The Big Short

Yesterday I went to our local theater to see "The Big Short", a fascinating and very entertaining adaptation of Michael Lewis' excellent book (by the same name) about the 2008 financial crisis. And today I listened to Dr. Michael Burry's commencement speech to the graduating class of 2012 at UCLA. In the movie, Dr. Burry is the eccentric math genius who was among the first to recognize the early signs of the sub-prime mortgage crisis that eventually served as the catalyst for the collapse of the financial markets in 2008 and early 2009. His financial success in capitalizing on his groundbreaking research is well documented in the movie, but not before he experienced the pain and suffering that almost always comes with being too early on major turns in any market. 

Even though it's now more than 3 1/2 years since Dr. Burry spoke to the 2012 graduating class at UCLA, I still feel incredibly sorry for all those students in the audience at that time who had to listen to the most depressing commencement speech that has ever been written or given to any graduating class ever! For those who wish to slog through this 22-minute speech, here is the YouTube link

If we use the U.S. stock market as our guide, the "current" U.S. economic recovery dates back to March 2009 when the S&P 500 Index bottomed out at 666.80. However, according to my research, the incredible bull market that began in March 2009 actually ended in May 2015 when the S&P 500 topped out at 2134.71. While the Nasdaq Composite Index didn't top out until July 2015, most U.S. stocks posted their 52-week highs in the first half of 2015. Of course, there is a possibility (however remote) that my conclusion regarding the ultimate top of the bull market that began in 2009 is flawed and that the final peak has yet to be set. 

In the interest of full disclosure, I currently have no short position in the U.S. stock market. In fact 90% of the funds that I have under management at this time are in cash. The remaining 10% is in relatively liquid "blue chip" corporate bonds that I have held for many years (some from late 2008 when yields surged on almost everything except Treasury securities following the Lehman bankruptcy). 2015 was among my best years ever as defined by the rate of return on funds under my management. My taxable investment funds earned 42.55% and non-taxable IRA funds earned 2.31%, which resulted in a "blended weighted average" of +17.57%. While I wish I could tell you that I have found the "keys to the kingdom" for superior money management, my computer trading system (which I personally crafted about 8 years ago based upon more than 30 years market experience) is designed to maximize profits by identifying variance-based turning points and then by using "regression to the mean" analysis to enter and exit trades. While the S&P 500 Index is basically "flat" on the year right now, there have been meaningful swings in almost every market (stocks, bonds, commodities, precious metals, and foreign currencies). In 2015, I was able to capitalize on several extraordinary price moves among mining stocks (especially in the precious metals mining sector).

My plan for 2016 is fairly straightforward: "more of the same" for my investment accounts, I hope. However, like Dr. Michael Burry in 2007, I am now extremely worried about the global economy generally and the U.S. economy specifically. I feel certain that a major liquidity squeeze is about to unfold that will inevitably lead to a greater-than-average bear market in U.S. and global equity prices. It almost looks to me as though no lessons were learned from the last financial crisis, which sets the stage for history to repeat once again.

S&P 500 Index Weekly Chart with Computer-generated Buy & Sell Signals (as of 12/25/15)

S&P 500 Index Monthly Chart with Computer-generated Buy & Sell Signals (as of 12/25/15)

Weekly Chart Sell Signal In Dollar; Weekly Chart Buy Signals In Gold & Silver

A weekly chart sell signal was triggered by my computer trading system in the U.S. Dollar Index (DXY) at Friday's close, December 4th.

Weekly chart buy signals were triggered by my computer trading system at Friday's close in the Gold (GLD) and Silver (SLV) ETFs.

Here are all three weekly charts for your review:

U.S. Dollar Index (DXY) Weekly Chart with Computer-generated Buy & Sell Signals

Gold ETF (GLD) Weekly Chart with Computer-generated Buy & Sell Signals

Silver ETF (SLV) Weekly Chart with Computer-generated Buy & Sell Signals

Daily Chart Sell Signals Triggered In Several Major U.S. Stock Indices Today

Daily chart sell signals were triggered by my computer trading system in the following major U.S. stock indices at today's NY close:

1. Nasdaq Composite Index

2. S&P 500 Stock Index (and the SPY ETF)

3. S&P 100 Stock Index

4. Dow Jones Industrial Average (and the DIA ETF)

Sector index sell signals were triggered in:

1. Philadelphia Bank Index (BKX)

2. Housing Index (HGX)

3. NDX-100 (NDX) (and the QQQ)

4. Philadelphia Semiconductor Index (SOX)

Single-stock sell signals were triggered in AIG, BMY, CVX, DHI, E, FITB, FTR, GWRE, HAL, INTC JBHT, KEY, LLTC, LLY, MET, MRK, MSFT, NVDA, PRU, SF, SMH, TM, TOL, USB, and XLNX.

