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Midweek Market 2 May 2019

May 2nd, 2019

Executive summary

How overvalued and dangerous is the US market? To answer that question you could look at one or two pertinent ratios.


The age old Warren Buffet measure of total US market cap to GDP ratio is currently at 145% which is a full 30% higher than it was before the start of the Global Financial Crisis in 2007. Another metric is the Household Net Worth to GDP Ratio which is calculated by dividing current total value of US home prices + equities by the underlying economy. This is now at an incredible 535% of GDP, all artificially inflated by interest rates that have been pushed down toward zero. This is also a record and 19% higher than at the Nasdaq bubble of 2000, compared against the historical average of 384%.


But the markets remain elevated, seemingly forever.


Equity markets continue to edge up towards the top with the Dow Jones now at a triple top and indicating classic symptoms of exhaustion and trend change, along with continued extreme optimism and euphoria. Also, US Treasuries have perhaps not normalised yet in resuming their long term bear market in that yields are not increasing with any noticeable momentum.

Meanwhile, the US Federal Reserve has just completed its FOMC meeting and remain in the midst of their ‘pause’ on interest rates, while they continue to rethink the perilous strategy of triggering lower interest rates to raise inflation and economic growth (which is failing everywhere else). This, in the glare of President Donald Trump’s ongoing pressure to cut rates and pile on the QE, while he points to China’s approach to stimulating its economy.


All the above certainly provides food for thought, and is causing some to now believe that this situation is going to continue for longer than originally thought. Markets may well continue longer before finally topping out.

The US dollar continues to increase overall although this week retracing some of the earlier advance. The index still looks set to increase up towards $100.00 or above but, once complete the dollar will resume its long term weakening trend.


Precious Metals and miners continue their weakening trend which is not complete. This is likely to extend declines before completing the down cycle in due course.

US Dollar

The US dollar index continues to increase into the rising wedge although retracing some of the earlier advance. The oscillators are rising and price is well ahead of all the MAs and looks set to move higher.

The dollar barrier triangle pattern has broken back below the BD horizontal to end in a bullish Hammer-type candle, indicating the next moves to be up. This could result in a more complex wave 3 of (C) which is still likely to catapult the dollar index up to $100.00 or higher, providing the red support line at 2 holds. This will complete the corrective (A)(B)(C) before the next impulsive 5 wave down.

The short term 3 month chart illustrates the partial retracement down to the bullish Hammer-type candle which is more likely to increase dollar value in the next period.

Japanese Yen

The Yen continues to weaken against the dollar in the expanding wedge formation, despite strengthening in the last 10 trading days. The Yen will continue to weaken as the US$ barrier triangle plays out to completion.

US Treasuries

The benchmark US 10 year Treasury yield bottomed at the start of April before launching into the usually longer and stronger Elliott Wave 3, which is at present enduring increased retracement pressure down as wave 3 struggles to gain momentum. This is caused principally by the threat of US recession and the onset of more modern monetary theory applied in potential QE later in 2019.


This can be seen in the next chart illustrating the US yield curve.

US Yield Curve

The official yield curve calculated on the 10 year and 2 year has been drifting up but jolted down this week as the threat of US recession re-surfaced. There is little doubt that global recession is coming (and already here in parts) and that US recession is potentially due later in 2019 or 2020.

Gold

The gold price 6 month cycle low is in progress which should complete somewhere between $1250-$1210 (red circle). As the US$ index strengthens towards $100.00 and beyond so too will the gold price drop down into its cycle low. The next up cycle may well take gold to the $1500 region later in 2019.

Gold continued to decline this week into the cycle low. Both oscillators are dropping in support of this with the MACD some way to go yet.

The bearish dome top formation and neckline, incorporating a H&S as well, has pushed the gold price below the neckline. Gold has consolidated below the neckline, having increased back to test, where it is likely to still drop down below 200-Dema into the support zone.

The 3 month chart illustrates gold’s increase back to test the neckline before ending on an indecisive red candle. Price needs to drop below 200-Dema if it is to drop down into the support zone. There is potential for partial price retracement in the short term back up to diagonal resistance.

South African Rand

The South African Rand weakened against the dollar up into earlier resistance before strengthening marginally. Despite this, the oscillators are mixed which indicates some dithering ahead. But with more dollar strength in the next period further Rand weakness seems likely.

HUI / Gold Ratio

The ratio dropped 12% in the last 25 trading days, with multiple breakdowns in the last 10 trading days. So US miners have underperformed weak gold significantly. It is well below the MAs and looks set to continue down, except the oscillators are also well down which could precede a bounce in the ratio.

US Miners

The chart includes the HUI Index, GDX ETF, and the Dust Bear Index, each with dome formations and necklines. The support lines are all penetrated with price back to test followed by further penetration. The top two have penetrated 200-Dema and Dust is about to penetrate also. This is not a positive picture and further declines in US miners are expected, which additionally impact negatively on metal prices.

Silver

Silver continues to move down into the reducing wedge, breaking down into the earlier support zone. This continues to display as a very negative bias chart. Although the Slow Stochastic is close to the bottom of its range, the MACD is virtually still at its mid-point with much downside still available.

The 12 month chart illustrates silver dropping further down into the reducing wedge pattern, as price moves toward the triangle apex. Price is below the MAs and multiple breakdowns have occurred as the earlier support zone is penetrated.

The 3 month chart illustrates the decline range as well as the multiple breakdowns in momentum that remains decidedly down.

Silver Miners

Silver miners, like US gold miners, are poised to break lower.

Gold : Silver Ratio

The gold / silver ratio continues rising overall within the rising wedge pattern, to close yet higher at 87.19. This reflects the continued silver underperformance of gold which is negative for the whole precious metals complex. The rising wedge pattern continues and seemingly has a way to go yet which presupposes continued lower precious metal prices.

General Equities

Equity markets continue to edge up towards the top with the Dow Jones now at a triple top and indicating classic symptoms of exhaustion and trend change, along with continued extreme optimism and euphoria.

Meanwhile, the US Federal Reserve has just completed its FOMC meeting and remain in the midst of their ‘pause’ on interest rates, while they continue to rethink the perilous strategy of triggering lower interest rates to raise inflation and economic growth (which is failing everywhere else). This, in the glare of President Donald Trump’s ongoing pressure to cut rates and pile on the QE, while he points to China’s approach to stimulating its economy.
All the above certainly provides food for thought, and is causing some to now believe that this situation is going to continue for longer than originally thought. Markets may well continue longer before finally topping out.
So, if it is simply a matter of preparing for the collapse and waiting, the wait might take longer and may even extend through towards 2021.

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