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InterMarket Review / Volume 33 No. 9 1
1. Rising trend favoring US equities over the rest of the world is starting to look vulnerable.
2. Gold is still classified as bearish, but some green shoots are developing.
3. Sector watch continues to favor earnings driven over liquidity.
4. The Dollar Index is still bullish, but very delicately balanced. Can’t afford a month-end close under 97.
InterMarket revIew
MartIn PrIng’s
Commodities: CRB Spot RM – Monthly close below 462 for a negative 12-month MA crossover or below 464 for a negative 65-week EMA crossover.
Currencies: Dollar Index – Month-end close below 97.3 for a negative 12-month MA crossover; below 97.3 for a negative 65-week EMA cross.
Credit Markets: Bonds – Above $130.8 for a positive 12-month MA cross Friday close for Barclays 20-year Trust; above $7.8 for a positive 65-week EMA cross.
Global Equities: MSCI World ETF – Below $57.40 for a negative 12-month MA crossover and below $57.9 for a negative 65-week EMA cross.
Precious Metals: Gold – A month-end close above $1262 for a positive 12-month MA crossover; a Friday close above $1234 for a positive 65-week EMA crossover.
US Equities: S&P Composite – Month-end below 2128 for a negative 12-month MA crossover; a Friday close below 2125 for a negative 65-week EMA crossover.
PublIshIng a synoPsIs of the world’s InterMarket analysIs for over 35 years.
Markets approaching important benchmarks. (These are not predictions, merely important chart points.)
Market suMMary Markets requIrIng actIon
6208 93rd St Cir E, Bradenton, FL 34202941-926-9664
Chart of the Month ..............................................................2Guidelines for IMR Asset Allocations .................................3U.S. Dollar-Based Asset Allocation.....................................4Pring Turner Stages and Sector Analysis ...........................5Overview and Global Financial Markets .............................6U.S. Stock Market.............................................................10U.S. Credit Markets ..........................................................17Commodity Markets..........................................................21International Markets ........................................................26Currencies ........................................................................33Precious Metals ................................................................39
contents
February, 2017 VOL. 33, NO. 9
Published and all rights reserved by Pring Research. In addition to publishing the InterMarket Review, the International Institute for Economic Research, d/b/a Pring Research, also acts as a consultant on financial markets and operates as an investment advisor.
Before making specific investments, further investigation is recom-mended. Although information contained in this publication has been derived from sources which are believed to be reliable, they are not always necessarily complete and cannot be guaranteed. Neither Pring Research, Inc. nor any of its employees, or any person(s) or firm who is represented within this publication shall have any liability for any loss sustained by anyone who has relied on the information contained in this publication. Employees of this company may at times have positions in the securities referred to in this publication and may make purchases or sales of these securities while the publication is in circulation.
The views expressed in this publication are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group or its affiliates.
The INTERMARKET REVIEW © is published monthly by Pring Research, Inc., at 6208 93rd St. Cir. E., Bradenton, FL 34202. INTERMARKET REVIEW. Address all subscription querries to Circulation Dept., INTERMARKET REVIEW, [email protected], phone 941-926-9664, Monday - Friday, 9:00 A.M. to 4:30 P.M. EST. 2015 SUBSCRIPTION RATES: E-mail - $75.00 introductory quarter, $100.00 quarterly renewal, (12 issues). All payments in U.S. currency only, please. Cancelations MUST be made in writ-ing via email to [email protected], respectively. Unused months will not be refunded unless requested.
2 InterMarket Review / February, 2017
Chart 1
They say that a bull market climbs a wall of worry. That wall currently facing US equity market participants has its roots in excessive levels of valuation. One of these measures, which has stood the test of 116 years of time, is the Shiller Cyclically Adjusted Price Earnings Ratio. We think of it, not so much as a valuation measure, but as a gauge of sentiment. Extremely high readings indicate investors are expecting rapid growth, otherwise why would they pay such a high price for $1 worth of earnings? By the same token, low readings reflect fear and pessimism, as investors demand to be compensated for what they perceive as huge risks.
Chart 1 displays the ratio from a historical perspective, whereas Chart 8 limits itself to the most recent couple of decades. Since extreme levels in the P/E are important in that they provide a clue as to the degree of optimism or pessimism amongst market participants, the current high reading, on the surface, looks pretty scary. However, we believe the trend to be equally if not more important. For example, in 1996 the P/E stood at 29. Anyone using that historically high reading to sell would have sat out several years of a rising market. Only when the ratio reversed did the stock market follow suit. It is never possible to consistently identify such turning points as they are developing, but pretty well all of the secular trend reversals since the 1920’s have been confirmed by long-term trendline breaks. Fast forward to the present.