Here is the daily chart of the Nasdaq Composite Index:

Nasdaq Composite Daily Chart with Computer-based Buy & Sell Signals

No Love For S&P 500 Shorts, But Gold & Silver Stocks Look Interesting Again!

Just a quick note this evening.

Despite a modest down day for U.S. Stocks today, on balance, short sellers have to be nervous given the intra-day price action yesterday and today. I personally thought that Monday's slide was the beginning of an extended downturn, but buyers seem willing to step in despite a potentially negative shift in U.S. monetary policy before year-end. While the bearish case for stocks still looks compelling to me, timing is everything, and maybe the bulls still have some ammunition for additional upside fireworks.

In the interest of full disclosure, I exited my entire short position in the S&P 500 today.

Also in the interest of full disclosure, I re-entered the precious metals arena today with long positions in several North American gold and silver stocks, plus the GDX and GDXJ gold mining ETFs.

With an interest rate hike from the Federal Reserve on the near-term horizon, why would anyone want to own gold and silver stocks? I've been asking myself this question several times over the last couple days. I could say that both gold and silver are now "oversold" technically and due for a bounce. This is true, of course, but it's not a good enough reason to buy here. All I really have that's different from everyone else is my computer trading system. While the signals from my system have been less than perfect in the precious metals arena, they have mostly provided me with enough successful trades that I am compelled to take action when buy or sell signals are actually triggered.

A bunch of daily chart buy signals have been triggered this week in this most hated stock group. Here is the latest daily chart of the most popular Gold Stock Mining ETF (symbol GDX):

Major Gold Mining Stocks ETF (GDX) Daily Chart with Computer-generated Buy & Sell Signals

Daily Chart Sell Signals in SPX, NDX, and DJIA at Friday's Close

Daily chart sell signals were triggered by my computer trading system in the S&P 500 Index (SPX), the S&P 500 ETF (SPY), the Nasdaq-100 Index (NDX), the Dow Jones Industrial Average (INDU), and the Dow Jones Industrials ETF (DIA) at Friday's close, October 30th.

In the interest of full disclosure, I have now allocated 50% of my assets under management to a short position in the S&P 500 Index. The remaining 50% has been allocated to "Cash" and a modest long position in medium-term blue chip corporate bonds.

The price action in U.S. stocks following last Wednesday's FOMC announcement was nothing short of incredible. I've seen many short squeezes in my career as a trader, but Wednesday's last hour rally was clearly one of the strongest given the relatively hawkish news from the Federal Reserve (a December rate hike is definitely still on the table, according to Fed officials). Of course, in my view, there is NO CHANCE now of an interest rate hike from the Fed this year. Now it's just a question of whether or not there will be a hike next year!

If the Fed doesn't hike interest rates any time soon, isn't that bullish for U.S. stocks? At this point in the economic cycle (i.e. almost 80 months into an economic recovery), maybe the Fed will soon have to find a way to EASE monetary policy to fight the next recession, which I think is on the near term horizon. If the Fed actually eases monetary policy (with negative interest rates or another QE program), won't that be bullish for stocks? I guess everything depends upon how deep the next recession is and to what extent corporate earnings will suffer. Since I am bearish on U.S. stocks in general and short the S&P 500 Index specifically (without a hedge), then I clearly think the economic negatives immediately ahead will outweigh anything the Fed can do, at least temporarily.

My greatest fear as a short-seller is the potential increase in central bank purchases of U.S. stocks. I strongly suspect that central banks in Japan, China, and Switzerland already have significant positions in global equity shares (including U.S. stocks) on their balance sheets. And Mario Draghi has said that all assets, except gold, are being considered for purchase in the ECB's current and ongoing quantitative easing program. I guess the $64,000 question has to be now: "Are central banks omnipotent?" So far in this 6 1/2 year recovery, the answer has been mostly yes! With my current short position in the SPX, I obviously think that the "intimidation" factor of central bank omnipotence will be severely tested over the next several months!

S&P 500 Index Daily Chart with Computer-generated Buy & Sell Signals

Is There A Message In The Latest VIX Buy Signals?

In modern day portfolio management, if a respectable manager said he was 40% long U.S. Stocks, most would say that this a "defensive posture". 

And what would most Wall Street analysts say about a portfolio manager who was 40% short U.S. Stocks? They might say he was a crazy man who will soon lose his job!

To me, the risk associated with 40% long is almost the same as the risk of being 40% short, especially if you used the SDS double-short S&P 500 ETF as the primary bearish trading vehicle. With the double-short SDS, a 20% portfolio allocation gives you the equivalent of a 40% overall short position. And because you are actually LONG the SDS ETF, you can never lose more than 20% of your total portfolio, even if the S&P 500 Index vaults to infinity overnight!

