Thursday, May 21, 2015

Dow Jones Transportation Average Breaking Down On Huge Volume

Yesterday one of the main US stock market averages, Dow Jones Transportation Average, broke down.
What is more, this move was accompanied by a huge volume, which magnifies this pattern. Please, look at the chart below:

The second most important average - Dow Jones Industrial Average is flirting with its top:

Simply put - the divergence between these two averages is increasing.

Sunday, May 17, 2015

Corn - Consumption Is Expected To Be Higher Than Production; This Is A Radical Change In Fundamentals

Some time ago I published a bullish post on agriculture commodities (link here). On May, 12 the USDA (United States Department of Agriculture) published new crop forecasts. According to these forecasts, for the first time since the season 2010 / 2011, the world consumption of corn is expected to exceed its production. Please, look at the chart below:

                                                               source: USDA and Simple Digressions

As the chart shows, in 2015 / 2016 corn consumption should exceed its production by 0.47 million tons. The last such occurrence took place in 2010 / 2011, when corn consumption was higher than its production by 18.22 million tons.

Looking at some details, below I am listing countries and their production / consumption numbers projected for 2015 / 2016:

  • The biggest world producer of corn is USA with production of 346.22 million tons per year (35% of the world production).
  • China and Brazil are ranked second and third with production of 228 and 75 million tons respectively. All these three countries are expected to report an excess in production over consumption of 68.96 million tons. And here we have another bullish indicator for the corn prices - this excess is expected to be lower than 82.11 million tons reported in 2014 / 2015.
  • The chart below shows other big players in the corn market and differences between their production and consumption (a negative bar means that consumption is expected to be higher than production):  

                                                                  source: USDA and Simple Digressions

In my opinion, the last forecast is supportive for the bull case for the corn prices.

While the fundamentals are indicating chances for the beginning of the new bull market in the corn prices, the technical picture is still bearish - look at the chart below:

Friday, May 15, 2015

Value Line and The Broad Equity Market In The U.S.

While the broad equity market in the U.S., represented by S&P 500 index, is still marching up, its geometric sister called Value Line Geometric Index ($XVG or XVG) has stalled since July 2014.

In the past such divergences have been an early indicator of the incoming problems. Please, look at the chart below:

For those unfamiliar with $XVG - this index tracks the median index move as if all stocks had an equal amount expressed in dollars invested in them. Simply put - all equities are equal (this index does not care whether Apple is bigger than e.g Ebay).

To make things more visible, below I am putting the detailed charts picturing three periods when divergences between XVG and S&P 500 occurred.

                                               1998 - 2000

The Internet bubble was catastrophic. But S&P 500 needed quite a long time (two years) to start its bear market since XVG topped in April 1998. What is more, S&P 500 went up 36% since XVG topped.


The last bear market in S&P 500 started just three months after a top made by XVG.

                                                  2014 - ?
XVG made its first top (in this ongoing bull market) in July 2014. Since that time S&P 500 has gone up 11%. The current divergence is still intact - XVG is struggling at its resistance while S&P 500 is still marching up. Please, look at the chart below:

Summary - looking at the history of divergences between XVG and S&P 500, today we have something similar to the late Internet bubble. Then the broad market was going up fueled by big internet companies. Today the broad market is fueled by the FED and other central banks all over the world. While this broad market is still going up, the warning signals are flashing.

Monday, May 11, 2015

Gold Is Disappearing From The Western Vaults

In my opinion, this is an extremely bullish development for gold investors. Simply put, there is less and less gold in the major Western vaults. What is more, these vaults comprise the lowest amount of gold since many years.
Let me discuss two vaults: COMEX and SPDR Gold Shares (GLD).

The chart below shows the number of ounces of gold held at COMEX as "Registered Category". These ounces of gold are the basis for futures transactions carried out at COMEX. On May 8, 2015
there were 407,402 ounces of gold registered at COMEX. This is a very small number - similar quantity was registered at the end of January 2014 (439,900 ounces) when a strong move up in the gold prices was beginning.