The preliminary reading for January was significant from a trend point of view, due to the fact that the ratio experienced a tentative breakout from an almost 15-year reverse head and shoulders pattern. The long-term KST also went bullish (see Chart 8). We do not know how long the implied rally in sentiment will play out. However, as long as the P/E is able to maintain a position above its 48-month MA and red (2009-17) up trendline, historically high valuations will remain a wall of worry. That means that normal valuations will be set aside, as the forces of irrationality temporarily obtain the upper hand. For the record, the 48-month MA and up trendline are at 25, and the upside objec-tive called for by the inverse head and shoulders is for a P/E just shy of 60. That is certainly not a forecast. What we can say though, is that when the psychological elastic finally breaks, as in always does, that will be the time to adopt a very cautious stance.
chart of the Month: The Shiller P/E Ratio
InterMarket Review / Volume 33 No. 9 3
Asset AllocAtion RecommendAtions
* Dependent on market action. ** Stop is based on Friday close. *** Buy on Friday close above.
The portfolio allocations presented above for the Inter-market Review (IMR) have two functions. First, they are intended as a guide for a neutral investor; i.e., one who lies between conservative and aggressive. For example, we may recommend a 40% allocation to US stocks. An older more conservative subscriber looking for income and safety may conclude that such an allotment may be too aggressive. On the other hand, a younger investor, who has time and cash flow on their side, could find the 40% overly conservative. The basic point is that these allocations should only be taken at face value if you consider yourself to be a neutral investor.
The second purpose of our allocations is to summarize our thinking about the markets in a practical, executable way. For example, we might conclude from the position of our indicators that inflation hedge stocks and commodities are headed higher. In that instance, the allocation page would be used to emphasize those views by recommending inflation driven sectors, resource based country ETF’s, such as Canada and Australia, as well as commodity index ETFs or individual commodity ETF’s. We might even include an inverse bond ETF to undermine our inflationary expecta-tions. By the same token, if our indicators suggest a global bear market for equities, that portion of the portfolio would be greatly reduced. This equity exposure would most likely comprise defensive sectors such as utilities and consumer staples. Greater exposure to long-term bonds and cash would round out the picture.
Guidelines for IMR Asset Allocations
Various asset classes and sectors perform differently in different parts of the business cycle. Our recommendations are usually consistent with the prevailing stage as flagged by our models. Technical factors that we take into consideration are long-term moving averages, such as the 12- month or 65-week time span, the absolute long-term KST, relative action and the long-term KST for relative action. Individual US equity sectors are compared to the S&P Composite and country ETF’s to the MSCI World Stock ETF (ACWI).
Since there is always a bull market somewhere and some investors have an insatiable appetite to be constantly active, we do, from time-to-time, recommend spreads where it’s possible to take advantage of a trend in a relationship that can benefit regardless of the market’s direction. For example, transports tend to be an early cycle leader and energy a laggard. If the technicals were consistent, a long transports/short energy ETF trade might be appropriate.
In most instances, risk management stop losses are rec-ommended. The stop will typically be placed below a previous short-term low or more commonly under a 65-week EMA. Each month the stop levels are reviewed and where possible are raised. When a market or sector is considered vulner-able, stops will be tightened aggressively. Because markets can move strongly between issues, new subscribers should always assess the risk between current prices and stop levels to make sure that the difference is manageable. If it is not, it probably means the security in question is overstretched and you are better advised to wait for a correction.