Of course, if the S&P 500 Index rallies sharply, as it did this past Thursday & Friday, you are going to lose money with your SDS bearish S&P 500 position, as I did with mine.

Bearish traders and investors sustained heavy losses late last week, but I still think the next big swing in U.S. stock prices is to the downside. 

Here is an interesting chart of the VIX, where three daily chart buy signals have been triggered by my computer trading system over the last five days. If my computer trading system is right, there is about to be a fairly significant uptick in stock market volatility. Sharp increases in the VIX are almost always associated with major downturns in actual stock prices. 

VIX Daily Chart with Computer-generated Buy & Sell Signals

Bill Miller CNBC Interview - At The Top!

Who is the all-time greatest investment manager? There was a time not too long ago when Bill Miller's name would have been right at the top of a very short list of "greatest ever". As the Chairman and Chief Investment Officer of Legg Mason's Value Fund, Mr. Miller managed to beat the return on the S&P 500 Index for 15 years in a row between 1991 and 2005. While I am not sure if there are any "official" statistics for this category, I think that Miller's 15-year consecutive out-performance against the S&P 500 Index is a record which probably stands alone. And if he had retired at the end of 2005, Miller may very well have gone down in history as the "greatest ever"!

However, in the securities business (as in many walks of life), sometimes "we are only as good as our last trade!" Value investors, including Mr. Miller, were annihilated between August 2007 and November 2008 when Fannie Mae (FNM) and Freddie Mac (FRE) both went from $70/share to ZERO! While I don't have the exact figure, I believe that Mr. Miller's value fund had greater than a 65% draw-down during that period. So much for talk of the "greatest ever"! Still legendary, of course, but definitely no longer on the short list of "greatest ever" for Mr. Miller.

So where is Bill Miller now, and why this special SuttonWatch update in his honor? Bill Miller is currently the Chairman and Chief Investment Officer of Baltimore-based LMM Investments. LMM has $2.9 billion under management and is a partially owned subsidiary of Legg Mason. He was interviewed by CNBC this past Wednesday, October 14th. In that interview, Mr. Miller said that there are NO reasons to be bearish on the U.S. Stock Market. The list of positives, according to Miller, include moderate economic growth, low interest rates, and low inflation (among others).

NO REASON TO BE BEARISH ON THE U.S. STOCK MARKET !?

WOW !!

In my previous SuttonWatch column dated Sunday, October 11th, I said there are several major cycles that will turn down towards the end of this month. I was hoping to be patient enough to wait for evidence of those negative turns before establishing significant short positions in the U.S. stock market, but Miller's CNBC interview on Wednesday had a profound impact on me. Late last Thursday I dipped my toe in the water with a very minor short position in the S&P 500 using the double-short SDS ETF. And late Friday during a vicious last-hour rally, I executed a major short position that completes my commitment to the bearish case for the U.S. stock market immediately ahead.

This coming Monday is October 19th, a date that will live in infamy for most of the older traders and investors. In 1987, the DJIA fell 23% on that incredible Monday in October. To put this in perspective, the October 1987 single day loss was almost double the percentage loss sustained on any of the black days in the October 1929 crash! In 1987, the S&P 500 peaked on August 25th and bottomed out on October 19th. This year, the S&P 500 bottomed out on August 24th, and I strongly believe that the peak will be seen on Monday, October 19th (or was already posted at Friday's close, October 16th)!

Does anyone think that it's odd that no one on Wall Street is talking about the possibility of a Fed rate hike following the October 27-28 meeting? It seems to me that in almost every speech from from almost every Federal Reserve official over the last three months (at least), including Janet Yellen, a rate hike before year-end 2015 is still on the table. Why risk a rate hike in December just before the all-important holiday buying season? If a 2015 rate hike is going to happen, then I think the most logical time for the Fed to test the waters is at the late October meeting. While precious metals mining shares have recently posted big gains (50% or more) from their early September 2015 intra-day lows, daily chart sell signals have been triggered by my computer trading system in most of these stocks over the last couple of days. My recommendation now is to liquidate holdings in this sector in favor of a better buying opportunity later this year.

Caveat Emptor! Let the buyer of U.S. stocks beware!! Trouble immediately ahead!

S&P 500 Index Weekly Chart with 75-Week and 150-Week Moving Average Lines & Computer Trading Signals

Counter Trend Rebound In U.S. Stock Prices Nearing Exhaustion

Most major U.S. stock market averages are up between 7% and 13% since their August 24th panic lows. However, I now believe that this rebound is a counter trend rally, and that the early summer all-time highs in most major indices will NOT be exceeded (or even tested). 

In my technical work, I see several longer term stock market cycles peaking between now and the end of this month.

