It remains to be seen whether that slippage was as a result of the record rise in nonfarm payrolls in June. The good news for Biden and bad news for Trump, however, is that Trump’s share remains at 148 Electoral College votes.

The number of Electoral College votes that are now up for grabs has risen from 72 to 109. As was the case at the start of the month, even if Trump takes all 109, he would still fall short of the 270 needed to win.

These latest numbers are as at 6th July.

COVID-19 and the Global Financial Markets

Following a bullish start to the week, we’ve seen the appetite for riskier assets wane on Tuesday and Wednesday.

Economic indicators have continued to support a speedier economic recovery than initially expected.

The increased spread of the coronavirus will likely slow the pace of the recovery, however. For the markets, the only uncertainty is to what extent the recovery will slow.

One economic indicator that has continued to flash red amidst all the hype has been the U.S weekly jobless claims.

These figures have continued to reflect dire labor market conditions and have shown little sign of falling to pre-pandemic levels.

A continued upward trend in COVID-19 cases across the U.S will likely lead to a rise in these weekly claims. Lag or no lag, we have not seen sub-1m levels since 281,000 claims back in the week ending 13th March.

Can the markets pallet another 1.4m jump amidst the accelerated spread of the virus?

We can expect plenty of market sensitivity to tomorrow’s figures. More alarmingly, is news of the WHO reportedly acknowledging that there is evidence emerging of the airborne transmission of the virus.

Airborne transmission coupled with the continued reopening of the U.S economy does not bode well.

In reality, however, we have yet to see the global financial markets shudder at the prospects of a full-blown 2nd wave.

At some point, this may change, particularly if U.S State governors rebel and shut down the most populous U.S states.

According to Reuters, California, Hawaii, Idaho, Missouri, Montana, Oklahoma, and Texas, all reported new record highs on Tuesday.

The two largest U.S states, California and Texas reported more than 10,000 new cases each on Tuesday.

Importantly, the numbers have also shown that there has been no summertime decline in transmission.

European Equities: DAX Set to Open in the Red, with No Stats to Provide Direction

Economic Calendar:

Thursday, 9th July

German Trade Balance (May)

The Majors

It was a bearish day for the European majors on Tuesday. The DAX30 fell by 0.92%, with the CAC40 and EuroStoxx600 seeing losses of 0.74% and 0.61% respectively.

Following the bullish sentiment on Monday, some caution hit the markets as summer economic forecasts rolled out.

On Tuesday, the European Commission projected an 8.7% contraction for 2020 followed by 6.1% growth in 2021. For the markets, the 1 percentage point downward revision will have been of concern when considering both fiscal and monetary policy support.

A continued rise in new coronavirus cases will also not have helped the majors on the day.

The Stats

It was a relatively quiet day on the Eurozone economic calendar on Tuesday. Key stats included Germany’s industrial production figures for May.

According to Destatis,

  • Industrial production increased by 7.8% in May, partially reversing a 17.5% slide from April.
  • Production in industry excluding energy and construction was up by 10.3%.
    • Within industry, the production of intermediate goods showed a 0.1% decrease.
    • The production of consumer goods increased by 1.4%, while the production of capital goods jumped by 27.6%.
  • Outside industry, energy production was up by 1.7%, with the production of construction up by 0.5%.

From the U.S

It was also a relatively quiet day on the economic calendar, with May’s JOLTs job openings in focus.

In May, job openings rose from 4.996m to 5.397m. Economists had forecast a fall to 4.85m.

The Market Movers

For the DAX: It was a mixed day for the auto sector on Tuesday. Continental and Volkswagen slid by 1.00% and by 1.16% to lead the way down. Daimler fell by a more modest 0.20%, while BMW bucked the trend, with a 0.12% gain.

It was also a mixed day for the banks. Deutsche Bank fell by 0.68%, while Commerzbank rallied by 3.56% following on from Monday’s 4.26% gain.

WIRECARD AG rallied by 32.51% to reverse Monday’s 25.55% tumble.

From the CAC, it was a bearish day for the banks. Soc Gen fell by 1.26% to lead the way down. BNP Paribas and Credit Agricole saw more modest losses of 0.28% and 0.25% respectively.