US Stocks 70%
International Stocks 13%
Recommended U.S. Sector ETF’s
Guggenheim S&P 500 Equal Weight Materials ETF (RTM)**$87iShares Dow Jones US Oil Equipment ETF (IEZ)**$37.50iShares North American Tech-Multimedia Networking ETF (IGN)**$39iShares Dow Jones US Reg Banks Industries ETF (IAT)**$35.50PowerShares S&P 500 HI Beta (SPHB)**$31PowerShares S&P Small Cap Financials Portfolio (PSCF)**$43First Trust ISE Cloud Computing (SKYY)** $31.25First Trust ISE Water Index Fund ETF (FIW)**$34.75Global X Copper Miners ETF (COPX)**$15.60Global X Fertilizer (SOIL)**$8.65Guggenheim S&P 500 Equal Weight Industrials ETF (RGI)**$88iShares Dow Jones Transport. Average ETF (IYT)**$150iShares Dow Jones US Brok-Dea. Ind. ETF (IAI) **$41iShares S&P Global Technology Sector ETF(IXN)**$105iShares S&P NA Nat. Re. Sc. Idx. Fd ETF (IGE)**31.60iShares US Energy (IYE)**$36.50iShares US Industrials (IYJ)**$109Market Vectors® Environmental Services ETF (EVX)**$66PowerShares Cleantech ETF (PZD)**$30.50PowerShares S&P SmallCap Energy ETF (PSCE)**$16.30PowerShares S&P Small Cap Information Technology Porfolio (PSCT)**$57
Cash 17%
4 InterMarket Review / February, 2017
U.S. Dollar-based asset allocatIon
January saw our business cycle model extend its Stage IV status for a third month. In Stage IV, bonds are bearish with stocks and commodities in bullish territory. One further observation is that bonds are at 0% and commodities 100%. That means these models are now in the second month at their maximum inflationary mode. In effect, they are offering a strong signal that deflation and interest sensitive assets should be downplayed in favor of earnings driven and inflation sensitives.
Additional evidence for the more inflationary theme also comes from recent breakouts in com-modity sensitive country ETF’s, such as Canada, Australia, Russia, Norway, Chile, etc. In this re-spect, the Canadian and Australian dollars look as if they are in the final process of completing bases. KST action is currently favorable across the board, which means upside breakouts are likely.
A second theme that may be about to emerge is a reversal in the trend favoring superior per-formance by the US versus the rest of the world. We emphasize the word “may”, because several indicators, whilst hinting at US relative vulner-ability, are not quite there yet. Remember, this is a trend that has been in force for 6 ½ years and will require quite a bit of technical work to reverse.
While the relative strength line for the US (SPY) against the MSCI World Stock ETF (ACWI) has not yet signaled a reversal, those of sev-eral country ETF’s have already experienced the completion of bases or multi-year trendlines. If, as and when the SPY/ACWI ratio does reverse, this list of individual country funds will definitely broaden.
One area that will help determine the course of this RS line will be the US Dollar Index because the two usually move in tandem. US equities tend to outperform when the dollar rises and vice versa. As discussed in the currency section, the technical position of the dollar is mixed. Were the Index to cross below its 12-month MA at just over 97, that would confirm any weakness that might show up in the US/Rest of the world relationship. Alternatively, renewed dollar strength would most probably extend the trend of superior US equity
performance. We would like to come down hard on one side or the other but that is just not pos-sible with the evidence as currently presented.
AllocationsOur Stock Barometer is bullish, so our US eq-
uity allocation is being maintained at 70%. Since the cycle is now in a Stage IV, our recommended sector ETF’s are focused on resource as well as other earnings driven areas. Interestingly, the resource part of the formula is causing several commodity sensitive international country funds to perform strongly at present. That means the implied lopsided 70/13 allocation ratio favoring the US is, in reality, more evenly matched. The international allocation consists of a 2% exposure to each of the following Global X MSCI Argentina ETF (ARGT) ($21.50), iShares MSCI Chile Capped (ECH) ($35), Global X MSCI Norway ETF (NORW) ($10.50), the Van Eck Vectors Russia ETF (RSX) ($16.60) and a 1% exposure to the iShares MSCI Frontier 100 (FM) ($24.30). We are also recom-mending iShares Germany (EWG) ($25), Market Vectors Poland (PLND) ($13.30) iShares Thailand (THD) $69.50) (above $78).
Figures in brackets represent Friday close protective stops.
We would add a 10% allocation to the Pow-erShares DB Commodity Tracking ETF (DBC) in the event that it experiences a Friday close in excess of $16.
February 1, 2017
Martin J. Pring
InterMarket Review / Volume 33 No. 9 5
• Stage 4 figures are monthly returns on an annualized basis. They represent averages of Stage 4 performance for the 19 signals since the mid-1950’s. Individual Stage 4 performance may vary considerably from the average.
• This performance data only measures sectors/industry groups where a multi-decade price history exists. Thus, it does not include internet stocks, etc.
• Performance is based on price not total return.