On the fundamental side, I would be very surprised if 3rd quarter corporate earnings reports provide significant upside support for stocks, and I would not be surprised at all if 3rd quarter earnings reports were actually negative relative to expectations, on balance. While the energy and mining sectors may be bright spots immediately ahead, the rest of the market looks poised on the precipice of a major downturn which will significantly violate that August 24th panic lows.

While I think my computer trading system did well in navigating this latest rally, I now believe that the weekly chart sell signal in the S&P 500 Index from July 24, 2015 is the dominant signal (see chart below). The counter-trend rally which has unfolded since the panic lows of August 24th looks tired to me.

S&P 500 Index Weekly Chart with 75-Week & 150-Week Moving Average Lines & Computer Signals

The Key To The Next Major Swing In Global Financial Asset Prices?

Is this the key to the next major swing in global financial asset prices?

The Bloomberg China Monetary Conditions Index, a gauge that includes inflation-adjusted interest rates and the exchange rate, improved for a second straight month in August. This is the first back-to-back monthly gain since 2013. 

 

The HSBC China Monetary Conditions Indicator also rose in August (to a 6-month high) after stalling in July. The Bloomberg and HSBC China monetary gauges are designed to give a sense of how monetary conditions change over time, with higher values indicating looser monetary conditions and lower values signaling tightening by the central bank (PBOC).

Bloomberg Monetary Conditions Index (thru August 2015)

Several major stock sectors in the U.S. market were pummeled last week including steels (-20%), biotechs (-12%), industrial commodity mining stocks (-10%), and big pharma (-5%).

However, the S&P 500 Index was down only 1.36% last week, while the Nasdaq Composite Index and the Russell 2000 Index were both down around 3% last week.

After a quick look at the charts, you could say that we are in the process of testing the panic lows set in the U.S. stock market on August 24th. My own view is that the final top in this 6-year bull market isn't in yet and that the August 24th intra-day lows will hold in most major averages on the current correction. Can we rally from this area to new all time highs? Probably yes!

Is China a major variable in this key mix of factors that will determine the next major swing in financial asset prices? You bet! And as written in this column recently, my view is that China central planners, including the PBOC, are going to be successful in stabilizing Chinese financial asset prices and also in stimulating the Chinese economy to sustained growth above 7% again. The above chart strong suggests that progress is being made in Asia's most important economy.

In the interest of full disclosure, the average mix in all my managed accounts now is 15% intermediate-term blue chip U.S. corporate bonds and 85% cash! Quite frankly, I just don't have the courage here to listen to the computer-generated buy signals that my computer system has triggered recently.

S&P 500 Index Weekly Chart with 150-Weekly Moving Average Line and Computer-generated Buy & Sell Signals

And how about the precious metals mining shares? Again, I think current share prices in most major gold and silver mining shares represent a "generational" buying opportunity, but the gold bug in me is just too strong right now to make unbiased investment decisions in this unloved and under-weighted sector.

However, I leave you with this very interesting chart of Stillwater Mining Corporation. Stillwater is the largest North American miner of platinum and palladium. Volkswagon's potential recall of 11 million automobiles for repair of emissions issues has created a frenzy in palladium prices. Who's to say how long the palladium and platinum markets will be impacted by auto emissions issues globally, but I suspect that this advance in Stillwater Mining Corporation has room to run and that the rally in palladium and platinum prices has really just begun!

Stillwater Mining Corp (SWC) Weekly Chart

Another Goldman Gem: Oil Could Hit $20/barrel !

I've always thought that the best job in the world is being a weatherman for a local TV news channel. Even if you are wrong 50% of the time, which is likely, you can still keep your job and your 6-figure salary.

However, yesterday's oil report from Goldman Sachs has completely changed my mind about the best job on the planet. My new best job on the planet is Global Head Of Commodities Research in the Global Investment Research Division of a major investment bank!

Let's take a look at the two primary forecasts by Goldman Sachs in yesterday's "groundbreaking" research report:

1. Goldman slashed its expected average price for a barrel of crude oil from $57/barrel to $45/barrel for 2016.

2. And Goldman now also says that crude oil prices could plunge to $20/barrel as a massive supply glut persists and new production hits the market from Iran, Iraq, and other sources.

While it was a long time ago, when I graduated from the University of Chicago Graduate School of Business in 1977, the lessons being taught by this prestigious institution then included this simple, but effective, forecasting tool:

After rigorous testing, and from the greatest minds on the planet using the finest empirical tools in the world, the best forecast for future commodity prices is today's price! There's a gem!! In other words, the best statistically-based forecast for next year's average price of crude oil is today's price!!! You have to love the efficients markets theory! No need for historical price pattern recognition analysis, no need to talk to major producers or consumers, no need to travel the globe in search of those golden nuggets of information that may give you an edge in forecasting among your peers. It's all worthless; just look at today's price and use it to forecast next year's average price! Simple!!