The French auto sector saw further gains on Tuesday. Peugeot and Renault rose by 0.34% and by 0.54% respectively.

Air France-KLM and Airbus SE fell by 1.17% and by 0.59% respectively.

On the VIX Index

It was a 2nd consecutive day in the green for the VIX on Tuesday. Following on from a 0.94% gain on Monday, the VIX rose by 5.33% to end the day at 29.43.

A pullback across the major U.S equity markets came on Tuesday as investors turned cautious ahead of a busy week next week. With economic data limited to JOLTs job openings, some profit-taking weighed ahead of earnings season.

A continued rise in new coronavirus cases across the U.S will have also weighed on risk appetite on the day.

The S&P500 fell by 1.08%, with the Dow and NASDAQ ended the day down by 1.17% and 0.86% respectively.

VIX 08/07/20 Daily Chart

The Day Ahead

It’s a quiet day ahead on the Eurozone economic calendar. There are no material stats to provide the majors with direction.

A lack of stats will leave the majors in the hands of the news wires and COVID-19 numbers. Following the 2nd quarter rebound in the majors and a positive start to July, the markets may remain relatively cautious.

Plenty of downside risks remain that could hit the majors, including a widespread reintroduction of lockdown measures. There are also rising tensions with a number of G7 countries and China to also consider…

From the U.S

There are no material stats due out later today. This will likely give the weekly crude oil inventory numbers, COVID-19, and geopolitics greater airtime.

The Latest Coronavirus Figures

On Tuesday, the number of new coronavirus cases rose by 227,176 to 11,940,258. On Monday, the number of new cases had risen by 177,554. The daily increase was higher than Monday’s rise and 201,507 new cases from the previous Tuesday.

Germany, Italy, and Spain reported 776 new cases on Tuesday, which was down from 1,876 new cases on Monday. On the previous Tuesday, 934 new cases had been reported.

From the U.S, the total number of cases rose by 67,655 to 3,096,516 on Tuesday. On Monday, the total number of cases had increased by 45,706. On Tuesday, 30th June, a total of 53,471 new cases had been reported.

The Futures

In the futures markets, at the time of writing, the DAX was down by 14.5 points, while the Dow was up by 124 points.

For a look at all of today’s economic events, check out our economic calendar.

Credit/Investments Turned Into End-User Risk Again

Continuing our research from Part I, into what to expect in Q2 and Q3 of 2020, we’ll start by discussing our Adaptive Dynamic Learning predictive modeling system and our belief that the US stock market is rallied beyond proper expectation levels.  The Adaptive Dynamic Learning (ADL) modeling systems attempts to identify price and technical indicator DNA markers and attempts to map our these unique price setups.  Then, it attempts to learn from the past DNA markers and apply that learned price behavior to future price DNA markers.  In this manner, it learns from the past and applies that knowledge to the future.

ES ADL PREDICTIVE MODELING

On June 15, 2020, we published this article referencing the ADL predictive modeling system and how the US stock markets were, at that time, 12% to 15% overvalued based on this analysis.  Continuing this research, our researchers still believe the ES (S&P500) is very likely to fall to levels near $2500 before finding support just below that level.  These predicted ADL price levels strongly suggest that the true valuation levels for the ES are near $2500 – not near the overvalued levels closer to $3000.

NQ ADL PREDICTIVE MODELING

Additionally, an update NQ ADL Weekly chart suggests the NQ has rallied to levels that appear to be extremely overvalued.  The current ADL prediction levels suggest the NQ ADL valuation levels should be near $6600 – not near $10,325 as they are now.  This suggests a massive -36% price disparity between the current overvalued rally level of the NQ and the expected ADL price level based on our advanced predictive modeling system.

Now that we’ve attempted to explain one of the core elements of our research estimates, let’s get further into the data that is likely to present a very real opportunity for skilled technical traders.