STAGE 4 – SECTOR WINNERS
Stage 4 Summary 1955-2011
- Signals 32 - Average Duration 6.8 months - % of total period 32.6%
* Monthly change annualized percent
6 InterMarket Review / February, 2017
World Overview & Global Financial Markets
Chart 2
The World Bond Index (BWX*3+AGG Spliced) and a Long-term Momentum Indicator
The World Bond Index remains slightly below the 2003-17 support trendline, so we cannot yet say that decisive breakout has materialized How-ever, it remains below its 12-month MA and the long-term KST is bearish, implying a primary bear market. Right now the short-term KST in Chart 3 is in a rallying mode and its intermediate counter-part is deeply oversold. That suggests some form of an advance or consolidation of recent losses is likely. It is important to remember though that if our bear market assumption is correct, this will take the form of a counter-cyclical move and that means a subpar, and likely deceptive move.
Global commodities are in a totally opposite condition as the primary trend for both price and momentum is bullish. Whereas bonds are over-sold short-term, commodities are overbought. Last month we pointed out that at the start of a bull market, an overstretched market does not necessarily result in a worthwhile correction. We referred to the examples contained in the ellipses in Chart 4. With our global commodity index at a new high, in the face of an overbought and declining indicator, it seems that a similar script is being followed in the current cycle.
InterMarket Review / Volume 33 No. 9 7
World Bond Index and Two KSTs
Chart 3
Global Commodity Index and Two KSTs
Chart 4
8 InterMarket Review / February, 2017
Chart 5
iShares MSCI ACWI Index Fund (ACWI) and an OECD LEI Indicator
The reason for a buoyant commodity trend lies in the fact that the global economy is starting to gain some strength. This is also bullish for stocks of course, as demonstrated in Chart 5. The verti-cal lines illustrate when the economic indicator crosses above zero, stocks usually have much fur-ther to run on the upside. In two instances,1980 and 2013, there was not much upside potential, but that was because the economic recovery was short-lived. That is a great reason for keeping close tabs on this series; to make sure it contin-ues to maintain an upward trajectory.
InterMarket Review / Volume 33 No. 9 9
iShares MSCI World Stock ETF (ACWI) and a Diffusion Indicator
Chart 6
Chart 6 compares the MSCI World Stock ETF to a diffusion indicator that monitors a basket of individual local currency country indexes that are above their 24-month MA. Two things are evident. First, the indicator is in a rising mode, which is bullish. Second, the current reading is still relatively modest, being around the equilib-rium level. Working on the assumption that an overstretched reading is achievable, that should leave quite a bit of upside potential for the cur-rent bull market.
10 InterMarket Review / February, 2017
U.S. Stock Market
S&P Composite and the Stock Barometer
Chart 7
As expected, our Stock Barometer remained unchanged at a bullish 66% reading. It is unlikely to improve any more this cycle because the two remaining bearish components are driven by in-terest rates and commodity prices, both of which are in bull markets and therefore unlikely to turn positive for stocks.
Even so, the vast majority of our primary trend indicators continue to point to higher prices over the course of the next few months.
What About Those Earnings?One of the worries facing US equity market
participants is high levels of optimism as reflected in historically elevated valuations. This can be seen from Charts 1 and 8, which feature the Shiller P/E ratio in both an historical and more recent period. Chart 1 tells us that the ratio is at an extremely overstretched and at a danger-ous level. Actual extreme levels in the P/E are
InterMarket Review / Volume 33 No. 9 11
S&P Composite and the Shiller P/E Ratio and Its KST
Chart 8
significant in that they provide a clue as to the degree of optimism or pessimism among market participants. However, we believe the trend to be equally, if not more important, since pretty well all of the secular trend reversals since the 1920’s have been signaled by long-term trendline breaks.
Chart 8 also shows the breakout from an almost 15-year reverse head and shoulders pat-tern in greater detail. It also developed under the background of a long-term KST buy signal. We do not know how long the implied rally in senti-ment will play out. However, as long as the P/E maintains a position above the red (2009-17)
up trendline and 48-month MA at 25, historically high valuations will remain a wall of worry on the back of which this bull market will continue to rise. This is not to say that such a condition is not dangerous for it certainly is. However, as long as market participants continue to bid up prices and thereby stretch the psychological elastic, there is less to worry about. When the elastic finally breaks, as it always does, that will be the time to adopt a very cautious stance.
12 InterMarket Review / February, 2017
Chart 9
Deflated S&P Composite and Two Indicators
Selected Primary Trend IndicatorsChanges in the level of the ratio between the
S&P and M2 (Chart 9), tell us whether an increase in the money supply is feeding back into improved economic activity and so forth. A declining ratio means the market is sensing that insufficient liquidity is being pumped into the system. When the market, in the form of the S&P, senses that this additional liquidity is actually going to have a positive effect, the ratio rises.
