Uh Oh

It should be no surprise to anyone bond yields are rising. What may be of surprise is that we MAY have just turned the corner and entering our first bond bear market in more than 30+ years.  As you can see in the 5-year weekly chart of 10-year US Treasury bond yields that we just broke out from a rounded base which target projects up to 2013’s high water mark, labeled T1.

While this chart may not look as if it has formed a bearish reversal (bear market), turning to the much longer-term view of Treasury 10-year rates we see they have broken and closed above their downtrend line for the first time in 30+ years. Breaks of downtrends are interesting but carry less weighting without higher highs and higher lows being formed. Without them, its more than likely to turn out to be just a counter-trend bounce.

While this is definitely a HUGE yellow caution flag, my interpretation is that until they break and hold above (not just rise up to) 2013’s peak, I would not be overly concerned. Why? Because virtually everyone is aware (the FED has been telling us they will be raising rates for eons) and the smart money is positioned accordingly. Markets move most when most involved are surprised, which is not the case here. As such, I fully expect the market to do exactly what you would expect it would do when everyone knows what is coming … the exact opposite of what is expected. So, until this reversal question is finally resolved, because of bonds effect on other investments, there are potential major changes on the horizon. I don’t need to say it but we are in interesting times and investors need to keep a close watch on what unfolds with intermediate and longer-term bonds in the weeks and months ahead.

My Precious II

Back in August of last year in my 8-23 blog post (“My Precious”) I wrote about the potential breakout in palladium above near-term highs with a target back to the 2001 highs at $1100.

On Jan 8th the price of palladium closed at $1105 (providing a nice 16% gain in 5 months), right where the breakout told me to expect it to go. As you would expect, that prior high is acting as resistance and price has pulled back slightly and begun a sideways consolidation.

Keep in mind that just because it has reached its target does not mean it’s done. But, if I were in this position (I am not), because it had reached its target, I would be taking at least ½ of my position off the table, locking in those profits and looking for another setup providing a risk:reward ratio of 1:3 or greater.

Too Far, Too Fast?

Turning the calendar to 2018 kicked off an exciting run in stocks as the market moved up almost 4% in 9 short trading days. In 8 of those 9 days the market closed higher and the one red day was down a whopping .1%. These euphoric-type moves can’t last forever especially when you consider how far price is from its 200 day moving average. Bullish RSI momentum has reached an extreme as it exceeded its all-time highs in the SP500, ever. When things become so stretched in one direction the markets need to rest and digest the moves, as such it would be normal and health to see a correction or a consolidation at a minimum.

Looking at the SP500 chart, you can see Tuesday gapped higher at the open and eventually closed below its open and down for the day and with large volume. This is clearly a distribution day. A day when the big money made some moves, locking in some profits. Anytime they speak, we need to listen. Keep in mind it was not just the SP500 that acted this was as almost all US and most foreign indexes followed suit.  Tuesdays’ action in stocks, while not surprising, was a warning shot to the possibility of a short term reversal. One could argue that “short term” price movement is only applicable to traders because investors have a much longer time horizon so there is no need to be concerned with them. This is a true statement but I find being prepared for any possible correction helpful to stay the longer-term course.

In an ordinary market, this gap higher and subsequent fizzle would be a huge red flag and a strong short signal. Unfortunately this is not an ordinary market and normal rules do not apply. We’ve seen poor price action over the last few months, but prices rebounded decisively within days, if not hours. Yesterday’s fizzle is still a significant concern as it usually is a sign of the start of a near-term dip. But without a bearish headline catalyst to drive fear into otherwise confident bulls, I don’t expect this selling to go very far or to dampen bulls’ conviction. If they refuse to sell, then it is much harder for a dip to take hold.  Complacency will eventually get us into trouble, but over the near-term confident owners keep supply tight by refusing to sell every bearish headline and any negative price-action. That said, at some point this unsustainable climb higher will falter. When that occurs is anyone’s guess. There is only so much money willing to chase these record highs even higher and yesterday’s daily reversal suggests we may be getting close to that point, at least over the near-term. One day does not make a trend so we will need to see what sort of follow through, if any, occurs over the next few trading days. If not, it yesterday’s action will just be another bump in the road.