ECONOMIC CYCLES

As you are likely well aware of by now, a series of catastrophic economic events continue to unfold throughout the globe.  Most importantly, the ability to earn revenues for consumers and corporations while dealing with hard fixed costs.  In previous articles, we’ve suggested our belief that a unique event in localized economies is not much of a concern because global central banks can support the market well enough to allow economic activity to resume near fairly normal levels.  We’ve suggested that the bigger problem is when an extended economic contraction takes place that is a global or more wide-spread economic event.  This type of economic crisis is much more dangerous because of two factors:

_ A.  The continued lack of revenue generation increases the pressure on the individual or corporation to cut costs, employees, or other assets.  Without the ability to earn, these individuals or corporations begin to eat up cash reserves very quickly and will quickly begin to identify their longer-term sustainability objectives. Unless the economy starts to recover quickly, this crisis for the individual or corporation could be a moderately slow and dangerous “bleed-out” event leading to bankruptcy.

_B.  The efforts of localized governments and global banking institutions initially attempt to mitigate the risks of such an event.  This is usually done by providing greater capital resources to certain industries, the general banking system, and in other ways/sources.  Currently, within the US, a number of forbearance programs have been initiated to take away certain pressures for homeowners and others.  Still, the economy must continue to operate within normal boundaries and bills must be paid.  With an extended economic collapse, such as we may be experiencing with the COVID-19 virus event, the problems for consumers and corporations grow bigger and more dangerous the longer the economic contraction event continues.

When you really start to understand the cycle of these events and then begin to understand the domino-effect process that may already be playing out in some form, skilled technical investors should already be preparing for extended price volatility and unknowns over the next 6+ months or longer.  Allow us to explain, in simple terms, how this cycle plays out…

_ Local consumers/workers are laid-off or fired from jobs.  This puts immediate earnings pressure on local families and individuals and it pushes them into a protective mode where they suddenly must decide between essential items (food, medicine, personal care, transportation, and other essentials) vs. non-essential items (movies, dining out, travel, discretionary purchases, and others).  Currently, there are more than 35 million unemployed people in the US (roughly 10% of the total population.

_ The COVID-19 shutdown within the US has disrupted the earning capabilities of many businesses over the past 3+ months.  As consumers slow down their purchases and businesses close because of government shutdown orders, the problems amplify for many business owners and employees.  If you have ever owned your own business, you understand the risks involved and the ongoing hard costs associated with owning a business.  Just because the governor orders a “shutdown” doesn’t mean that your hard monthly costs are going away too.  This ongoing problem sets up another crisis event in the making – the Business Owner risk factor.  How long before these individual business owners simply can’t sustain their operations any longer and are forced into bankruptcy?

_ Local governments derive their operating budgets from taxes and revenues generated within their communities.  With the COVID-19 shutdown crippling these revenues, we estimate that Q3 and Q4 2020 will become a point of “bleed-out” for many local governments.  They may be able to manage their budgets for a few months within the economic contraction period, but we believe the longer this economic contraction event continues, more and more pressure will be put on local and regional (city/state) governments where revenues have likely collapsed 25% to 45%+ recently.

_ The bigger cycle start to take place.  (A) With consumers laid-off and/or fired from their jobs, their income levels drop dramatically and their spending decreases dramatically.  (B) With business owners struggling to survive with hard costs and payroll in a depressed economic environment, these businesses will either find a way to survive or fail – laying off more people and creating further disruption in earnings/revenues for workers and local governments.  (C) With local governments slow to react to the economic contraction (and mostly hiring under contract), the decreases in revenue over time may present a very real issue for government agencies and become a real problem 4 to 6+ months into the economic contraction.

_ When businesses and governments suddenly realize the scale and scope of the economic contraction, they will attempt to balance their books by adapting (developing new sources of revenue: products, services, taxes, fees) and/or begin to contract themselves.  Either of these two options is fraught with risk and could potentially increase the risks of a more extended economic contraction event. Raising taxes or fees on consumers/businesses within a massive economic contraction event will likely push more individuals/businesses into bankruptcy – further decreasing the government revenues.  Developing new products/services and marketing them to consumers requires capital and resources.  If the product is not a success, the business takes a huge risk making these aggressive transitional moves – which may lead to increased economic concerns.  As long as the consumer is struggling and not earning sufficiently, the foundation of the economic structure is at risk of collapsing even further.

