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