The smallcap indices ($RUT-Russell 2000 & $SML- S&P 600 smallcap) led the way this week even though they are still not close to their previous highs made back in June 2015. The $RUT is not even over its 200 week moving average yet. The NDX 100 and Nasdaq Composite indices did not lead the way as you would like to see in a healthy market and their big move off the August bottom has really been based on only a relatively few big stocks and most of that move was based on big jumps on well received earnings reports instead of a broad based moved by the market as a whole. Earnings in general have declined for the 3rd quarter in row and much of the earnings improvements that exist have been based on stock buybacks, in many cases funded by cheap debt. Retail sales have been a major disappointment across all levels from the Macy’s to the Walmart’s. Malls have been relatively empty for some time now with more empty retail spaces due to stores closing. The global economies as a whole have been slow for quite some time now with the Baltic Dry Index trading near all-time lows. The Baltic Dry Index is a good indicator to follow for the health of the world economies since it is not a government manipulated number, I mean not released by any government. So what is keeping this market up, the central banks with their funny money as well as those who have direct access to the cheap debt provided by the big banks. Another factor is the low interest rates that force major institutions, particularly pension funds to invest in the stock market in an effort to make a reasonable return that is not being provided by bonds.
When the stock market broke down in late August, the stock indices blew through their 200 week moving averages. This was the deepest penetration below this standard during the entire bull market dating back to 2009 for the stock indices, especially for the NDX 100 and the Nasdaq Composite. The NDX 100 and Nasdaq Composite typically lead a healthy market up and when things go bad they lead on the way down as well. Such a deep penetration below the 200 week moving average at these high levels and after a 6.5 plus year advance combined with the weak economic fundamentals should be a serious warning sign that not even the Federal Reserve and its merry band of market elves can keep this hot air balloon up at these elevated levels for much longer. The general U.S. economy has never really been in recovery since 2008 and the parts of the economy that have shown any sign of growth have been financially engineered, or are dependent on historically low interest rates, or are highly dependent on pockets of overseas sales or are in the pharmaceutical/biotech drug sectors or have low cost products that people need or are in the high end sector. These areas are starting to show serious signs of wear and tear.
I think it is very possible for the general market to continue up for a week or two more but then either start to display a range bound topping pattern or start to roll over. I think you will very likely start to see a rotation into selected emerging markets within the next 2-4 weeks. Emerging markets were weak and down this past week. I expect this to continue for another 1-3 weeks as we sort through the IMF SDR meeting this week and whether the Chinese Yuan is added to the SDR basket of currencies. If the Yuan is added to the SDR, then it will probably take some time for the market to determine its effect on the Chinese stock market. I do expect it to have a positive effect but probably not immediately this week. The China ETF, FXI, looks likely to continue to fall some more before it bottoms. Also, Russia has been in the news this week with the geopolitical conditions in the Syrian terrorist war becoming more complicated due to Turkey shooting down a Russian airplane. Brazil’s economy is terrible and they have political issues mixed in with the economic problems. But if energy prices start to show serious signs of bottoming, then these latter two countries and their markets could start to improve rapidly. Sugar has also started to show some strength recently. Foreign investors have also started to move into Brazil and take advantage of some bargains in buying businesses and making investments as stated in a Wall Street Journal article last week. If the U.S. stock market starts to roll over, then that money is going to look for other places to put it. Bonds offer no return and very high risk due the highly indebted governments of most developed countries. Russia’s government has low debt compared with almost any other country with a significant economy, which is another thing in its favor. Russia also has reasonably capable leadership, especially when compared to the U.S. and Europe. The Russian and Brazilian ETFs are RSX and EWZ, respectively.
The dollar continued to edge up last week and with the ECB and its head Mario Draghi ready to provide some more stimulus in the near future, it looks likely to head lower. As Michael Pento pointed out in an excellent interview with King World News this weekend, the dollar index is the dollar being compared to a basket of 16 other currencies with the Euro making up 58% of that basket. So with the Euro poised to continue its downward trend due to more paper money printing (it’s mostly created digitally, which makes it much more efficient to screw things up), I mean economic stimulus (that sounds much more substantial doesn’t it), the dollar will continue to rise. And with the dollar continuing to rise, then precious metals will continue to fall. The precious metals had a pretty big move down this week and look poised for significantly further downside. I think gold could go to below $700. The article from Zeal LLC that I referenced a couple of weeks ago, said the cash costs of producing gold for the 34 top gold miners in the ETF GDX, was about $675. So I think you could see it go below the cost of production and where these miners would actually start losing money on a quarterly basis.
Junk bonds as represented by the ETF JNK look terrible and significantly more downside is probable from here. The 30 year Treasury yield and the 10 year Treasury yield as represented by the ETFs TYX and TNX have been consolidating and holding on to their prior gains for the most part. They look likely to continue their prior, recent strength at some point in the not too distant future. If they stay in the same range as they have been over the last few weeks by the mid December Federal Reserve meeting, then I doubt that the Fed will raise rates. But if rates start rising significantly before the meeting then the odds would change.