This cycle is sometimes called the “death cycle” in economic terms.  It is a cycle where economic contraction leads to further economic contraction.  The process of breaking this cycle is simple, the entire economic engine must “unwind” sufficiently to remove/reduce the overextended valuation and “fluff” within the system.  Once this has happened, then a new economic foundation will begin to establish where growth and opportunity will resume within local and regional economies.

IMPORTANT ECONOMIC DATA

Now, let’s look at some of the data that supports our research.

The World Uncertainty Index has recently skyrocketed above 50, the highest level over the past 60+ years. Since the low point, in 1985, the World Uncertainty Index has continued to rise with higher peaks and higher troughs over the past 30+ years.  Currently, this index suggests there is a massive amount of uncertainty throughout the globe related to economic function, central banks, geopolitical issues, and humanitarian issues.

Bay very close attention to the peaks in this index and the dates of these peaks (2004, 2013, 2020).  The 2004 and 2013 peaks occurred roughly 3 to 4 years after a major stock market bottom setup.  The current index high would suggest a market bottom may have set up in 2016 and a peak in this Uncertainty index may still be 12 to 24 months away.  This suggests we may still experience a moderately high degree of uncertainty and a number of unknown global and economic crisis events over the next 12 to 24 months.

The US Federal Reserve has recently begun another massive quantitative easing phase and actively begun to purchase various forms of debt, bonds, and equity within the financial markets.  Paying attention to the rallies in the Fed buying activity and the World Uncertainty Index, you’ll see the peaks in the Uncertainty index align with the midpoints of the Fed activities.  Generally, the uncertainty levels rise as the US Fed intervenes and executes QE policies to support the global markets.

This Global Commodity Price Index chart highlights the recent collapse in raw commodity prices and illustrates the incredibly depressed level of commodities related to global economic activities. Over the past 20 years, the only time when commodity prices were lower was in early 2000~2005 – just after the 9/11 economic contraction. The current Commodity Price Index level suggests we have entered a new deflationary price cycle with the peak setup near August/September 2018 – just before the big downside price contraction started in October 2018. Our researchers have continued to highlight that point on multiple charts as the true peak in the US and global markets

At this point in time, developing a safe and protected strategy to ride out these uncertain times is essential.  We’ve been advising our clients to stay safely away from the global stock market trends and we issued a Black Swan warning on February 21, 2020, telling all of our clients to “get into cash immediately”.  Since then, we’ve advised our clients to move their capital into selected sectors to take advantage of hedging opportunities and targeted trading opportunities over the past 3+ months.

We continue to believe the best way to profit from these market trends is to develop a super conservative investment model where Cash is King and proper hedging is essential.  There are plenty of great trades to select from – assuming we want to take on the additional risks associated with these trades.

We believe the next 3+ months will result in a massive volatility spike, likely seeing the VIX move above 50~60 again, as Q2and Q3 earnings and expectations continue to shock the investment community.  We do not believe this potential “V-Shaped” recovery is sustainable and continues to advise our clients to be prepared downside price reversion.

Get our Active ETF Swing Trade Signals or if you have any type of retirement account and are looking for signals when to own equities, bonds, or cash, be sure to become a member of my Passive Long-Term ETF Investing Signals which we are about to issue a new signal for subscribers.

For a look at all of today’s economic events, check out our economic calendar.

 

Chris Vermeulen
Chief Market Strategies
Founder of Technical Traders Ltd.

NOTICE: Our free research does not constitute a trade recommendation or solicitation for our readers to take any action regarding this research.  It is provided for educational purposes only.  Our research team produces these research articles to share information with our followers/readers in an effort to try to keep you well informed.

 

These Are the Factors Going for the S&P 500 Bulls

Since Monday’s premarket open, the S&P 500 was steadily rising before stabilizing above the mid-June tops. While the index comfortably closed at its intraday highs, can we trust this breakout? While a little breather following the string of five consecutive days of solid gains isn’t unimaginable, I think the unfolding rally has legs enough to confirm this breakout shortly.

I say so despite the uptrend in new U.S. Covid-19 cases that has many states stepping back from the reopening, rekindling lockdown speculations. I say so despite the Fed having its foot off the pedal in recent weeks, which makes for more players looking at the exit door as the rising put/call ratio shows.