The trajectory of this indicator has mirrored each of the secular bull and bear markets since the 1920’s. Right now, it is caught right at a key 16-year resistance trendline, so any additional strength will result in an upside breakout. That seems likely given the fact that the 48-month (4-year) ROC has just broken above a 4-year down trendline. It is true this break would take place from a relatively overstretched level. That would not invalidate it, but merely underscore its high risk characteristics.
InterMarket Review / Volume 33 No. 9 13
Chart 10
Real Stock Prices (1870 - 2011) and the Financial Asset Velocity Indicator
Our Financial Velocity indicator in Chart 10, is a cyclical one that monitors the combined ROC of bonds, stocks and commodities. When it is in a rising mode, it signals that the combined velocity of the three financial markets is sufficient to be consistent with a primary bull market in equi-ties and vice versa. We use the blue 6-month MA as a directional trend indicator in view of the somewhat jagged (black) monthly observation. Right now, that MA is in a rising mode. It looks set to remain that way, because the latest Janu-ary data has just registered a new high for the current 2016 cycle.
14 InterMarket Review / February, 2017
Chart 11
S&P Composite and Two Indicators
The trend of margin debt is another useful primary trend indicator. Chart 11 features it in the form of a ratio to GDP, which reflects its im-portance to the economy over time. It is apparent that reversals flag primary price movements, as confident investors take on more debt during the course of bull markets, whereas cautious ones liquidate as prices retreat. Right now this relationship is in an uptrend as it is comfortably above its 12-month MA. However, it is positioned just below key resistance in the form of the 2000 high. The ratio briefly moved above it in 2015, but that developed at a time when the KST was declining. Now, that momentum indicator is in a bullish mode above its 9-month MA, which means there is an excellent chance that the ratio will soon move above the trendline, with the obvious bullish implications for equities.
InterMarket Review / Volume 33 No. 9 15
The Food ModelThe Food Model compares the intermediate
KST for the S&P Composite to the intermediate KST for the relative strength of the S&P Food Group. When the S&P crosses above the food RS KST the model is bullish and vice versa. The rationale is that investors favor the defensive food stocks when they are cautious and the S&P when confident. Chart 12 displays the difference between these two momentum indicators, which means that a zero reading is registered when the two KSTs are at the same level. The model also requires the S&P to confirm by trading above its 40-week MA. When both components of the model are bullish a green highlight appears on the chart. When they are bearish, a red highlight is displayed; black highlights reflect a conflict. Right now the indicator is rising, as the difference
S&P Composite and the Food Model
Chart 12
between the two momentum series is expanding. You might think that the current overbought read-ing is bearish, but that is not the case because it means the indicator is a long way from triggering a bear signal by crossing below zero. Just look at the strong performance to the right of the verti-cal lines which flag when it initially touches the 100 level. There are 18 instances since 1986 and each was followed by a worthwhile advance. We like those odds!
16 InterMarket Review / February, 2017
Stocks, Bonds and Utilities Last month we pointed out that the stock/bond
ratio had broken out from a 17-year consolida-tion formation. This month we repeat the chart, but this series has been plotted inversely (bond/stock ratio) in order to compare it to the relative action of electric utilities. Both series in Chart 13 usually trend in tandem, though occasionally their action differs. However, each series is now fac-ing an important support trendline. That for the ratio has already been violated of course, but the relative utility line is so far intact. Both long-term KSTs have started to roll over, so it seems likely that bonds will continue to deteriorate against stocks and drag the relative performance of utili-ties with them.
Electric Utilities Relative Strength versus the Stock/Bond Ratio
Chart 13
InterMarket Review / Volume 33 No. 9 17
Chart 14
U.S. Credit Markets
January saw no change in our Bond Barom-eter, which remained at its maximum bearish reading at 0%. The corporate/treasury yield curve, which compares the yield on 3-month commercial paper to that for 20-year treasuries has been rising of late, as short-term corporate paper has been advancing at a faster rate than long-term bond yields. Even so, it is a long way from an actual inversion when short rates move above their longer-term counterparts. This is important because the chart demonstrates that
iShares Lehman 20-Year Trust (TLT) versus the Bond Barometer
inversion or close inversions usually end up causing recessions, as the tight money they re-flect eventually causes the economy to weaken. Sometimes a recession develops but the curve does not invert; e.g. 1953. In such situations, a topping out of the KST substitutes as a warning device. In this respect, the vertical lines flag the start of economic contractions. Comparing them to the KST of the curve indicates that a bearish one is usually associated with a reces-sion. The blue arrows indicate false negatives.
