Market Exit Back to Neutral

A positive day for high-yield will move the option adjusted high yield spread below the danger zone.


One Chart to Rule Them All

I've seen more than one macro economist say the U.S. dollar will plunge next year. There are lots of theories about why the dollar will decline. The latest comes from Stephen Roach.

ZH: Yale Economist Warns Of Looming Dollar Collapse

The first bit is from dollar permabear Peter Schiff:

With the federal budget deficit exploding towards 16% of gross domestic product this financial year, according to the Congressional Budget Office, the savings plunge is only a hint of what lies ahead. This will trigger a collapse in the US current-account deficit. Lacking savings and wanting to invest and grow, the US must import surplus savings and run massive external deficits to attract foreign capital.”
Basically the same thesis that every dollar bear has peddled for the past 40 years. Here's the thing about cyclical markets though: broken clocks get to be right once in a awhile. In this case, about about once every 18 years.

Back in 1985 and in 2002, the U.S. dollar began precipitious declines that lasted for 2 to 3 years. In both cases, the DXY fell through its 6-year moving average like a hot knife through butter and kept on falling with little to no countertrend rallies.

How much does Stephen Roach say the U.S. dollar will fall? 35 percent. Or almost the exactly same target you would get from looking at the DXY chart for a few minutes. Where's my Yale PhD?

Below I highlight the measured moves in the DXY after it broke through its 6-year moving average. The final two charts show possible targets for DXY nexy year assuming similar declines and Roach's forecast.

Unless Roach is claiming the dollar will break long-term support next year, he's predicting it will proceed within its 40-year cycle. I believe a dollar bear market is possible because it is time based on the prior two cycles. Additionally, this would be a healthy decline for the U.S. dollar and the global economy. It would not threaten the U.S. dollar. Break support and then we can talk about dollar doom.

A bear market isn't guaranteed though, at least not yet. Right now the U.S. Dollar Index is testing its breakdown. Neither the 1985 nor 2002 bear markets looked back after slicing though their 6-year moving average. A reversal this time would catch many traders off guard and open the possibility of the dollar breaking above its long-term resistance again. It would be historically significant, albeit within a sample set of three.

The important area is the blue horizontal at 95.95, call it 96. Below this line, the dollar bear scenario is in play. Below 88 on the DXY and I would throw nearly all caution to the wind in forecasting a bear market. Above 96 and we might soon be saying "Goodnight Gracie" to the dollar bear forecasts.

Largo Still Looking Good

As Long As They Don't Get Nationalized

Kefi. Lokos like a test of the breakout. Building a mine in Ethiopia. No position.

Trump Melt-Up

First an update: "market exit" signal is down to 5.52 percent. Below 5.50 percent, the bull market has nothing to worry about from the credit market.

On to the election. For this post, I only want to discuss broad market outcomes. My expectation right now is a Trump win causes a melt-up in the markets, broadly speaking. Gold, equities, you name it. A big reason there has been no infrastructure bill over the past 4 years was Russiagate and internal opposition from the GOP. If Trump wins, the opposition will wilt on this issue, particularly because the economy looks like it will crumble without stimulus. More imminently, if Biden were to implode tonight, the Democrats might quickly agree on a stimulus bill because their re-election chances will take a hit.

If Biden does well tonight or is seen as the destined winner, I suspect stocks will sell-off in October because wealthier investors will lock in this year's lower capital gains tax rate. Traders and investors positioned in "Trump trades" will shift out of them. After the election, and if the Democrats take control of the Senate, the spending floodgates will open. The dollar will likely sell off hard on a Biden win and various trades related to U.S. trade war with China would reverse.

Finally, stocks should rally if either candidate wins a clear victory on election night.

Sector performance remains mixed. Weakness in cannabis is the clearest sign (if we can take any of this as indicating election outcomes) that the market doesn't yet expect a Democrat sweep. Solar's move is good for Biden. Gun stocks might no longer be a good signal with Trump getting another SCOTUS nominee. Unless Barrett turns out like Souter, it looks like gun rights are secure for now.

ZH: "Crash-Up Risk": What If The Election Is Not The "Doomsday Event" The VIX Expects It To Be

Kraken Rising

Kraken is through all the meaningful resistance. The resistance lines matter, but I'm not sure how much. It will make a new monthly closing high if it holds its gains through tomorrow. My expectation would be close to $1.00 by year end, if not for a potential broad stock market correction between now and the end of October. Would look to add this on successful test of support levels.