The summer months will be one heck of a bumpy ride, and the bullish picture is far from complete as the lagging Russell 2000 shows. But emerging markets are on fire, not too far from their February’s lower high already – Monday’s boon in the China recovery story keeps doing wonders. That’s wildly positive for world stock markets, including the U.S. ones.

V-shaped recovery being real or not, corona vaccine hype or not, stocks love little things more than the central banks standing ready to act. And the punch bowl isn’t about to be removed any time soon. Let’s take the most recent Fed policy step, which was the decision to start buying individual corporate bonds. So far, less than half a billion dollars has been deployed to this purpose – but the corporate bond market is firmly holding up nonetheless, with the Fed waiting in the wings.

That’s just one of the factors going for the stock bulls, and today’s analysis will deal with yesterday’s market performance so as to form a momentary, spot-on picture.

S&P 500 in the Short-Run

I’ll start with the daily chart perspective (charts courtesy of http://stockcharts.com ):

If I had to pick just one chart for today, this one would cut it. Having broken above the mid-June highs, the S&P 500 closed strongly. But it’s also true that it has been languishing below 3170 despite reaching this level at the onset of European trading already, unable to extend gains during the regular session.

Recapping the obvious, stocks are on the upswing after the bears just couldn’t break below the 200-day moving average, which means that the momentum is with the bulls now. The daily indicators keep supporting the unfolding upswing, and volume doesn’t raise red flags either.

The breakout above the blue horizontal resistance line stands a good chance of succeeding. That’s true regardless of the S&P 500 futures dipping below 3145 as we speak. It’s that the majority of signs speak in favor of the upswing to continue, short-term breather to come or not.

Crucially, do the credit markets agree?

The Credit Markets’ Point of View

High yield corporate bonds (HYG ETF) are clearly rising in unison with the S&P 500. Please visit this free article on my home site so as to see more charts – feel free to let me know should you wish to see them included in full, on the site you are reading this analysis now.

Back to the HYG ETF – so far so good, its daily indicators are reflecting the daily upswing positively, and the volume doesn’t smack of an impending reversal. In short, there are no clouds on the junk corporate bonds chart horizon.

Investment grade corporate bonds are also powering to new highs. Then, the ratio of high yield corporate bonds to all corporate bonds (PHB:$DJCB) has bottomed at the rising support line connecting its March, April and May intraday bottoms. The question remains whether it will turn higher next so as to support the stock upswing that surely appears getting a little ahead of itself when viewed by this risk-on metric alone.

But it can’t be denied that risk is staging a comeback into the market place, albeit a painstakingly slow one.

Or isn’t it that slow when we examine the performance of technology, and other clues?

Technology and USDX in Focus

The tech sector (XLK ETF) keeps making new highs, and the volume remains quite healthy and free from bearish implications. The sector continues leading the S&P 500 higher, and perhaps most importantly, its internals have improved yesterday.

I mean semiconductors (XSD ETF). While they are not yet at their early June highs, they are within spitting distance thereof. The technical posture has improved with yesterday’s show of strength, and as the segment leads the whole tech, that means a lot.

The flies in the short-term bullish ointment are volatility ($VIX) refusing to stick to its intraday move lower, another black daily candle in smallcaps (IWM ETF) or greenback’s overnight upswing attempt.

Nothing unsurmountable, and definitely not overshadowing improving market breadth in the S&P 500 or the still very low bullish sentiment that can power stocks higher – you know what they say about the times when everyone moves to the same side of the boat…

Summary

Summing up, the S&P 500 broke above short-term resistance formed by the mid-June tops yesterday, and the rally’s internals keep supporting more gains to come. Importantly, emerging markets and semiconductors sprang to life yesterday. Signs are though mostly arrayed behind the bulls, and most importantly, the credit markets continue supporting the unfolding stock upswing regardless of Monday’s intraday wavering that could foreshadow some short-term sideways moves. The key word is could – S&P 500 market breadth is getting better while the sentiment remains too bearish to enable a sizable downswing attempt to succeed. What else can the bulls wish for?

I encourage you to sign up for our daily newsletter – it’s free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to the premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

For a look at all of today’s economic events, check out our economic calendar.

Thank you.

