Low in place for resources stocks and inflation emerging #96

by Barry Dawes

This has certainly been uncharted territory for us all so we can only react to what major markets are doing and saying.  The very long term price histories remain positive and suggest the past few months have seen declines to major long term support.

We now need to ponder what this all means in the longer term.

And price history suggests you can forget the doomsday scenarios.

Extremes in sentiment show many signs of very important lows and provide the basis for continuation of the DawesPoints Global Boom.

The rally in global equities has begun and it could be driven more by the assumption that the worst for Covid-19 may be over rather than just the US bailout.  The markets are anticipating a peaking in new Covid-19 reportings and/or that a cure/cures has/have been found.

Let’s look at what the markets are saying and have been showing these signs for the past month as reported in my desk notes.

Key Points

  • Dow Jones Industrial Index at important MAJOR long term uptrend support
  • Four year cycle low is probably in place
  • Sentiment indicators show high pessimism levels
  • Long term indicators suggest low is in place
  • US$ still strong – Euro made new 3year low
  • Bond markets well over extended
  • Commodities driven lower by oil price rout
  • Shanghai market still holding well
  • Iron ore steady
  • Long term ASX Metals and Mining index back to downtrend line
  • Oil price bottoming
  • Gold rising  – physical gold scarce – much higher prices coming
  • A$ gold price still very strong and exceeded A$2800 intraday
  • ASX Gold stocks ready to rally to new highs
  • Best big buys BHP RIO FMG MIN WPL OSH
  • Best emerging golds DEG BGL CYL RED KZR CDV NTM CHN MGV  

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I still am of the view that this weakness will be over very quickly and the fiscal and monetary easing across the world will cause strongly inflationary pressures.

I am seeing numerous efforts to bring some vaccines and drugs to combat the virus and am particularly impressed with the results from the anti-malarial Hydroxy Chloroquine.  Markets might be recognizing this.

These figures are very interesting for the understanding of this Covid-19 virus and who it hits.

A 2 April 2020 report from Reuters on Louisiana showed an astounding 97% of COVID 19 hospital admissions had pre-existing conditions:-

  • Diabetes 40%
  • Obesity 25%
  • Chronic Kidney 23%
  • Cardiac Problems 21%

(these are not meant to add to 100)

And this:-

I have not been able to independently confirm this data but it seems whatever data we are seeing it is more a matter of comparing apples with bananas, cheese and zucchini.

Age, gender, race, comorbidities, mortality/admission ratios and so much needs to be tabulated and analysed.

Control might prove to be far simpler than currently perceived.

This crisis is enforcing curtailment of civil liberties and changing expectations from citizens so we might see some most unexpected outcomes when this is all over.  Will it bring better people into politics and will the media be reformed after so much partisan commentary from commentators who are instant experts on everything?

Good people need to, and are, standing up.  

The opportunity for restructuring the global economy and supply chains is now massive.  This should result in more manufacturing in the US and hopefully in Australia and may be a sea change here in attitudes and actions.  New incentives for start ups, fewer regulations, revival of onshore oil and gas exploration, consideration of new onshore refining capacity and changes in labour laws.

The crisis has created problems in Europe and the pressures will surely lead to the eventual break up of the EU.  That union has no leadership and its many members will be wondering why they are there at all.  Euro to zero?

Also the problems in Iran could lead to a better outcome for its citizens and a regime change would curtail much of the insurgency in the Middle East.

And the impact on China may also lead to more liberalisation once the crisis there has truly passed.

The collapse in the oil price will cause restructuring in US shale production and in Russia.  Saudi Arabia will be having budget issues as will all the high taxing oil producing countries.

Expect to see the permanent loss of at least 1mmbbl/day production from marginal fields in the US and Russia in 2020.  Oil prices (West Texas Intermediate -WTI) in Midland Texas have been in the US$6-7/bbl range as demand drops storage is taken up.  Expect a 25% decline in US oil production rate from ~13mmbbl/day to <10.  

This crisis has also shown up problems in so much infrastructure so renewal capex should accelerate across the board with physical assets and also in IT and bureaucracies.  Interesting times.

The economic impact of the shutdowns will be great on employment levels but many sectors will be completely unaffected in the short term.

The equity markets will discount the future and give a better idea of the outlook so it will again be a time to `Heed the Markets, not the Commentators’.

This is indeed a critical moment in the markets but could be the MAJOR low here as the bottom picked up the 1982 uptrend.    Maybe some churning is required but the worst is probably over.

This graphic shows the extreme low channel and a jump back into the next channel.

The shorter term looks even better for a market bottom to be in place.  Bounced off a lower channel and back into a mid-range channel.

It is worth looking at some of the sentiment graphics available.

Martin Pring with Stockcharts showed the NYSE Bullish % Index hit a level almost as low as 2008.

The US Put/Call ratio was at extremes with all Puts and no Calls.

Martin Pring’s momentum indicators provided a major BUY signal with many stocks making extreme lows then rebounding to show leadership in the S&P500 Index.