18 InterMarket Review / February, 2017
Chart 15
Corporate/Treasury Yield Treasury Yield Curve and a Long-term KST
3-month Commerical Paper versus a Money Market / Commodity Momentum Indicator
Chart 16
InterMarket Review / Volume 33 No. 9 19
Chart 17
Full-time versus Part-time Help
The KST in Chart 15 has once again started to turn down. However, this is unlikely to be closely followed by a recession for three rea-sons. First, the KST is at a record level. Such an extreme reading, in any market, reflects extraordinary upside momentum, which often peaks well ahead of the price series it is moni-toring.
Second, the green and red highlights in Chart 16 show when the commercial paper/commodity momentum indicator is above and below zero respectively. Since it is currently close to a record high reading, a sell signal for rates and therefore the economy, is clearly some way off in the future. For the record, this indicator combines the momentum of the commercial paper yield with that for industrial commodities.
Third, when the ratio between full-time and part-time help rises, it is bullish for the economy because it means that full time, better paid jobs, are expanding at a faster rate than part-time ones. Chart 17 shows that the ratio has peaked well ahead of the last seven reces-sions, which are displayed in red. Since the ratio touched a new recovery high in December, no warning of economic softness has been given yet. A more precise timing signal for economic contractions develops when the price oscillator in the lower window crosses below zero. It is clearly a long way from doing that.
20 InterMarket Review / February, 2017
Chart 18
iShares Barclays 20+ Yr Treasury Bond ETF (TLT) and Three KSTs
We should add that this indicated future economic strength is typical of pretty well all the reliable leading indicators we follow. These would include the ECRI Weekly LEI, the Chemi-cal Institutes Chemical Barometer or our own Pring Turner LEI. All of these factors suggest that rates are headed much higher before this cycle has run its course.
Chart 18 offers the possibility that the Bar-clays 20-year Trust, the TLT, is in the process of completing a top. That would require a Friday close below $116. However, the short-term KST is in a rising mode and the intermediate coun-terpart is deeply oversold. That combination argues for this potential top to be completed later, rather than sooner. However, with the bond barometer in a bearish mode, we would not count on much of a counter-cyclical advance developing, even though several sentiment in-dicators are close to an extreme.
InterMarket Review / Volume 33 No. 9 21
Commodities
Chart 19
CRB Spot Raw Industrials and The New Commodity Barometer
Our Commodity Barometer continues to register its maximum bullish reading of 100%. This strong showing is also supported by several indicators.
22 InterMarket Review / February, 2017
Chart 20 for instance, shows that commodity peaks are typically preceded by a topping out of capacity utilization momentum, as displayed in fuchsia. That series is still rising. Moreover, mo-mentum for the American Chemical Institute’s Chemical Barometer invariably leads the capac-ity series. It is plotted in green and is also in a rising mode.
In addition, Chart 21 tells us that the KST and commodity diffusion indicators both continue to rise. Neither is yet even close to an overbought condition. That is not to say that they will reach an extreme this cycle, but as long as they continue to advance, a positive backdrop is being painted for commodities in general.
Chart 20
CRB Spot Raw Materials Index and Two Indicators
The more broadly based CRB Composite has just broken out from a base and moved above its 65-week EMA. Since all three KSTs are in a positive mode and none are overextended the all-clear for commodity prices over the near-term is being signaled.
InterMarket Review / Volume 33 No. 9 23
Chart 21
CRB Spot Raw Materials and Two Indicators
CRB Composite and Three KSTs
Chart 22
24 InterMarket Review / February, 2017
Chart 23
iPath Bloomberg Industrial Metals Total Return Sub-Index ETN ETF and a Long-term KST
Two commodity sub-indexes in Chart 23 are also looking positive. The first is industrial met-als in the form of the iPath Bloomberg Industrial Metals Total Return Sub-Index ETN ETF (JJM), as its price has recently moved above its 2011-17 down trendline. The long-term KST for this ETF has also reversed to the upside.
The PowerShares DB Base Metals ETF (DBB) in Chart 24 also looks positive from a short-term aspect. That is because it has just broken out from a base and is being supported by a positive intermediate and short-term KST.
The PowerShares DB Agriculture Fund ETF (DBA) is experiencing positive action from all three KSTs. The price itself has not yet broken to the upside with a Friday close in excess of $23. However, that KST action suggests there is a sporting chance of that happening.