Monica Kingsley
Stock Trading Strategist

Sunshine Profits: Analysis. Care. Profits.

* * * * *

All essays, research and information found above represent analyses and opinions of Monica Kingsley and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Monica Kingsley and her associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Ms. Kingsley is not a Registered Securities Advisor. By reading Monica Kingsley’s reports you fully agree that she will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Monica Kingsley, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Buyers Will Have to Defend the Recent Gains

The first Monday in July started off positively with indices heading higher. This could have been triggered by traders’ good mood following the US Independence Day, or optimism over the COVID pandemic, perhaps it’s the freshly printed US dollars from the Federal Reserve, flooding the market. Instead of focusing on what has happened, let’s focus on what will probably happen next.

Let’s start with the SP500, on Monday it broke a crucial mid-term resistance on the 3155 point. This resistance has held its own since mid-June, buyers tried to break it a few times but failed, which makes it a significant level. This area was broken during the Asian session and the price remained above it during the European and American hours. The SP500 tested the broken resistance as a close support during the beginning of the European session on Tuesday. It’s crucial to hold the price above this support level to get a mid-term buy signal. Otherwise, we may experience a false bullish breakout pattern, which may be pretty unpleasant for demand.

Moving on the NZDUSD, the price of the pair is currently correcting the bullish movement that happened after the defense of the 0.639 support level and the breakout of the dynamic down trendline. Here, the price is also testing the broken horizontal resistance as a close support, which can work out for sellers.

Meanwhile the NZDCAD’s price is bouncing from the major down trendline on the weekly chart. As long as the price stays below the trendline, sentiment is negative. More will be revealed on Friday when we can view the shape of the weekly candle. Anything with a bearish body, will be considered a sell signal.

For a look at all of today’s economic events, check out our economic calendar.

Will Gold March Forward on Fed’s Forward Guidance?

The Fed could strengthen its forward guidance later this year. Given its dovish bias and the fresh viral outbreaks, it could be positive for gold prices.

Last week, the FOMC has published minutes of its meeting from June 9-10. They show a few interesting things. First of all, although the Fed officials could be satisfied with their monetary policy stance, they want to communicate better to the markets their intentions about the path of the federal funds rate and the Fed’s balance sheet. In other words, the FOMC is likely to strengthen their forward guidance later this year:

Participants agreed that the current stance of monetary policy remained appropriate, but many noted that the Committee could, at upcoming meetings, further clarify its intentions with respect to its future monetary policy decisions as the economic outlook becomes clearer. In particular, most participants commented that the Committee should communicate a more explicit form of forward guidance for the path of the federal funds rate and provide more clarity regarding purchases of Treasury securities and agency MBS as more information about the trajectory of the economy becomes available.

Now, the question is the type of the forward guidance which will be chosen. A few members of the Committee suggested the use of the calendar-based guidance, which sets a specific date beyond which accommodation will be reduced. But participants generally preferred outcome-based guidance. While a “couple” of them wanted to tie any rate hike to the decrease in the unemployment rate below a certain level, a “number’ of central bankers preferred to make the normalization of the federal funds rate dependent on the inflation rate. Actually, they suggested that the Fed should not hike interest rates unless inflation would modestly overshoot the 2-percent target:

A number of participants spoke favorably of forward guidance tied to inflation outcomes that could possibly entail a modest temporary overshooting of the Committee’s longer-run inflation goal but where inflation fluctuations would be centered on 2 percent over time. They saw this form of forward guidance as helping reinforce the credibility of the Committee’s symmetric 2 percent inflation objective and potentially preventing a premature withdrawal of monetary policy accommodation.

In plain English, it means that the Fed is likely to tolerate inflation above its target for some time and it will not hike interest rates unless inflation rate surpasses 2 percent. The Fed’s dovish bias and reluctance to actively combat inflation are excellent news for gold which is considered to be a hedge against inflation. Higher inflation rate also mean lower real interest rates, which should be also supportive for the gold prices.

Second, the Fed expressed concerns about the next waves of the Covid-19 epidemic, which could additionally hit the US economy:

A number of participants judged that there was a substantial likelihood of additional waves of outbreaks, which, in some scenarios, could result in further economic disruptions and possibly a protracted period of reduced economic activity.

