Ridiculous Minutia

Jerome Powell, the new Chairman of the Federal Reserve, just completed his third week on the job.  He’s hardly had enough time to learn how to operate the office coffee maker, let alone the all-in-one printer.  He still doesn’t know what roach coach menu items induce a heinous gut bomb.

 


The perpetually slightly worried looking new Fed chairman Jerome Powell, here seen warily inspecting the Rose Garden at the White House. Everybody wants to know if he has a “better plan” – but there is no better plan, thus no-one has one. [PT]

Photo credit: A. Brandon / AP

 

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Peculiar Behavior

As I have shown in previous issues of Seasonal Insights, various financial instruments are demonstrating peculiar behavior in the course of the week: the S&P 500 Index is typically strong on Tuesdays, Gold on Fridays and Bitcoin on Tuesdays (similar to the S&P 500 Index).

 

The quest for profitable foresight…[PT]

 

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Whipsawed

Frank Roellinger has updated us with respect to the signals given by his Modified Ned Davis Method (MDM) in the course of the recent market correction. The MDM is a purely technical trading system designed for position-trading the Russell 2000 index, both long and short (for details and additional color see The Modified Davis Method and Reader Question on the Modified Ned Davis Method).

 

The Nasdaq pillar…

 

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Economic Activity Seems Brisk, But…

Contrary to the situation in 2014-2015, economic indicators are currently far from signaling an imminent recession. We frequently discussed growing weakness in the manufacturing sector in 2015 (which is the largest sector of the economy in terms of gross output) – but even then, we always stressed that no clear recession signal was in sight yet.

 

US gross output (GO) growth year-on-year, and industrial production (IP) – note that GO continues to be published with a lag of two quarters. As the upper half of the illustration shows, growth in manufacturing output turned negative in 2014 – 2015, while y/y growth in “all industries” GO fell to zero by Q3 2015. The lower half shows the culprit: the mining sector, which includes upstream oil and gas production. While the sector is small, it is very volatile and accounted for an uncommonly large share of capex due to the shale oil/fracking boom. This was confirmed by the action in credit spreads during this time period as well, as junk bond spreads exploded mainly due to a relentless sell-off in energy company debt in the wake of plunging oil prices. Although happy times are here again following the oil price recovery, GO has begun to weaken slightly again in Q1 and Q2 2017 (note: the surge in IP since then does not tell us much, as GO leads IP).

 

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Fibonacci Retracements  

Following the recent market swoon, we were interested to see how far the rebound would go. Fibonacci retracement levels are a tried and true technical tool for estimating likely targets – and they can actually provide information beyond that as well. Here is the S&P 500 Index with the most important Fibonacci retracement levels of the recent decline shown:

 

So far, the SPX has made it back to the 61.8% retracement level intraday, and has weakened a tad again since then. This is not yet conclusive evidence that this level will contain the rebound, but it is worth noting that the RSI made it back to just below 50 as well (the 40-50 area in the RSI is often an important demarcation in both bullish and bearish market phases). On the other hand, the decline has injected somewhat greater caution than was detectable previously (e.g. the VIX remains around the 20 level). That may help support a larger rebound; note also that the 200-dma serves as support, so an argument could be made that the decline was merely one of the periodic tests of this moving average. One should watch what happens if lower Fibo retracement levels, i.e., the 50% and 38% retracement are approached from above. According to Canadian technical analyst Ross Clark, statistics suggest that the 38% level must hold to maintain a positive bias. If it breaks, a retest of the lows becomes the minimum expectation.

 

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Mnuchin Gets It

United States Secretary of Treasury Steven Mnuchin has a sweet gig.  He writes rubber checks to pay the nation’s bills.  Yet, somehow, the rubber checks don’t bounce.  Instead, like magic, they clear. How this all works, considering the nation’s technically insolvent, we don’t quite understand.  But Mnuchin gets it.  He knows exactly how full faith and credit works – and he knows plenty more.

 

Master of the Mint and economy wizard Steven Mnuchin and his wife at the annual ritual greenback burning festival. [PT]

 

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Copper vs. Oil

The Q1 2018 meeting of the Incrementum Fund’s Advisory Board took place on January 24, about one week before the recent market turmoil began. In a way it is funny that this group of contrarians who are well known for their skeptical stance on the risk asset bubble, didn’t really discuss the stock market much on this occasion. Of course there was little to add to what was already talked about extensively at previous meetings. Moreover, the main focus was on the topic presented by this meeting’s special guest, Gianni Kovacevic.

 

Copperbank chairman Gianni Kovacevic

 

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Actions and Reactions

Down markets, like up markets, are both dazzling and delightful. The shock and awe of near back-to-back 1,000 point Dow Jones Industrial Average (DJIA) free-falls is indeed spectacular. There are many reasons to revel in it.  Today we shall share a few. To begin, losing money in a multi-day stock market dump is no fun at all.  We’d rather get our teeth drilled by a dentist.  Still, a rapid selloff has many positive qualities.

 

Memorable moments from the annals of dentistry [PT]

 

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Opportunities in the Junior Mining Sector

Maurice Jackson of Proven and Probable has recently interviewed Jayant Bandari, the publisher of Capitalism and Morality and a frequent contributor to this site. The topics discussed include currencies, bitcoin, gold and above all junior gold stocks (i.e., small producers and explorers). Jayant shares some of his best ideas in the segment, including arbitrage opportunities currently offered by pending takeovers – which is an area that generally doesn’t receive much attention, but seems to harbor quite a bit of potential.

 

Jayant Bandari at the at the Sprott Natural Resource Symposium in Vancouver in 2017.

 

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Well Known Seasonal Trends

Readers are very likely aware of the “Halloween effect” or the Santa Claus rally. The former term refers to the fact that stocks on average tend to perform significantly worse in the summer months than in the winter months, the latter term describes the typically very strong advance in stocks just before the turn of the year. Both phenomena apply to the broad stock market, this is to say, to benchmark indexes such as the S&P 500 or the DJIA.

 

Summer and winter in the stock market…  [PT]

Illustration via CNNMoney

 

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It’s Just a Flesh Wound – But a Sad Day for Vol Sellers

On January 31 we wrote about the unprecedented levels – for a stock market index that is – the weekly and monthly RSI of the DJIA had reached (see: “Too Much Bubble Love, Likely to Bring Regret” for the astonishing details – provided you still have some capacity for stock market-related astonishment). We will take the opportunity to toot our horn by reminding readers that we highlighted VIX calls of all things as a worthwhile tail risk play. Not only were we right, we were actually kind of double-plus right, with near perfect timing to boot. That doesn’t happen very often, so forgive us for enjoying this brief moment of Zoltar glory.

 

Sometimes it just works… Zoltar has happy news for that exceedingly rare species, the “long vol” speculator (lately seen to be recovering – the endangered species, we mean).

 

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Contradictory Palaver

The recent hullabaloo among President Trump’s top monetary officials about the Administration’s “dollar policy” is just the start of what will likely be the first of many contradictory pronouncements and reversals which will take place in the coming months and years as the world’s reserve currency continues to be compromised.  So far, the Greenback has had its worst start since 1987, the year of a major stock market reset.

 

A modern-day reenactment of the famous “our currency, your problem” play that went over so extremely well in the 1970s… [PT]

 

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