July brought a welcome relief to the markets as most US indexes broke out to all time highs. For some that is all that is needed to jump all in, for others prices are too high so its time to take some chips off the table. Where do you stand?
The Case for Platinum
If you are like me and see enough supporting evidence the precious metals markets have turned the corner and are not yet fully allocated, I want to make the case for some exposure into platinum. Gold and silver are what first come to mind for most people when discussing or investing in precious metals. They are the most liquid and have the greatest availability in both physical and financial instrument form and as such many forget about platinum. But based upon what I see in the charts right now, platinum provides the potential for greater forward returns of the big three.
Let’s take a look at the last two year performance chart of platinum and gold. Historically they move in lockstep (what occurred prior to 2016 is what you would expect) but since the start of this year gold has substantially outperformed platinum creating a huge divergence. This divergence is what is creating the potential out-performance opportunity. I expect returns to eventually turn back to pre-2016 days and as such either gold has to fall to platinum’s level or platinum has to rise to catch-up with gold. Or a little of both.
Taking a 40+ year look at the monthly ratio of platinum to gold in the chart below we see it ranges between .7 - 2.5. The upper boundaries have provided a good time to sell platinum and buy gold. The .7 level, on the other hand which was hit in Feb of this year provides excellent opportunities to sell gold and buy platinum.
Changing the view once again, this time to a 5-year weekly look at the platinum to gold ratio we can see, while it has not yet confirmed, we are closing in on forming a w-bottom with bullish positive RSI momentum divergence. Looking to the left you can see this exact same pattern formed (from higher levels) in early 2012. Those that took the signal and switched to platinum at that time outperformed gold by more than 35% peak to trough. It looks like we are setting up to do the exact same thing again but with more upside potential.
There is more than enough technical evidence here to suggest platinum, at least for the intermediate term future is the better precious metals investment candidate. For those who are leery of the metals, a pairs trade of long platinum and short gold should provide very low risk, good return reversion to the mean opportunity.
The Fabric of Our Lives
Unless you have access to the futures market, there are some investments that are not really accessible to the retail investor. I consider cotton to be one in that category as the only tracking vehicle, BAL, trades on average less than 20k shares per day. I have talked ad nauseam on the perils of illiquidity so I will not go down that path again but remember if you want to sell an illiquid investment and the market is falling, good luck trying to find a buyer at your price … and possibly at any price. I bring this up because of the strength of its chart, I wanted so desperately to add it to client accounts but refused to violate my investment rules regarding illiquidity. In spite of that it is still worth reviewing the chart as these setups, when available, provide both a high probability of successful pattern playout and big upside potential.
Cotton formed an interim top back in April of 2014 at just above $95. From that point a waterfall decline transpired as it lost almost 40% in the next 9+ months bottoming in Jan of 2015. Since then it has been consolidating and range-bound bouncing between $56-$68. This sideways action continued for 2 boring years (this is exactly why these setups work so well all the sellers have left and only the smart money is left … to buy). One of my mentors drilled into my head the old adage of “the bigger the base the higher in space” so it should be obvious why cotton had my interest. I prefer to see a minimum of at least 6 months so the fact it was working on 2 years was just that much more interesting.
As you can see it finally broke out last week on incredible volume, a classic textbook dream setup for much higher prices. This week (so far) it appears as if price is consolidating and digesting its gains but setting up for its next leg higher. The fact that both patterns that have formed (double divergent low bottom and bull flag) have similar targets, I expect a high probability the $83 range will be hit. Even though I was unable to capitalize for clients, once this cotton move has played itself out, I will circle back around with a follow-up post as successful pattern setups are a great learning tool and go a long way towards out-sized gains.
Is Singapore Ready to Breakout?
As an adjunct to last week’s post on the emerging markets breakout my screens highlight a number of foreign regional markets that have either already broken out or on the threshold including the topic of this post, Singapore. Like EEM, the emerging market equity proxy, EWS Singapore’s stock market index ETF has formed a an inverse head and shoulders reversal pattern signaling the bottom of this particular downtrend is potentially in. You can see the right shoulder formed with positive divergence on the RSI momentum indicator and has formed a higher low and higher high. Price closing above the neckline will validate the uptrend by making a second higher high. Further upside could be expect on a break above the pattern’s neckline which has yet to occur and will not be valid until it confirms. A minor but important difference in the EWS chart is the pattern has a preferred horizontal neckline versus the slanted one seen on EEM.
Price currently sits above the 200 day moving average which has just recently begun to point higher. Like EEM, the upside potential if this pattern were to play out is beyond 20% testing the 2014 and 2015 double top highs of $13.2. I think this setup is very attractive but have learned buying in advance of a patterns confirmation, like what exists here, is not conducive to portfolio out-performance. As such, I sit in cash waiting patiently for EWS to confirm the pattern
Did Anyone Else Notice?
Going sideways for more than 5 years the emerging markets gapped up this week breaking above the neckline of an inverse head and shoulders pattern. The move higher was not unexpected as the bullish positive divergence that formed on the RSI momentum back in early January gave us a heads up to expect a bounce. What is interesting is the strength and ongoing conviction of the move as it looks like maybe a reversal rather than just a counter-trend, oversold bounce. A confirmed breakout of this pattern has an upside target near last year’s highs some 20%+ higher with the potential for much more.
It is still a bit early on calling this a breakout (and opportunity) since the confirmation comes on a weekly close which won’t actually occur until this Friday. Because I usually post after-the-fact examples and would normally wait until confirmation has occurred, I wanted to give readers an early, real-time heads up on this opportunity. Whether this turns out to be a fake out and quickly reverses or peters out before hitting its target only time will tell but the setup is compelling. Anyone following along please make sure you have a position management plan in place before entering as that is specific to your risk tolerance, not mine.