The recent epidemiological data suggests that the Fed officials’ worries were justified. As the chart below shows, on July 2, the number of daily new confirmed cases of the coronavirus in the U.S. was more than 52,000, surpassing the April peak and reaching a new record.

I don’t know how for you, but for me the second uptick definitely looks like the additional wave of outbreaks! And the July 4 holiday weekend, which was – as always – celebrated with barbecues and fireworks displays, could only add fuel to fire. Of course, this time the reaction of authorities and citizens could be different and less aggressive, but it’s hard for me to imagine that the resurgence of infections would not be negative for the GDP growth. Some states have already re-imposed restrictions or have slowed down reopening because of the resurgence of coronavirus cases. It means that the W-shaped recovery, rather than V-shaped rebound, is becoming more and more probable. Good news for gold! Of course, not necessarily in the very short term.

As we have repeated many times, the vivid recovery was never an option. Even without the second wave, the pace of economic growth would be slow after the initial rebound. As the FOMC admitted itself, “the recovery in consumer spending was not expected to be particularly rapid beyond this year, with voluntary social distancing, precautionary saving, and lower levels of employment and income restraining the pace of expansion over the medium term.”

Moreover, high level of uncertainty, subdued consumer demand, a dearth in public infrastructure projects, and low oil prices would constrain business investments, capital expenditures and new hiring. Hence, “participants concluded that voluntary social distancing and structural shifts stemming from the pandemic would likely mean that some proportion of businesses would close permanently”.

Implications for Gold

What does it all mean for the gold market? Well, the recent FOMC minutes show that the Fed will strengthen its forward guidance later this year. It may increase transparency of the American monetary policy and increase confidence in the Fed, which could be negative for the gold prices. However, given the U.S. central bank’s dovish bias, the forward guidance would probably imply low interest rates for a very long period, which should be supportive for gold prices. The fresh viral outbreak only increases chances of further economic disruptions and very accommodative monetary policy.

Moreover, the Fed may use forward guidance based on inflation, announcing lack of any interest rate hikes unless inflation will reach a certain level, which could be above the 2-percent target (the Fed officials have long dreamed of raising the target or overshooting, so now they have the perfect opportunity to officially allow for higher inflation!). Such forward guidance would be particularly positive for the gold prices, as the yellow metal is seen as a hedge against inflation which shine the brightest in an environment of low real interest rates.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

For a look at all of today’s economic events, check out our economic calendar.

Arkadiusz Sieron, PhD

Sunshine Profits: Analysis. Care. Profits.

European Equities: Can the Majors Continue to Defy Gravity? Plenty Can Go Wrong…

Economic Calendar:

Tuesday, 7th July

German Industrial Production (MoM) (May)

Wednesday, 8th July

EU Economic Forecasts

Thursday, 9th July

German Trade Balance (May)

The Majors

It was a bullish start to the week for the European majors, with the bullish chatter across China’s state-controlled media driving risk appetite early on.

The DAX30 rose by 1.64%, with the CAC40 and EuroStoxx600 seeing gains of 1.49% and 1.58% respectively.

News had hit the wires in the early part of the day of a reported priority to foster a “healthy” bull market.

The news allowed the markets to once more cast aside negative COVID-19 news to deliver support for riskier assets. Even rising tension between the U.S and China over the last week was not enough to pin back risk appetite.

Economic data certainly contributed to the upside on the day, with stats from the Eurozone and the U.S impressing.

From last week, news of the conditional approval for the use of antiviral drug remdesivir in the EU was also taken as positive by the markets. The approval came ahead of a record-high number of COVID-19 cases from the weekend.

The Stats

It was a relatively busy day on the Eurozone economic calendar on Monday. Key stats included Germany’s factory orders and the Eurozone’s retail sales figures for May. From Germany, June’s construction PMI was also in focus.

According to Destatis, factory orders rose by 10.4% in May, partially reversing a revised 26.2% tumble in April. Economists had forecast a 15% rise.