InterMarket Review / Volume 33 No. 9 25
Chart 24
PowerShares DB Base Metals ETF (DBB) and Three KSTs
PowerShares DB Agriculture ETF (DBA) and Three KSTs
Chart 25
26 InterMarket Review / February, 2017
International Markets
Chart 26
SPDR S&P 500 ETF (SPY) / iShares MSCI EAFE (EFA) Indicator and Two Indicators
US versus the Rest of the WorldThe relative strength of the US to the MSCI
World ETF (ACWI) remains in an uptrend. Nevertheless, it is very close to the 2011-17 bull market trendline favoring the US, as well as the 200-day MA. A reversal seems likely as the Special K (SPK) has already violated its 2006-17 up trendline. Moreover, this indicator crossed below its signal line early in 2016 and is now experiencing a series of declining short-
term peaks and troughs. It remains to be seen whether the potential 2011-17 top is completed, but the declining short-term KST argues that a more decisive downside break of the trendline marking the base will take place. The ratio is calculated by dividing the daily close of the SPY by that of the ACWI and the breakdown point would be a decisive drop below the solid green line at 3.65.
InterMarket Review / Volume 33 No. 9 27
Europe, Australasia and Far East vs. The Rest of the World
The MSCI Europe Australia Far East ETF, the EFA, essentially represents the rest of the world excluding the US. Chart 27 shows that it has just completed a reverse head and shoulders and crossed above its 65-week EMA. Since all three KSTs are in a rising mode it seems like all systems go on the upside.
Chart 27
MSCI EAFE Index (Europe, Australasia, Far East) ETF (EFA) and Three KSTs
28 InterMarket Review / February, 2017
Chart 28
iShares MSCI EMU Index ETF (EZU) and Three Indicators
EuropeStarting with Europe in the form of the Eu-
ropean Monetary Union ETF (EMU) we see a breakout above two converging trendlines. The relative line in Chart 28 has also started to move to the upside and is being tentativley supported by the long-term KST for relative action.
GermanyOne European country that appears to be
moving ahead of the pack is iShares MSCI Germany Index Fund ETF (EWG) in Chart 29, where both KSTs are bullish and the absolute and relative breakouts far more decisive.
AsiaThe BLDRS Asian 50 has also experienced
an upside breakout, which is being supported by positive KST action. However, the relative line in the third window of Chart 30, is strug-gling to break above its down trendline and the 65-week EMA.
InterMarket Review / Volume 33 No. 9 29
Chart 29
iShares MSCI Germany Index Fund ETF (EWG) and Three Indicators
BLDRS Asia 50 ADR Index ETF (ADRA) and Three Indicators
Chart 30
30 InterMarket Review / February, 2017
Chart 31
iShares MSCI Thailand Inv Market Index Fund ETF (THD) and Three Indicators
ThailandOne Asian country that offers potential is
Thailand (THD), which is very close to break-ing out from a 4-year base (Chart 31). Relative action will likely break out as well, due to the positive long-term RS KST.
AustraliaThe Australian economy is very much influ-
enced by commodity prices, so it is no surprise that the Australian ETF (EWA) is acting in a similar manner to the bullish CRB Composite (Chart 22).
Latin AmericaLatin America also appears to be emerging
as the Latin 40 ETF, the (ILF) is close to breaking out from a base at a time when its long-term KST is bullish; relative action is similar.
InterMarket Review / Volume 33 No. 9 31
Chart 32
iShares MSCI Australia Index Fund ETF (EWA) and Three Indicators
iShares S&P Latin America 40 Index ETF (ILF) and Three Indicators
Chart 33
32 InterMarket Review / February, 2017
Chart 34
iShares MSCI Brazil Index ETF (EWZ) and Three Indicators
BrazilIts largest component, Brazil (EWZ) is right
at a 6-year down trendline and its RS line is in an uptrend (Chart 34). Since both KSTs are rising, we expect the EWZ to as well.
InterMarket Review / Volume 33 No. 9 33
Chart 35
US Dollar Index and Three KSTs
Currencies
US Dollar IndexThe Dollar Index is in a very finely balanced
technical position as it is above its 12-month MA and 65-week EMA, both of which are slightly above 97. However, as we can see from Chart 35, the long-term KST is slightly below its 26-week EMA. This indicator could easily turn bullish again. However, since it has slightly veered to the downside in the last couple of weeks, this is not encouraging, especially as the short- and intermediate KSTs are declining.