Either way, I don’t trust this market, but because markets can be irrational for longer than we can expect and more importantly it keeps doing the right thing means we stick with it.

3 for the Bulls

We are in interesting times. No matter where you look, most charts of stocks are screaming “buy me”. Far be it from me to fight the trend, so I thought I would devote this post to 3 bullish charts which are setting up to break out of short term consolidation to the upside. Why 3? I wanted to provide an example of a stock at the bottom, middle and top of their longer-term charts.

Let’s take a look at a bottom feeder first, Chipotle Mexican Grill (CMG). Anyone following Chipotle’s multiple catastrophic PR nightmares over the past two to three years won’t be surprised to see their stock off 65% from its prior highs.  But it looks as if it may be ready to turn things around. With bullish RSI momentum divergence and price forming an inverse head and shoulders bottom reversal pattern, a break out and hold above the neckline would present a compelling investment opportunity. The pattern projects to a ~25+% upside target (around the 415-420 range) if it were to follow through.

My second chart is that of Pretium Resources, PVG. As you can see its stock has been consolidating since June of 2016, stuck in a box, its bottom at $7 and top at $12. In addition to the longer-term rectangle pattern, it recently has also formed a bullish cup and handle. Having a bullish shorter-term pattern develop within a longer-term pattern is not unusual and if triggers, increases the probabilities of it meeting either one or both targets. The more conservative cup and handle target projects to a 30% rise while a breakout from the larger rectangle, points to a healthy move near prior 2012 highs some 40% higher. This one has my interest.

My last chart is one that is familiar to everyone, Apple. Its price currently sits at all-time highs but it looks like it’s not done. Like PVG above as it has formed a rectangle and is trying to breakout to the upside. The projections for this pattern if it were to break and hold would, based upon the conservative target, push Apple’s stock price up 8%, while the more extreme target would see Apple test $300, some 17% from where it closed on Friday.

Each of the above stock’s charts have formed bullish patterns using classic charting techniques as defined in the TA bible, “Technical Analysis and Stock Market Profits” by Richard Schabacker. While there are never any guarantees when investing, I find those opportunities that conform to the rules outlined in Schabacker’s book have a much higher probability of success.

Crypto Consequences

While the crypto mania continues to froth ever higher, it appears that digital financial transactions come with a real-world price. Read on:

The tremendous growth of cryptocurrencies has created an exponential demand for computing power. As bitcoin grows, the math problems computers must solve to make more bitcoin (a process called “mining”) get more and more difficult — a wrinkle designed to control the currency’s supply.

Today, each bitcoin transaction requires the same amount of energy used to power nine homes in the U.S. for one day. And miners are constantly installing more and faster computers. Already, the aggregate computing power of the bitcoin network is nearly 100,000 times larger than the world’s 500 fastest supercomputers combined.

The total energy use of this web of hardware is huge — an estimated 31 terawatt-hours per year. More than 150 individual countries in the world consume less energy annually. And that power-hungry network is currently increasing its energy use every day by about 450 gigawatt-hours, roughly the same amount of electricity the entire country of Haiti uses in a year.

That sort of electricity use is pulling energy from grids all over the world, where it could be charging electric vehicles and powering homes, to bitcoin-mining farms. In Venezuela, where rampant hyperinflation and subsidized electricity has led to a boom in bitcoin mining, rogue operations are now occasionally causing blackouts across the country. The world’s largest bitcoin mines are in China, where they siphon energy from huge hydroelectric dams, some of the cheapest sources of carbon-free energy in the world. One enterprising Tesla owner even attempted to rig up a mining operation in his car, to make use of free electricity at a public charging station.

In just a few months from now, at bitcoin’s current growth rate, the electricity demanded by the cryptocurrency network will start to outstrip what’s available, requiring new energy-generating plants. And with the climate conscious racing to replace fossil fuel-base plants with renewable energy sources, new stress on the grid means more facilities using dirty technologies. By July 2019, the bitcoin network will require more electricity than the entire United States currently uses. By February 2020, it will use as much electricity as the entire world does today.