  • Domestic orders increased by 12.3% and foreign orders by 8.8%, month-on-month.
  • New orders from the euro area went up 20.9%, with new orders from other countries increasing by 2.0%.
  • Manufacturers of intermediate goods saw new orders increase by 0.4%, with manufacturers of capital goods seeing an increase of 20.3%.
  • Consumer goods new orders increased by 4.7%.
  • New orders in the automotive industry saw a marked increase, though remained more than 47% lower than in February 2020.

In June, Germany’s Construction PMI rose from 40.1 to 41.3 in June.

From the Eurozone, retail sales jumped by 17.8% in May, coming in ahead of a forecasted 15% increase. In April, retail sales had slumped by 12.1%.

According to Eurostat,

  • The volume of retail trade increased by 38.4% for automotive fuels, by 34.5% for non-food products, and by 2.2% for food, drinks, and tobacco.
  • Luxembourg (+28.6%), France (+25.6%), and Austria (+23.3%) registered the largest increases in May.

From the U.S

It was a relatively busy day on the economic calendar, with June’s ISM Non-Manufacturing PMI in focus.

According to the latest ISM Survey, the June PMI jumped from 45.4 to 57.1, coming in well ahead of a forecasted 50.1.

The pace of job losses eased in June, with the Employment PMI rising from 31.8 to 43.1.

The Market Movers

For the DAX: It was a bullish day for the auto sector on Monday. Daimler and Volkswagen each saw gains of 2.13% to lead the way. BMW and Continental rose by 1.20% and 1.49% respectively.

It was a particularly bullish day for the banks. Deutsche Bank and Commerzbank rallied by 4.26% and by 7.49% respectively.

WIRECARD AG bucked the trend, following Friday’s 13.33% gain, with a 25.55% slide on the day.

From the CAC, it was also a bullish day for the banks. Soc Gen rallied by 3.96% to lead the way. BNP Paribas and Credit Agricole saw gains of 3.05% and 2.80% respectively.

The French auto sector also saw green on Monday. Peugeot and Renault rose by 2.87% and by 4.40% respectively.

Air France-KLM bucked the trend on the day, falling by 0.07%, while Airbus SE rose by 3.18%.

On the VIX Index

A run of 4 consecutive days in the red came to an end for the VIX on Monday. Partially reversing a 3.28% fall from Thursday, the VIX ended the day at 27.94. (The U.S markets were closed on Friday).

In spite of a broad-based market equity market rally, the VIX found support from the record number of new COVID-19 cases from the weekend.

The S&P500 rose by 1.59%, while the Dow and NASDAQ ended the day with gains of 1.78% and 2.21% respectively.

VIX 07/07/20 Daily Chart

The Day Ahead

It’s a relatively quiet day ahead on the Eurozone economic calendar. Key stats include German industrial production figures for May.

Barring particularly dire numbers, we would expect the stats to have a muted impact on the majors. We can expect June’s figures to have far greater impact…

From the U.S

May’s JOLTs job openings are due out later today. With plenty of focus on labor market conditions, expect the numbers to influence late in the session.

Geopolitics

On the geopolitical risk front, there is still plenty to catch the markets off-guard, with U.S and China tensions elevated.

A continued rise in new COVID-19 cases will also test market risk sentiment. Much will depend on whether there is a continued shift in stance on reopening the economies across the EU and the U.S, however.

At present, central bank support and optimism of a swift economic recovery continue to push the majors northwards.

The Latest Coronavirus Figures

On Monday, the number of new coronavirus cases rose by 177,554 to 11,713,082. On Sunday, the number of new cases had risen by 156,610. The daily increase was higher than Sunday’s rise and 153,341 new cases from the previous Monday.

Germany, Italy, and Spain reported 1,876 new cases on Monday, which was up from 407 new cases on Sunday. On the previous Monday, 803 new cases had been reported. Notably, Spain reported 1,244 new cases on Monday. This was the highest since 22nd May and follows news of a lockdown within the Catalonia region.

From the U.S, the total number of cases rose by 45,706 to 3,028,861 on Monday. On Sunday, the total number of cases had increased by 47,385. On Monday, 29th June, a total of 41,940 new cases had been reported.

The Futures

In the futures markets, at the time of writing, the DAX was up by 52 points, with the Dow up by 71 points.

For a look at all of today’s economic events, check out our economic calendar.