And just a wild guess where the current head of Commodities Research at Goldman Sachs earned his PhD in Economics? Incredible! You guessed right!! The answer is the University of Chicago!

Bottom line: Goldman's latest forecast of $45/barrel for the average price of crude oil in 2016 is exactly today's closing price! To me, a forecast of $60 or $30 would be noteworthy and probably useful, but too risky for anyone who wants to keep his job. However, I don't think a forecast of $45 needs a PhD in Economics from the University of Chicago! 

And let's address Goldman's outrageous claim in yesterday's report that crude oil prices could fall to $20/barrel, which is about a 55% drop from today's closing price of $45/barrel. Now that's a forecast! Of course, saying something COULD happen is not the same as PREDICTING it!! Heck, oil prices could fall to $10/barrel, or they could rally to $60/barrel, or even $100/barrel! Or, oil prices could fall to $10/barrel and then rally to $100 barrel. See, I can speculate about these possible outcomes as well, but I don't make 7 figures a year! This is why the position of Global Head of Commodities Research is the best job in the world. You make 7 figures a year and you don't even have to go out on limb with any of your forecasts! According to Goldman Sachs, next year's average price for crude oil is today's closing price, and prices could go up or down dramatically throughout the year!

I love this business!

This column is FREE, and maybe it's worth just what you pay for it! However, here are forecasts for the next 16 month period (through December 2016) that may have a little more risk (and worth) than Goldman's latest groundbreaking report on oil prices as released yesterday:

1. I believe that Crude Oil prices bottomed in late August 2015 just below $40/barrel.

2. While $45/barrel is a good guess for the average price of oil in 2016 (and maybe even the best guess), I believe the average price will be closer to $55/barrel, or even higher.

3. Potential new oil supply from Iran (and other sources) has already been discounted in current prices.

4. The vicious downward cycle of lower prices which forced higher production to maintain revenue for producers which then forced even lower prices is now over! High cost producers are capping wells and exiting the market at current prices, at least temporarily, and supply/demand equilibrium is probably at least $50/barrel now (and may even be higher). The largest swing producer, Saudi Arabia, is still talking tough regarding its record production levels, but I strongly suspect that even this Kingpin will soon have to "cooperate" with other major producers to stabilize prices to avoid a potential fiscal crisis of their own. 

5. China will succeed in its fiscal and monetary stimulus efforts designed to reverse the downward trend in that country's economic growth. Global demand factors in the energy sector will begin to improve with the expected success of China's government economic support and interventions on a massive scale.

6. The U.S. Federal Reserve may raise interest rates by a 1/4-point once or twice over the next year, but it won't matter. Commodity prices in general have all bottomed out and are already showing decent chart patterns ahead of major new bullish trends expected on the near term horizon or already underway.

Why would anyone listen to a free research blog from a relatively unknown multiple "Timer of the Year" when they can pay the big bucks for the research services of Goldman Sachs, where 7-figure incomes among department heads are the norm and not the exception?

All I have is 35 years experience in the financial markets and my computer trading system. The 35 years experience may not be worth much, but my computer trading system is outrageous and scary accurate!

Here are two charts of the Oil Services ETF that are probably worth more than a quick look. On the weekly chart, please note the buy signal that was triggered in the week ended August 28th. On the monthly chart, please note the buy signal that was triggered at the end of August 2015. While crude oil prices could possibly move lower, recent bottoming price action in the Oil Services sector strongly suggests otherwise!

Also, just a quick comment on the precious metal stocks. At yesterday's close, 23 signals were triggered by my computer trading system in the daily charts of 23 of the more than 500 stocks and indexes that are currently in my database. 17 of those 23 were buy signals in the following gold and silver mining stocks: ABX, AEM, AG, AUY, EXK, FSM, GDX, GDXJ, HL, MVG, NEM, PAAS, SIL, SILJ, SLW, SSRI, and XAU. In the interest of full disclosure, I have significant long positions in AG, CDE, EXK, PPP, and SSRI.

Oil Services ETF (symbol OIH) Weekly Chart with Computer-generated Buy & Sell Signals

Oil Services ETF (symbol OIH) Monthly Chart with Computer-generated Buy & Sell Signals

Major Gold Miners ETF (symbol GDX) Daily Chart with Computer-generated Buy & Sell Signals

Junior Gold Miners ETF (symbol GDXJ) Daily Chart with Computer-generated Buy & Sell Signals

China's PBOC Says The Correction Is Over!

While I am less than 100% confident in the exact translation, PBOC Governor Zhou Ziaochuan said the following to G20 finance ministers this past weekend in Turkey:

“At present, the exchange rate of the Renminbi against the Dollar is stabilizing, the correction in the stock market is already mostly over and the financial markets show hope for stabilizing.” Zhou added “Following the correction, levels of leverage are clearly lower and there has been no notable effect on the real economy.”