Ciovacco Capital has this interesting chart for the S&P 500 250 week moving average with probably fastest-ever test.

Source: Ciovacco Capital

The short term has seen a close above the 200 week moving average but with confirmation needed with this week’s close.

Source: Ciovacco Capital

Stocks are outperforming bonds and have just pulled back to the break out line.  Very positive.

And this from Graddhy – Commodities TA and Cycles (@graddhybpc) suggesting the 4 year cycle low is coming in right now. This is impressive.   Major sell off, massive volume right on time with this 4 year cycle.

f you have a Twitter account I suggest you follow him at @graddhybpc

Comparisons with 1929. 

The 1929 fall was very dramatic and the recovery quite spectacular.

This graphic is not logarithmic so is not so useful.  (Apologies that it is cut off, unlabelled and unsourced.)

However, this is Martin Pring’s view of 1926-1941 highlighting major selloffs.

The world worked on the Gold Standard then so prices had a true yardstick (even if it did change in 1934 from US$20.67 to US$34.00).

Today, with no Gold Standard, all prices are measured against a floating currency which means nothing can be measured against a fixed yardstick.

It is also worth noting that in the 1920-30s about 40% of Western World workforce was employed in primary industries:-  agriculture, mining, fishing, forestry, energy etc.

Today it is 3-4% so low commodity prices benefit most of the other 96%.

But today, services are far more than 40% and here it is where most job losses appear to be.

Importantly, many of these services have low barriers to entry as far as working capital so we should see a strong pick up once the turn comes through.

Barriers to employment in many services might just be a desk, phone or a vehicle.

I have shown this long term graphic of the Dow Industrial Average from 1923 to present from Schism @jatkinson33 previously.

A break of the uptrend curve from the low in 1932 would be very negative indeed but it would seem that government fiscal and monetary policies are and will be very accommodative such that a decline would be unlikely.

Also, bull markets, and this has been a major bull market, generally end with a bang.   This hasn’t!

Note that the Dow 30 was not even at the midpoint curve when it had its pull back to the bottom uptrend curve.

We have a long way to go yet to the upside!

Source: Schism @jatkinson33

The US$ seems to be retaining its strength in this index.

The Euro looks awful to me.

Bonds are well overbought, at EXTREMES and have hit the top of the channel….

… the long term is for a change in the direction of interest rates.  This must be the low in interest rates.

Commodities are bottoming out after a massive energy related sell off into a four year cycle low. 

Source:  @graddhybpc

The longer term in this 60 year price history of the CRB Index shows today is certainly at an extreme level but it is at a stage of close to the end of a 12 year decline from 2008.

Source: Schism @jatkinson33

This index is back at 1973 levels in nominal terms but it is heavily weighted to oil and petroleum sector products. 

It seems to be coming into a major low.

Clearly precious metals and copper are well above 1973 levels and certainly iron ore so do not fit into this group.

ASX Metals and Mining

This is one of the best and most positive charts I can find.  Pull back to 2008 downtrend and some long term support.

This graphic tells me a lot and is very positive.  Ignore the current `fundamentals’ and consider that a retest of the 2008 downtrend line has taken place at a level that is horizontally important.  The bounce should be robust from here.

BHP is well placed to continue its longer term outperformance of the S&P500.

Shanghai – Long term still heading up

It is surprising that Shanghai is holding up well and in 2019 finally broke out from its 2015 downtrend.

This market may be manipulated but it is still at the level of a decade ago despite rising GDP figures.

Shanghai – Short term still solid

And what might this mean?  Shanghai vs S&P 500.

Iron ore is holding OK.

Gold – looking very strong  – Much higher prices coming -probably quite soon

Watch the recent interview with Barry on CNBC here.

Gold – still in uptrend here and making new rally highs.

And here

This model puts gold into the US$10,000/oz class in the next few years and almost US$9,000 now.

Source: Lighthouse

Another view on gold from Northstar @Northst18363337 suggests we are only just starting this bull market.  Northstar is an excellent analyst on Twitter.

Source: Northstar @Northst18363337

Gold stocks in North America have done some constructive (if highly unusual) technical action and this is very positive.

The sell-offs were related to highly leveraged ETF and hedge funds getting margin calls. The worst of this should now be over and will allow gold stocks to move higher again.

Market leaders Barrick and Newmont are very constructive.

The bigger picture is provided by this Dawes Point Elliott Wave interpretation where it would appear we have just completed a wave 2 in a WAVE 3. 

Gold stocks are poised to strongly outperform the general market.

A$ gold is still strong and made a new high above A$2800 and is now about A$2730.

The ASX Gold Index has provided a good test and a bounce.

All this looks very encouraging to me. Best big buys BHP RIO FMG MIN WPL OSHBest Golds NCM NST EVN WGX RRL SAR WGXBest emerging golds DEG BGL CYL RED KZR CDV NTM CHN MGV  

Call me to participate.
Barry Dawes BSc F AusIMM(CP) MSAFAA
Executive Chairman
Martin Place Securities
+61 2 9222 9111