Scotgold Keeps Running

Back in September I posted Why I Buy The Charts. I discussed Scotgold and it's great chart. The cursory fundamental research said it was probably an expensive mine, although my gut says they will find more gold. I like the story of the first and only commercial gold mine in Scotland. But really the story was the chart, the chart said buy. And now it's up about 70 percent in September.

I expect Scotgold will make a short- or intermediate-term top around the time they make their first pour. I may or may not add depending on how much it consolidates. Not worth chasing here. There are many similar charts still in their basing pattern.


O3, O4, O5

O3 Mining completes the base and breaks out. Closed at $3.06 today. volume has been rising. Measured move alone takes it to $5 per share.

Taking Profit to Hang Ten

I sold some NCP today and took a position in Group Ten PGE.V and PGEZF. Still like NCP, chart looks good. But PGE;s market capitalization is now about one-third cheaper. If nothing else, I'm diversifying exposure to this area. I think platinum is very undervalued. there are other miners with similarly attracive charts, as I've shown before.

PGE is exploring in the Stillwater area. I think there's greater potential for stock-specific news flow in PGE in the near term. As shown below, both stocks have traded similarly in the recent past. PGE has performed much better over the long-term. PGE looks like it could encounter resistance up to 50 cents before breaking out of its massive base.

Update: Aurania Going For It

The all-time high was $5.21, not a closing high. Above that level, I think this should run. Below $5.00 and could be a consolidation before the final breakout in a few weeks or months.

Prior: If the stock has some company specific catalysts ahead, a significant breakout could be underway. There's a gap 11 percent lower at $4.49 that will want to get filled on a broader pullback in the miners.

If The Market Is Going Down

CME Group looks like a short. A move below $160 would complete the pattern. A correction could take it to around $150, a bear market would open the blue horizontal at $75, but this isn't even a correction yet...

Digital Currency Completes the Last Mile for Payment Apps

Digital RMB will complete the "last mile" for payment apps by making it possible to transact with people on different apps or when one pary is offline. 21st Century: 挑战微信支付宝痛点 解码数字人民币比较优势
Although from the perspective of user experience, Mu Changchun also said frankly, “For ordinary people, the boundary between electronic payment and central bank digital currency for basic payment functions is actually relatively blurred.” But it is worth noting that this The experience result is based on the network environment and payment environment that have certain conditions. If it is in a scene where online payment is not available in subways, airplanes, remote areas, etc., the digital renminbi can exhibit characteristics superior to those of Alipay.

Hao Yi said that there is basically no difference between the use of digital renminbi and Alipay in big cities. The difference between the two is not at the scene level, but in the technology, that is, dual offline payment technology. In other words, digital renminbi can complete transactions without the Internet, and it also promotes the expansion of transaction scenarios.

"If WeChat Pay and Alipay must do dual offline payments, it should be possible." Dong Ximiao, deputy dean of the Chongyang Institute of Finance, Renmin University of China, also believes that the cost is too high due to the multi-party technical transformation and the requirements for equipment. Enterprises have no motivation if the input-output ratio is too low, and now they have a huge number of users.

A reporter from 21st Century Business Herald conducted an offline payment test on WeChat Pay and Alipay and found that one party must be online to complete the transaction. Currently, the dual offline payment that the digital renminbi intends to achieve cannot be realized.


A Yen For Trouble

I spy with my little eye, a small inverse H&S patter that takes FXY to 94 if it completes. USDJPY shows a similar pattern. The target is the green line, USDJPY 99.

A rising yen could accmopany a weaker U.S. dollar or the yen could rise against a strengthening dollar during a bout of risk aversion.

Investment Banks Say Buy Buy Buy Evergrande

乐居财经: 六大投行力挺恒大:降负债超预期 目标价23港元
Let's take a look at the views of these top big players:

Deutsche Bank: Evergrande’s large, high-quality land bank and strong execution will ensure that it completes its 800 billion internal control sales target. It is expected that at least half of the 130 billion war investment will continue to cooperate. This adjustment brings a good opportunity to increase its holdings.