As incredible as it may sound, I ACTUALLY BELIEVE MR. ZHOU and the People's Bank Of China, at least for the short term !! Does the PBOC have the financial wherewithal and necessary willpower to backup these reassuring remarks with any and all necessary market interventions to make it so? Probably!!

More importantly, my computer-based trading program believes Mr. Zhou as well, which is all I need right now to suggest the unthinkable. I now believe that the U.S. stock market correction is over and commodity prices have bottomed!

If the U.S. stock market correction is over, can most major indices rally back to new all-time highs before year-end 2015? I think maybe yes! 

Investor sentiment has dramatically shifted (to bearish) and even the financial media is printing "end of the world" headlines now. If you believe in contrary indicators, as I do, then all this negative talk is bullish for stocks and also for commodity prices. To me, even crude oil prices look ready for a sustained advance!

In the interest of full disclosure, I have major long positions now in mining stocks including FCX and a well diversified package of precious metals mining shares in all my managed accounts. And I also have a relatively major position in the S&P 500 Index in one of my managed accounts.

The following weekly charts have been provided with all trading signals reflected from my computer-based trading system. And if a picture is worth a 1,000 words, then these charts speak for themselves:

1. S&P 500 Index Weekly Chart (SPX)

2. Russell 2000 Weekly Chart (RUT)

3. Freeport McMoran Weekly Chart (symbol FCX)

4. U.S. Steel Weekly Chart (symbol X)

5. Oil Service Stocks ETF (symbol OIH)

6. Major Integrated Oil Index (symbol XOI)

S&P 500 Index Weekly Chart with 150-Week MA & All Computer-based Trading Signals

Russell 2000 Index Weekly Chart with 150-Week MA & All Computer-based Trading Signals

Freeport McMoran (symbol FCX) Weekly Chart with All Computer-based Trading Signals

U.S. Steel (symbol X) Weekly Chart with All Computer-based Trading Signals

Oil Services ETF (symbol OIH) Weekly Chart with All Computer-based Trading Signals

Major Integrated Oil Stocks Index (symbol XOI) Weekly Chart with All Computer-based Trading Signals

Has The VALE Finally Been Lifted On Commodities?

I hope you will forgive my attempt at a pun.

Brazilian multinational VALE, of course, is the 3rd largest mining company in the world. It is the largest producer of iron ore and the 2nd largest producer of nickel.

VALE traded as high as 44.15 in May 2008, plunged to 8.80 in November 2008, then rebounded to 37.25 in January 2011, and then collapsed (slowly) to this week's low at 4.13. Heck, VALE actually traded above $9/share on May 6, 2015, only 3 1/2 months ago. Given the fact that VALE is one of the lowest cost producers in almost everyone of its many commodity markets, and given the fact that VALE has managed its operations expertly through the carnage that litters the global mining landscape right now, I am more than a little surprised by the complete collapse in VALE's share price over the last several months.

However, VALE's stock price jumped 12.62% today (in a single day). At today's closing price of $5.00/share, VALE is now up 21% from its low set earlier this week.

In the interest of full disclosure, I bought my first share of VALE in early June at $6.10/share. I doubled down last Friday at $4.85/share, and then watched with horror as the stock printed 4.13 on Monday and then tested this low yesterday with a print at 4.20. Today's surge in VALE's stock price is exceptional, of course, but I am clearly still underwater on this trade. 

The reason for this column is not to share my sad story about a small part of my portfolio, but to reflect on the possibility that commodity prices in general may have finally found an important bottom after years of steady declines. Today's price action in VALE is significant, in my view, and I now believe that a major rebound in mining stocks is underway.

My preference for Gold and Silver mining stocks is well documented in this space, and I am still seriously over-weighted in this hated group, but VALE's price action today is more than just the result of a beaten down stock experiencing a dead cat bounce. VALE's price surge probably represents a major tone change in the entire mining sector with serious positive implications for commodities prices across the board!

Here are the latest daily and weekly charts for VALE. Please note the weekly chart buy signal now triggered by my computer trading system in VALE's stock price!

VALE Daily Chart

VALE Weekly 'Chart with Computer-generated Buy & Sell Signals

When Will We Know When Gold Has Bottomed & The US Dollar Has Topped?

Answer: Depends upon your definition of bottom and top.

For day traders, bottoms and tops are viewed and analyzed by the minute. For short-term investors, daily charts are scrutinized for clues to the next big swing. For intermediate-term investors, maybe the weekly charts are most important. And for longer term investors, perhaps the monthly charts are key.

I would like to think I am an intermediate-term investor for my clients. However, my trading track record points to a tendency to trade with shorter term horizons (using the Daily Charts).