To be even more precise, open interest in gold futures is currently standing at around 41 million ounces of gold, which means that the investors / speculators take part in a play where the total bet of 41 million ounces is covered by just 407 thousand ounces of "real" gold (1%). This can end very badly if even a small  group of players wants their gold to be physically delivered. Because there is practically no gold in the registered category vaults, only higher gold prices could fill the gap between demand and supply. But even then I am not sure whether the vault is filled with enough gold. 

2. GLD
Similarly to COMEX, the GLD vaults comprise less gold. Please, look at the chart below:

It is easily spotted that today there is the smallest amount of gold in the GLD vault since the end of 2008, when the last bottom in the gold prices has been established.

These two developments are, in my opinion, very bullish for the gold bugs.

Friday, April 24, 2015

U.S. Equities Topping Process Is Ongoing

The technical picture of American equity market is still deteriorating. Toady Nasdaq 100 printed another once again the record was accompanied with worsening market internals. Please, look at the table below:

As it is easily spotted, subsequent records printed by S&P500 and Nasdaq 100 are reported at lower new highs. For example, at Nasdaq 100 only 219 issues hit their records today while in the middle of the bull market, in May 2013, as many as 236 issues made records. The similar pattern is visible in S&P 500.

Another example of worsening technical picture of the equity market is presented at the chart below:

 In October last year both indices, Industrials and Transportation, broke their supports. Then the bearish pattern was invalidated and equities started another bull up leg. But since December 2014 Transportation has been trading in the range of 8,600 - 9,200 points. DJIA managed to print another record (in the beginning of March) but this occurrence has not been confirmed by the sister indice.

In my opinion since October 2014 the U.S. equity market is in its topping pattern.

As for fundamentals - below I present a chart of  net operating profit after taxes reported by Ebay. I guess everybody knows this company. Apart from an excellent ecommerce platform, this company is also an excellent investment play. But looking at the company's nopat one can spot that this company probably reached a sort of plateau. Since the beginning of 2013 nopat has been staying practically unchanged (with spikes in Decembers, which are usually the best months for ecommerce companies).

Another problem - return on invested capital (ROIC). As the chart below shows, since 2011, Ebay has reported lower ROIC. Simply put, the company is not able to provide its shareholders with decent returns on its capital (with cost of capital of 9.84% for on-line retailers Ebay is nearly at its break-even point).

Therefore, as other U.S. corporations, Ebay repurchases its shares - since 2011 the company has spent $9.7 billion on stock repurchases.

Saturday, March 7, 2015

Precious Metals Market - One of the Most Hatred Sectors

Well, in the Precious Metals (PM) market once again we see the same story.
Some time ago I presented the chart showing the probable "Head and Shoulders" pattern. Well, as you can notice at the chart above, the pattern has been negated.

Now, we are once again in the PM market downtrend:

But still, PM market relative strength against the broad equity market is testing its lows. Look at the chart below:

So the thesis, that a new big bull market in the gold sector may start again, is still intact.

For example, Juniors are still being accumulated. The chart below presents a few best juniors (maybe except from Midway Gold, which goes the same as the broad PM sector), which perform much better than the broad PM sector equities. As you can notice, new, promising mineral assets are being widely bought.

Apart from Juniors, there are some companies, which perform much better than the PM sector. Please, look at the chart below:

  • Randgold (NYSE: GOLD) is one of the best gold miners in the world - see my article on the Seeking Alpha website.
  • Franco-Nevada is the streaming company - the company looks for profitable PM purchase agreements signed with PM miners.
  • Fortuna Silver Mines and Fresnillo are silver and gold miners.

All these companies, due to their sustainable competitive advantage,  perform much better than the whole PM sector. Therefore they seem to be suitable for conservative investors.

Thursday, February 19, 2015

We Are Very Close To A Buy Signal In Precious Metals Sector

In June last year I published an article on an easy play in Precious Metals Market. Here is the link.

Today, despite falling PM share prices we are very close to another LONG trade. Please, look at the chart below:

In the upper section you will find the chart showing the relative strength of Junior sector of PM market (GDXJ) against the big gold producers (GDX). Every time Juniors start showing strength against Big gold the rally in the whole sector begins.
Keep a close eye on the behaviour of PM shares in the coming days.