The global economy has been stuck in a low-growth rut for almost two years, but since the Spring of last year, manufacturing has been increasing (as measured by the PMI) across all five of the major economies (chart below). Notice that this started before the Donald got elected, and as far as we know, continues still.
This growth in manufacturing may explain why the major stock markets, except for China, have all risen more than the American stock market since the election (chart below).
Since there is growth to be found in all the major economies, we wonder if, perhaps, investors are less inclined to preferentially invest in American stocks until they see what the Donald does with international trade agreements. If Trump doesn’t totally blow-up America’s international trade, then we may see an increase in foreign capital flows that could keep the SPX rallying further into the year. However, that is not a prediction, just a possibility; the Donald is impossible to predict, except that we know he will do something outrageous.
Using fundamentals to gauge where the market is heading has been a useless exercise for the past year; most fundamental indicators show the market to be over-valued, yet the market has continued to rally. We, therefore, look for patterns in investor sentiment and in technical indicators.
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The Bear:Bull Rydex asset allocation ratio is at levels not seen since the major market top of 2000 (red arrows in the chart below).
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Eight out of the last ten down-spikes in the eight-week moving average of the put-to-call option ratio have corresponded with local tops in the SPX (chart below). A possible down-spike has formed (question mark on the chart below), which increases the probability of a correction in the S&P 500.
Over-all, from an investor sentiment perspective, the market is elevated and vulnerable, but still has momentum to move higher in the mid-term.
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The chart below, shows how the SPX traded during the tech and housing bubbles. The bond bubble that we are in now, has already lasted must longer than either of the two previous bubbles, but could keep going further (question mark on the chart).
The extraordinary accommodative monetary policy of the world’s central banks, has been single-handedly responsible for this bull run. This has occurred without a corresponding increase in the business cycle; even though the monetary base has expanded to unprecedented levels, the velocity of money is at an all-time low. The ‘Trump trade’ is predicated on the hope that easy fiscal policy will finally inject money into the real economy, and that the return of the business cycle will elevate the SPX further. We have no idea if this, in fact, will work.
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The long-term moving averages (MA) are also showing a bullish trend (chart below), with further upward movement possible.
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We continue to hold our position in WILN (chart below). If it breaks above the $1.80 resistance, then $2.20 comes into play. We expect a better patent-friendly environment with the new administration.
Gold and Silver
Because of this week’s gold update, we will present a shorter version of the gold summary.
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The upward-trend in the dollar and Treasury rates is still in place (chart below).
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The commitments of silver futures traders (chart below) shows that the commercial traders increased their short positions slightly, and the large speculators increased their long positions slightly. This is in line with continued silver weakness.
The commitments of gold futures traders remained essentially unchanged, except for the producers adding to their short positions, which supports the probability of continued lower gold prices.
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We wish our subscribers a profitable week ahead, and ask that you monitor your email for Trade Alerts.
Source: Nicholas Gomez