34 InterMarket Review / February, 2017
Pring Unweighted Dollar Index and Two Indicators
Chart 36
The Pring Unweighted Dollar Index (PUDI), which is constructed from eleven strategically selected currencies (Chart 36) is in an uptrend, but is also showing signs of tiredness. It is true the Special K (SPK) is above its signal line, but it failed to confirm the 2017 high in the Index itself. Normally, the SPK peaks and troughs with the Index, as you can see from the arrows. The two points we are focusing on are the two solid trendlines; one for the SPK, the other for the Index. Note the Index trendline is also at the same level as the 200-day MA, which reinforces its role as support. If both lines are violated, this would place a serious dent in the bullish case for the dollar.
InterMarket Review / Volume 33 No. 9 35
Chart 37
Select Currencies
The delicate nature of its overall technical po-sition can also be appreciated from the fact that four of the five currencies in Chart 37 are very close to their 24-month MA’s.
36 InterMarket Review / February, 2017
Euro and Three KSTs
Chart 38
EuroThe Euro has broken down from its recent
trading range, but the rising short-term KST is offering some hope to the bulls that the break will turn out to be false. If so, that would set the scene for a worthwhile rally. Alternatively, if the currency now moves to new lows the failure to rally significantly would represent a bear market characteristic, probably resulting in a long-term KST sell signal.
InterMarket Review / Volume 33 No. 9 37
YenThe yen remains below its key long-term MA’s
and appears to be in a primary bear market. How-ever, some near-term respite from the downdraft is likely because of the oversold nature of the short- and intermediate KSTs.
Chart 39
Japanese Yen and Three KSTs
Canadian DollarThe Canadian dollar looks as if it is forming
an inverse head and shoulders, as illustrated in Chart 40. We are watching for a decisive Friday close above 77c since that would not only com-plete this potential formation but also result in the clearing of the 65-week EMA. Positive KST action on all three fronts suggests that a breakout will materialize.
Australian DollarChart 41 shows the Aussie dollar is just above
key support in the form of a secular up trendline. We are looking for a break above the 77c level on either a month-end or Friday close basis, since that would complete the 2015-17 base thereby confirming that a bull market is underway.
38 InterMarket Review / February, 2017
Chart 40
Canadian Dollar and Three KSTs
Australian Dollar and a Long-term KST
Chart 41
InterMarket Review / Volume 33 No. 9 39
Precious Metals
Chart 42
GoldLike the dollar, but perhaps even more so,
the technical situation of gold is finely balanced. You can see this from Chart 42, featuring the price deflated by the CPI; gold as an inflation hedge, if you like. It is currently trading below its 12-month MA, but remains above the two
Deflated Gold and a Long-term KST
significant converging trendlines. To add to the uncertainty, the long-term KST is declining, but has not yet fallen enough to trigger a negative 9-month MA crossover.
40 InterMarket Review / February, 2017
Chart 43
SPDR Gold Trust ETF (GLD) and Three KSTs
SPDR Gold Trust ETF (GLD) and Three Indicators
Chart 44
InterMarket Review / Volume 33 No. 9 41
Chart 45
Gold/Bond Ratio (GLD/TLT) and Three KSTs
From the perspective of Chart 43, the price action since 2014 resembles a widening trad-ing range, which means that long-term MA crossovers tend to result in false signals, losing their significance to the two extreme points of the range. For the GLD, these Friday closes are around $101 and $131.
Complicating things even more is the fact that the short- and intermediate KSTs are rising and the more sensitive weekly long-term KST is absolutely flat.
One bullish clue would come from an upside break in the ratio between the Market Vec-tors Junior (GDXJ) and the Gold Shares ETF’s (GDX) as shown in Chart 44. Although the data history is limited, it does appear that a rising ratio, indicating a preference for junior golds is bullish, whereas a falling one, signifies a loss of confidence and is generally negative for the gold price. The recent sell-off in the ratio was less severe than that of the gold price itself.
That means it will take less in the form of up-side action to trigger a breakout than would be the case with the GLD itself. Both KSTs are positive, which means there is a good chance that can happen. If so, it would likely represent an early bird indication that the gold trading range will be resolved on the upside. A decisive break would take place with a reading in excess of 1.7. The ratio is calculated by dividing the Friday close of the GDXJ by that of the GDX. Given the absence of such evidence at this time, a cautious stance is currently recommended.
Finally, Chart 45 shows that all three KSTs are in a gently rising mode for the gold/bond ratio, which is itself on the verge of an upside breakout. Should it succeed the relatively tight trading range of the last year would suggest the kind of sharp take-off often associated with a decisive resolution of a fine battle between buyers and sellers.