Will 2018 Bring the Return of Inflation?

The strength of the global economy is one reason why the stock market has started 2018 in a buoyant mood (with the Dow passing 25,000). At some point, in any expansion, businesses find it harder to recruit workers or get the materials they need; these bottlenecks cause wages and prices to rise. Central banks then start to tighten monetary policy, a process that can eventually turn the market (and the economy) down (recession). For years the US has been in a deflationary environment in spite of the FED’s ongoing attempts to do everything possible to create inflation but that looks like 2018 may signal a change.

Because commodities rise in an inflationary environment, following their price can be very profitable for investors in the back-end of the business cycle. The $CRB index is a basket of 19 liquid and highly diverse individual commodities is about the best proxy I have found which can help determine the direction of commodity prices. Taking a look at the chart of $CRB we see the index has been in a severe downtrend from 2014-2016 and after bottoming has consolidated sideways for 2 years. But it looks like it may soon change as it is attempting to breakout to the upside.  The consolidation is forming an inverse head and shoulders bottom pattern which projects, if it breaks out and confirms, to the 2015 highs, almost 30% higher.

I have learned the hard way that commodities are a fickle group and are not as reliable as stocks are when looking at charts and attempting to interpret what is next. As such I prefer to get additional confirmation before committing investment capital. What better confirmation than looking at the biggest market of all, bonds and see what, if anything, they are saying. You may be asking what do bonds have to do with commodities. The common thread is inflation so checking in on TIPS (Treasury inflation protected securities) makes a lot of sense.

In the chart of TIPS below you can see that they, like the $CRB index are knocking on the door looking as if they want to break out to the upside. The cup and handle continuation pattern that has formed points to a target move of 5% higher (don’t scoff, that’s a big move for bonds)

Whether we see inflation or not will only be known later in time. With both commodity prices and TIP bonds looking as if they want to go higher, is a signal the markets believe inflation may not be too far around the corner. As with all pattern breakouts, you should never invest unless the pattern triggers and confirms, which neither the $CRB or TIPS have yet done. Until then, it will pay to watch these two closely in the coming weeks/months for investment opportunities. 2018 may be shaping up to be a great year for inflation hedged investments

Dubbya Bottom

Back in July of last year I wrote about the W bottom pattern that had formed in Vietnam’s stock market ( “Good morning, Vietnam”). It occurred after a long one and half year downtrend that was followed by a one and half year sideways consolidation potential bottom.  At the time I mentioned that If it broke out above the upper blue resistance line and held, it suggested an upside target of $18, a 20% move higher. The chart I posted at that time was:

Fast forward 6 months and I am happy to report VNM closed at $18 yesterday as you can see in the updated chart below. 

As always, when our targets are met we have to ask, “what now?” My investing rules are such that if my upside target is achieved, I am required to sell at least half of the position. In the case of VNM, because the chart still looks constructive and there appears to be more room to the upside (2014 prior highs near $21 is the next target), an investor should consider selling just ½ and letting the rest run. Of course, each person needs to make those decisions based upon their own risk tolerance. If you decide to hang on to some shares, be aware you will need to give it some room to wiggle as it is currently very overbought and due for a pullback/consolidation before a big move higher can occur. For those that are watching and wishing, do not chase, the next opportunity is just around the corner

December 2017 Charts on the Move Video

I do a quick recap on 2017 and take a look at what 2018 will likely bring for investors in this months Charts on the Move video.

https://youtu.be/KrBsM59DhM8

Understanding Support and Resistance

One of the most basic (and important) elements of Technical Analysis is support and resistance. They represent key junctures where the forces of supply and demand meet. In the financial markets, prices are driven by excessive supply (down) and demand (up). Supply is synonymous with bearishness and selling. Demand is synonymous with bullishness and buying. As demand increases, prices advance and as supply decreases, prices decline. When supply and demand are equal, prices move sideways (consolidate) as bulls and bears slug it out for control.

Resistance is the price level at which selling is thought to be strong enough to prevent the price from rising further.

Support is the price level at which demand is thought to be strong enough to prevent the price from declining further.

Taking a look at a post I made back in July of this year regarding Grainger, GWW, the chart illustrates that price was approaching a prior level of support.  As such, I was expecting it to find a bottom and experience at minimum, a reversion to the mean bounce. Additionally, momentum would likely form positive divergence and be the wind behind any bounce. July’s chart is below

Fast forward 5 months ahead to now, taking a look at the same chart of Grainger updated with recent action we can see how price did find that bottom, it also formed positive RSI divergence and provided a very nice tradeable bounce opportunity. 

In this case, GWW actually provided something much more than a tradeable bounce as it has  gained more than 50% from the July bottom. Identification of key support and resistance levels is an essential ingredient to successful technical analysis. Even though it is sometimes difficult to establish exact support and resistance levels, being aware of their existence and location can greatly enhance analysis and forecasting abilities. If a security is approaching an important support level, it can serve as an alert to be extra vigilant in looking for signs of increased buying pressure and a potential reversal. If a security is approaching a resistance level, it can act as an alert to look for signs of increased selling pressure and potential reversal. The bottom line is if a support or resistance level is broken, it signals that the relationship between supply and demand has changed. A resistance breakout signals that demand (bulls) has gained the upper hand and a support break signals that supply (bears) has won the battle.

It's Coming, Are You Ready?

Automation may wipe out 1/3 of America’s workforce

In a new study that is optimistic about automation yet stark in its appraisal of the challenge ahead, McKinsey says massive government intervention will be required to hold societies together against the ravages of labor disruption over the next 13 years. Up to 800 million people—including a third of the work force in the U.S. and Germany—will be made jobless by 2030, the study says.

The bottom line: The economy of most countries will eventually replace the lost jobs, the study says, but many of the unemployed will need considerable help to shift to new work, and salaries could continue to flatline. "It's a Marshall Plan size of task," Michael Chui, lead author of the McKinsey report.

In the eight-month study, the McKinsey Global Institute, the firm's think tank, found that almost half of those thrown out of work—375 million people, comprising 14% of the global work force—will have to find entirely new occupations, since their old one will either no longer exist or need far fewer workers. Chinese will have the highest such absolute numbers—100 million people changing occupations, or 12% of the country's 2030 work force.

The details:

• Up to 30% of the hours worked globally may be automated by 2030.
• The transition compares to the U.S. shift from a largely agricultural to an industrial-services economy in the early 1900s forward. But this time, it's not young people leaving farms, but mid-career workers who need new skills. "There are few precedents in which societies have successfully retrained such large numbers of people," the report says, and that is the key question: how do you retrain people in their 30s, 40s and 50s for entirely new professions?
• Just as they are now, wages may still not be sufficient for a middle-class standard of living. But "a healthy consumer class is essential for both economic growth and social stability," the report says. The U.S. should therefore consider income supplement programs, to establish a bottom-line standard of living.
• Whether the transition to a far more automated society goes smoothly rests almost entirely "on the choices we make," Chui said. For example, wages can be exacerbated or improved. Chui recommended "more investment in infrastructure, and that those workers be paid a middle wage."
• Do not attempt to slow the rollout of AI and robotization, the report urged, but instead accelerate it, because a slowdown "would curtail the contributions that these technologies make to business dynamism and economic growth."