So here is what I see for both the short term and intermediate term horizons:

1. Gold, Silver, and most commodity prices have now bottomed. US Steel (symbol X) posted a 12-year low at $15.68/share on July 27th, but it has since rebounded 31%! I see this price action in "Big X" as a significant leading indicator for commodity prices immediately ahead.
2. According to the latest CFTC weekly "Commitment Of Traders" (COT) report, Gold short positions currently held by Commercial Hedgers are now at the lowest since 2001. I view this sophisticated group as "smart money", and I see this latest COT report as additional strong evidence that a major turning point in Gold prices is here and now!

3. Precious metals mining shares are the single best buy on the planet right now.

4. The U.S. Dollar Index has topped, for at least the short term and probably the intermediate term.

5. China will succeed in its ongoing  massive intervention to support its financial markets and the overall Chinese economy (which fits nicely into my call that commodity prices have bottomed). Evidence of Government success is already being witnessed with the latest China customs figures which show that inbound cargoes of iron ore were 86.1 million metric tons in July from 74.96 million metric tons a month earlier and 82.52 million metric tons in the same month a year ago.

6. The U.S. Federal Reserve is NOT likely to raise interest rates more than two times over the next 12 months. While in my view "one and done" is the most likely scenario (1/4 point hike in the Fed Funds rate in December), Yellen & Company may feel compelled to chance a 2nd 1/4-point hike if the financial markets don't completely collapse after rate hike #1.

7. While I think the U.S. stock market has topped on both the short term and intermediate term horizons, I do NOT have any short sales on right now, so my conviction level with this call must not be very strong.

8. Precious metals mining shares are the single best buy on the planet right now. Oh, I already made that call in #3 above. In the interest of full disclosure, I am fully invested right now in a basket of gold and silver mining shares. While today was obviously a great day for my positions (my largest position was actually up 13% today), most of my precious metals mining stocks are still "under water" from their average purchase prices in each of my managed accounts.

Here is an interesting quote from Credit Suisse today:

"Optimism on the [U.S.] dollar is widespread, and our house view is for further dollar strength," Credit Suisse's Andrew Garthwaite said in a new note to clients. He noted that a recent Credit Suisse survey found that 70% of investor clients expected the dollar to continue appreciating over the next 12 months.

70% OF CREDIT SUISSE CLIENTS EXPECT CONTINUED STRENGTH IN THE DOLLAR! I read another survey recently that showed that Dollar bears may actually be less than 25% right now.

Of course, gold bugs have been totally discredited and overall sentiment in this hated asset class is probably the most bearish EVER! Hedge funds are actually SHORT on balance in the Comex gold futures for the FIRST time in history according to the latest Exchange report.

Here are three charts for your review:

1. U.S. Dollar Index (DXY) Daily Chart has now been updated with Friday's closing prices, August 7th. A daily chart sell signal has been triggered by my computer trading system at Friday's close, August 7th. The Greenback looks extremely vulnerable to a major correction here!!

2. Philadelphia Gold/Silver Stock Index Daily Chart (which shows that a computer buy signal was triggered today, Thursday, August 7th!)

3. Philadelphia Gold/Silver Stock Index Monthly Chart (which shows an 80% decline over the last five years since the top in December 2010)

U.S. Dollar Index (DXY) with 150-Day Moving Average Line and Computer-generated Buy & Sell Signals

Philadelphia Gold/Silver Stock Index Daily Chart with 200-day Moving Average Line

Philadelphia Gold/Silver Stock Index Monthly Chart with 200-Month Moving Average Line

Gold & Silver Mining Stocks: Powerful Daily Chart Double Buy Signals Today!

It's time!

If my computer trading system is credible, then today's price action in the precious metals mining stocks is exceptional and noteworthy. Daily chart double buy signals were triggered in the following gold and silver stocks: ABX, AEM, AU, GDXJ, GG, and PAAS. The daily chart double buy signal is one of the most powerful signals in my system.

For those who are reading my column for the first time, I've never been a "trend is your friend" trader or investor. In fact, most of my research is dedicated to the finding tradable tops and bottoms in the financial markets. The search engine within my computer trading system attempts to identify potential major turning points in stocks, bonds, indexes, and popular ETF's. I designed this search engine using 35 years of actual trading experience and dedicated research as my guide.

In the interest of full disclosure, my allocation to precious metals (PM) mining stocks is substantial right now in all my managed accounts. I was short the Russell 2000 Index against my mining shares, but I covered my entire short Russell position yesterday morning. Based upon everything I know about gold, the Dollar, U.S. stocks, and global financial markets, being unhedged long in the most hated asset class in the world right now (gold) is the right move. And my computer trading system is now screaming "BUY" the PM mining shares in the loudest of terms!