Lyon: Evergrande has formulated a clear three-year debt reduction plan. Coupled with the separation and financing of properties and automobiles, it is believed that the effect of debt reduction will far exceed market expectations. The stock price adjustment has brought investors a good opportunity to buy bottom.

JPMorgan Chase: The market has overreacted to the rumors. It is expected that Evergrande will reach a consensus with strategic investors for an extension. The current valuation is very attractive.

DBS: The sharp correction in the stock price is mainly due to short selling. Evergrande’s strong sales performance, coupled with the potential benefit of renegotiation with strategic investment, will trigger short covering and a sharp rebound in the stock price.

Galaxy Lianchang: The separation and listing of Evergrande properties and automobiles will drive the net debt ratio to drop by 50%. Coupled with strict control of land acquisition, it is expected that Evergrande's net debt ratio will drop significantly below 100% in 2021.

Huatai Securities: Evergrande’s strong sales and collection performance, the spin-off and listing of automobiles and properties are expected to bring about 50 billion cash flow, and the financial status will be further protected.


Long-Term Stock to Bond Ratio

The Dow Jones Indsustrial Average peaked in 2018 versus the 30-year bond. The Nasdaq (Nasdaq 100 in the chart below) has gone much higher. Highlights the divergence in performance. Also, moving forward the Dow and Nasdaq will resolve in a similar manner, but the Dow chart looks kind of bullish. Dow beating Nasdaq and bonds would likely accompany tumbling bond prices and higher inflation in coming years.

U.S. Dollar Threatens Reversal

The U.S. Dollar Index could re-enter the triangle pattern. It spiked above durng the March panic and went below in July. The level I'm looking for is 96. Above that line, it will clear the 6-year moving average. It has already broken above its 7-year moving average, but the 6-year is the entirety of the bull market. The 5-year moving average is slightly above 96 on the DXY. Why this matters: the U.S. Dollar Index broke through its 6-year moving like a hot knife through butter in 1986 and 2002. Both came after the beginning of USD bear markets and the greenback would tumble relentlessly for another 18 months and 2 years, respectively. A bounce and continuation of the break would leave open the possibility that the dollar peaked in March 2020 and will not make an initial bottom until sometime around late 2021 or 2022.
If instead the dollar reverses, there's no precedent. Looking over the history, the most likely analog is the 1997-1999 consolidation. Back then, the dollar made a higher low in October 1999. The current bull market (if extant) made a higher low in August 2020. It did not breach its moving average back then, however. Another difference is this one is much larger in time, 5 years into a pattern versus 2 years. At minimum, the dollar would be expected to run for another 2-plus years or go much higher than expected.
Finally, if this is an analog, the Fibonacci retracements are similar.
I have made comparisons between the current stock market and the late 1990s.

September 2018: It's 1998

At the low in 2018: What a Tantrum, Is 1998 in Play?

March 2020: About That 1998 Analog and Y2K Scenario

April 2020: 1998 Again: The Greatest Bubble in History

Most recently looking at a similarity between Nasdaq 3/2000 and Nasdaq 9/2020: Nasdaq Reversion Getting Mean

Aurania Battling for Breakout

If the stock has some company specific catalysts ahead, a significant breakout could be underway. There's a gap 11 percent lower at $4.49 that will want to get filled on a broader pullback in the miners.

Copper Miner Reversal Or Doom

If the copper miner ETF fell out of the triangle pattern again, a termination of the move after a loss of about 10 to 15 percent would opent the door to another inverse H&S pattern similar to the one in 2016. However, the broader mining ETF is threatening a move more on the order of 40 percent if it can't retake the horizontal.


Market Exit Signal: Missed a Fakeout

I didn't mention one other fakeout by the market signal. I consider it a fakeout because I do not use this as a short-term timing signal because there's no buy signal. The signal goes to buy when the spread stops rising. However, back in 2012 there was a correction of about 4 percent around the presidential election. You could have shorted when it first went through in September 2012 and gotten shaken out when it fell below 5.50, but if you went back in on October 31, you would have caught a 4 percent down move. Not worth the hassle of going short unless you're towards the daytrading end of the trading spectrum.

I prefer using this as a long-term signal, combining it with other signals to confirm a top is underway or even past.

Evergrande Under the Radar

Markets outside of Hong Kong seem to be ignoring this news.

