Dear Bottarelli Research Reader,
Welcome back. The end of summer vacation was official when the life guard at our local pool blew the all-out whistle Sunday evening – and folks began to close down their grills and pack up their coolers for good.
This morning, traffic was atrocious again as millions of folks struggled past school buses trying to get back to work. For once, I didn’t grumble and curse at my fellow commuters.
You see, for weeks now, the absence of vacationing senior traders has been haunting the stock market. It’s amazing what a few fellows can do when the grey-beards of the trading desks are away. Prices can jump and tumble for little reason – all as the young turks try to make a few quick trades to impress the elders before they return to the trading pits.
But now, volume is finally returning. To give you a sense of scale, the Dow Jones Industrials (DJIA) first half hour last Friday saw a mere 11.0 million shares traded. Tuesday morning saw 27.7 million shares move through the pits.
Questions remain, however, as to whether returning senior traders will see a buying opportunity this week – or an opportunity to lock in a good year’s gains.
Here’s what we think will happen…
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The Current Situation
When we look to the DJIA chart, we see the first white candle in weeks.
But, will it stay white?
Most of Tuesday morning’s upside came from the White House’s decision to seek Congressional approval before dropping cruise missiles on Syria. Also note that oil and gold both backed off a tad after opening up on Tuesday.
Frankly, we still don’t credit “Syrian relief” as a genuine long-term catalyst. The market began its tumble long before the words “Sarin Gas” hit the headlines.
And this “relief” comes and goes almost hourly, as Washington attempts to craft legal cover for this unique police action. In fact, the situation is so fluid I’ve already had to correct these paragraphs twice — just while I was writing them.
Goodness knows what’ll happen over the next few hours.
While the folks in the bleachers are watching the Syrian circus, senior traders are paying closer attention to Richmond Fed President Jeffery Lacker’s threat that the Fed might cut its portfolio of mortgage-backed bonds at the same time (or even before) they back out of the Treasury market.
Lacker’s Targeted Scalpel is Wall Street’s Chainsaw
Lacker claims that “I don’t view tapering as cutting back on stimulus.”
The Fed is merely “reducing the pace at which we are adding stimulus... The Federal Open Market Committee is considering whether the U.S. labor market has improved enough to warrant scaling back the monthly purchase of $45 billion in Treasuries and $40 billion of mortgage-backed securities. It should dial down its buying of mortgage bonds before Treasuries so as not to favor a specific part of the economy... If we begin reducing purchases, all the reduction should come out of the MBS. I just don’t think it’s appropriate for us to be channeling credit to one particular market.”
But wait, it gets even better! Lacker speculated that the U.S. economy would grow at a mere 2% over the next 12 months – barely above “recessionary stall speed” – but didn’t see this as a reason to forestall any of these moves. No wonder Wall Street’s senior managers are looking to back out of the market!
Looking back to the DJIA chart, we note that Tuesday’s action did not break out of the falling trend. And when we look down through the corollary indicators, we still see sell signals across the board.
Without stronger upside signs, we’re standing by our initial target of Dow 14,431.
The Telling Detail
I’d like to take a look at another asset that’s moving on the whole Syrian crisis. But this one actually has the long-term trend behind it!
I’m talking about gold, which has been popping and dropping over the past few days as the Syrian crisis drove inexperienced junior traders just a little nuts. But, that’s all short-term stuff.
Before I get to the chart for today, I’d like to offer you a different sort of story out of the Middle East.
According to the World Health Organization, some 30.2% of men and 43% of women in Dubai in the United Arab Emirates (UAE) are fat. We’re talking seriously obese here.
So the Dubai Municipality, Dubai Gold and Jewelry Group, and Dubai Multi Commodities Centre got together to sponsor its own “Biggest Loser” contest this summer. In Dubai, oil might be where the wealth comes from but gold is still respected as good money. So participants who lost more than 2 kilograms (4.4 pounds) received a gram of gold worth some $49 for each kilogram of fat they lost. The three “biggest losers” will make off with 20,000 dirhams ($5,445) in gold coins (a small sample shown below).
My point is simply this: Outside of the western bubble, a large portion of the world still connects health, wealth, and good fortune with gold.
This is a very long-term trend – as in thousands of years – that isn’t likely to change anytime soon, regardless of gold’s short-term gyrations.
Gold is Putting in a Bookend Buy Signal
And indeed, we see that gold, as exemplified by the SPDR Gold Trust (GLD – NYSE) chart below, has put in the counterpart to the DJIA’s Double Top – a solid rounding bottom and a 3x Buy Signal Stack, and a steady rise through most of the summer.
What do gold buyers see that the rest of the market has missed?
Is it that they don’t believe the Fed will taper at all – and will instead act to push down the U.S. dollar?
Or maybe they’re watching Washington run headlong into another spending cap crisis?
Without further spending cuts or extension of borrowing limits, current estimates have the national checkbook coming up short in mid-to-late October.
Long-Term Cycles Trumping Short-Term Politics
Junior Gold Fund manager Angelos Damaskos credits the increase in political risk over the last few weeks by saying (emphasis added)…
Long-term, I think investors will return to the mood of the last 12 years. As stocks have reached all-time highs, companies will fail to deliver promised earnings and dividend growth, which will provide the next catalyst for an upward trend in gold that will go beyond current levels.
BullionVault’s head of research, Adrian Ash, acknowledges politics as a stimulant, but thinks it’s more of a cyclic issue. He says…
It’s like summer 2013 never happened for gold and silver. The dramatic downturn in U.S. data, plus the fresh wrangling over the U.S. debt ceiling, have seen both metals recover all of June’s slump. Bullion prices say Fed tapering is off the table for September, and that’s before the Syrian crisis puts a real premium on crude oil. Since April 1968, there have been 15 rolling three-month periods where gold in sterling has lost 24 percent or more, and after each of these three-month periods, gold prices rose again over the next three months, resulting in an average 20.7 percent increase for [U.K.] investors.
Looking back to the GLD chart, we know one thing for sure…
Regardless of expressed reasons, gold buyers’ demonstrated behavior looks like it will drive the GLD to resistance at the 61.8% retracement marker at $141.86 over the next few weeks for a 4.2% net gain from current price.
That’s when things get really interesting.
Once the GLD clears that barrier, it could easily double this summer’s gain in short order!
As always, the charts tell all.
Sincerely,
Adam Lass
Bottarelli Research Newsletter
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