In my last column written a few days ago, I mentioned that one of the potential catalysts for a potential rebound in gold/silver prices might be a successful central bank effort to support China's stock market after its recent severe shakeout. The PBOC appears to be pulling out all stops in this effort now, and yesterday's rebound in Chinese stock prices looks promising. Of course, all that newly printed Yuan won't just go to buy stocks! Gold will be a big winner as well !!

According to the U.S. Mint (www.usmint.gov), July sales of gold and silver coins to collectors are approaching a record for a single month. For gold, 164,500 ounces of gold eagles have been sold. While the record at 209,500 ounces sold in April 2013 will probably not be broken, July 2015 sales with be the second largest ever. For silver, 5.33 million ounces of silver eagles have been sold so far in July. The total for the month is likely to place July in the top 5 months of all time.

As mentioned in previous columns over the last week, I now strongly believe that the selling climax in gold, silver, and related precious metals mining stocks has run its course and that a major bull market in this sector has just begun. The gold/silver long trade, especially in the miners, has all the potential to be the single best trade from here through the rest of the year!

Barrick Gold (ABX) Monthly Chart with Computer-generated Buy & Sell Signals

Gold/Silver Mining Stocks: Greatest Buying Opportunity Since October 2008

On Friday morning, July 24th, a massive selling climax unfolded in the precious metals mining shares. Most popular names were down between 5% and 10% intra-day before finding support. This incredible sector-wide liquidation followed a month of relentless selling that clipped 40% or more from each individual gold/silver mining stock.The underlying gold and silver prices fell 10% and 12% respectively over the same 30-day period. 

The financial press is having a field day with daily reports of the carnage in precious metals and commodity prices in general. All the usual Wall Street suspects (I mean analysts and economists) with bearish views on gold have been quoted extensively over the last few days, with most now calling for a complete collapse below the "key" $1,000/oz level. The bearish narrative for gold includes talk of a stronger dollar, potentially higher U.S. interest rates, weakness in China's economy, less than forecast PBOC gold purchases, apparent stabilization in the Greek debt crisis, ongoing deflationary threats globally, and negative investor sentiment towards gold generally after 5 years of falling prices. This narrative is compelling and makes for interesting press, but it's worthless now from an investor's point of view. The perfect storm that conspired against precious metals prices recently has now run its course and a major turning point is upon us.

In fact, I now believe that Friday's selling climax in the precious metals mining stocks represented the greatest single buying opportunity in this hated group since October 2008! Daily chart buy signals were triggered by my computer trading system at Friday's close in the following gold and silver mining shares and related ETFs: ABX, AEM, AG, AU, EXK, GDX, GDXJ, GG, GLD, MVG, PAAS, SIL, SILJ, SLV, SLW, SSRI, and XAU. Several of these stocks rebounded between 10% and 15% from their intra-day climax lows on Friday to close sharply higher on the day. 

Of course, for me to be right about such a "golden" buying opportunity, the narrative on precious metals prices will have to change. Here are just a few changes in the financial landscape that I see immediately ahead that will support gold and silver prices:

1. The U.S. Dollar will begin a steady retreat following the realization the the Federal Reserve won't raise interest rates by more than 1/4-point over the next 12 to 18 months (and maybe not at all). 

2. The Greek debt crisis is far from over, and all the PIGS (Portugal, Italy, Greece, and Spain) will soon be a major part of the inevitable collapse of the Euro$ as the common currency for Europe. The European Union is actually in jeopardy now of completely disintegrating over the next 18 to 24 months.

3. China's central bank (PBOC) is aggressively supporting China's economy, its stock market, and its fragile financial system right now. And just like the Federal Reserve in early 2009, the PBOC will succeed, but not before it prints a massive amount of Yuan to end deflationary forces and reflate its economy.

4. As of last week, hedge funds are now short gold futures contracts, on balance, for the first time since records began being kept on this trading group in 2006. Some may view this fact as negative for gold prices ahead, but I see this development as a monumental contrary indicator (and extremely bullish for gold ahead).

5. The U.S. Mint reported last week that sales of gold coins have totaled 143,000 ounces so far in July, the most since April 2013. Physical demand for gold and silver is off-the-charts right now despite a 5-year low in actual prices. I see this extraordinary demand for the physical gold and silver as "strong hands" not likely to be liquidated anytime soon.

In the interest of full disclosure, I am long a basket of gold and silver mining shares against an equal dollar amount of short sales in the Russell 2000 Index.

P.S. A weekly chart sell signal was triggered by my computer trading system in the S&P 500 Index at Friday's close, July 24th (see attached chart). The last weekly chart sell signal by my computer system was in the week ended April 6th, 2012. Over the next 10 weeks the S&P 500 Index declined 11% (top to bottom). A buy signal was then triggered by my computer system during the week ended June 8th, 2012. There have been no signals since then until this past Friday's sell signal.

S&P 500 Index Weekly Chart with Computer-generated Buy & Sell Signals