FT: Evergrande bond trading halted on reports of cash crunch

Trading in onshore bonds of China Evergrande, the world’s most indebted developer, was halted after reports it was seeking government help to stave off a cash crunch caused the price of its shares and debt to tumble.

Shanghai’s stock exchange suspended trading in Evergrande bonds for half an hour on Friday morning, citing “abnormal fluctuations”. Their prices plunged from just under Rmb90 ($13.19) to finish trading at Rmb74, compared to their par value of Rmb100.

Evergrande’s shares and debt prices dropped after a letter, purportedly from the company, circulated on Chinese social media on Thursday requesting support for a previously planned reorganisation from the provincial government in Guangdong, where Evergrande is based.

I searched and saw a link broken for news, but this came up from Sina: 中国恒大集团:截至2020年6月30日现金余额人民币2046亿元
China Evergrande Group: As of June 30, 2020, the cash balance is RMB 204.6 billion
Reuters: Evergrande's too-big-to-fail bind comes to a head
Evergrande beseeched officials in its home province of Guangdong for assistance with a so-called back-door listing, according to a copy of the Aug. 24 letter, whose authenticity was confirmed by Reuters sources. The idea, first proposed as part of an October 2016 restructuring, was for subsidiary Hengda to combine with a publicly traded state developer. If the deal doesn’t happen by January 2021, a group of investors can demand repayment of some 144 billion yuan, or about $21 billion, all of Evergrande’s cash as of June 30.

The letter suggests a private sense of concern that Evergrande rarely exhibits in public. Chairman Hui Ka Yan often provides a helping hand to Beijing, supporting national goals such as poverty alleviation, even as its own debt load has surpassed $100 billion. Evergrande shares tumbled by as much as 6% on the news. S&P Global cut its outlook on the credit rating to negative from stable. The Shanghai Stock Exchange temporarily suspended trading in two of the company’s bonds on Friday.


If things get messy....I used today's late bull surge to load up on puts. Hopefully I'm not catching the start of a bull move, but high-yield performed poorly today, consistent with the market exit signal...

Time to Dust of the Shorts List

The Market Exit signal has triggered. I'm not going to sell everything and get short just yet, but my cash is now looking for put options as long as the ICE BofA US High Yield Index Option-Adjusted Spread is over 5.50 percent. the alarm bells sound at 7.50 percent, there's not necessarily an imminent move in the market coming, though there could be. It could also be a false signal that reverses. My gut and other charts tell me it isn't false. There is more downside ahead. Update: After going through some charts, I'm taking some mining profits in highly volatile miners (silver) and some low vol ones I don't think will run away from me if I'm wrong. I'm adding some puts. I have about 100% of my trading account hedged. Taking advantage of today's strength. If it gets much stronger into the close, I might be wrong, but thus far the high-yield ETF HYG is still red on the day. It's not confirming today's rally.

Aurania Possible Breakout

I have a horizontal at $4.95, and the high from early 2018 is $5.21 per share. Aurania briefly broke $5.21 today, currently trying to hold the $5.00 area. This is a popular and expensive stock. It trades about 10x to 20x what similar companies trade at, plus it is in Ecuador, no longer a friendly mining jurisdiction. It's expensive for two reasons. One, it is founded by Keith Barron. He found a big deposit in Ecuador in the last bull cycle. Two, he is looking for mines that supplied the Lost Cities of Gold. It doesn't get any more "castle in the sky" than this.

Mianmi Herald: Have these men found a forgotten road to lost Spanish gold mines in Ecuador?

The two mines, Logroño de los Caballeros and Sevilla de Oro, were established around 1562 and abandoned 40 years later after a smallpox epidemic killed the indigenous workforce and the Spaniards came under prolonged attack from local tribes. At one point the conquistadors who owned the mine appealed to the Spanish crown to send African slaves to keep the enterprises alive, but by that point the empire was bankrupt. As the jungle reclaimed the area, the mines themselves were lost to history — last pinpointed on maps in about 1650. Barron’s obsession with the South American mines began almost by chance.

Taco Watch

My preferred resoltion right here is a broader market decline and taco fails to follow with a breakdown. Then I would be bullish, but still have a nice entry price.


Decisive Move in Markets Coming Soon

A signal I use for exiting the market is close to resistance. On the other side, many precious metals stocks are testing support levels after recent breakouts.