Was That It?

From the June 5, 2016 HRA Journal: Issue 252

Well, if that was the correction I’d have to call it underwhelming.  Ok, I admit the payroll report debacle was a bit of a “save” at least where the producers are concerned.  They were down several percent and things clearly could have gotten worse if the payroll number had been a huge beat rather than a huge miss.

It’s a piece of news that is making everyone happy at least for now. Wall St bulls see an accommodative Fed, whatever the reason, as the path to new highs they have been pining for since last May.  They might get their wish if there are enough FOMC members making dovish speeches in the next few weeks.  That said, given how foolish they currently look, said FOMC members might be wise to just clam up for a while.

Short of a crash in NY, I don’t see the level of the SPX putting a crimp in a renewed resource sector rally.  Even if NY markets disappoint it won’t do gold any harm if the USD is weakening as well.

One thing that does need to be watched is the Brexit vote.  That suddenly looks like a close race. Maybe its just bad polling.  There has been plenty of that in recent years.  If the “Leave” side really did win volatility across all markets could explode and the summer could be way more “interesting” than we want.  We’ll cross that channel when we come to it as I’m still assuming the “Stay” side wins.

***

I noted in the last issue that I thought the junior resource sector was in a “correction” that would be short lived and soon reversed, much like a couple of similar ones coming out of the 2009 bottom.  Tradable if you’re a trader perhaps but best left alone if you’re not.  I finished off the sidebar editorial comment on page one with the simple phrase “We’ll be fine”. 

The correction never got to the point where I found it very concerning, especially for the earlier stage companies that make up most of the HRA list.  What concerns there may have been for others were just vaporized by the latest US payrolls number.

Friday’s stunning reversal after a horrific US payrolls report looks like it may be the bottom to me.   As you know, I use charts for simplicity of display but I’m not a chartist.  I don’t think there is anything “special” about the $1200 level in technical analysis terms but round numbers do resonate for most people. Most chart traders expected a pullback to the $1180-1150 level for a variety of reasons. 

They may have shrugged at sub $1200 prices but I don’t think that’s true for the average investor.  Seeing an 11 handle again on the gold price would have sowed more doubt among the longs and both deepened and lengthened the correction that now appears to be over. 

The two charts above, especially the top one, make the nature of the correction clear.  The top chart of the TSXV index is the most interesting.  While its not a great index for a number of reasons I won’t bore you with here is it a good visual representation of trader sentiment, especially in the smaller earlier stage companies. 

Correction?  What correction?  The index just hit a new high and a new 52-week high for the first time in four years.  All that chart says to me is “game on”.

I doubt that many of the people who were crowing about having sold at the Metals Investor Forum still think that was a clever move.  Most of the people talking that way ARE traders so it may have worked out for them – if the got the timing perfect.  

If you were trading the producers, there was indeed a correction but it wasn’t much of one.  If Friday’s gains hold you would have had to sell right at the top of the pullback to be ahead now and you’re only ahead by a couple of percent.  It’s much more likely that someone who sold during the pull back may now find themselves buying back higher.

I don’t want to sound like I’m gloating.  There WILL be corrections where the smart thing is to trade them but this doesn’t look like one of them.  That is often the case early in a bull market.  Those who are not nimble and don’t have the intestinal fortitude to “buy lower” tend to be left behind on rallies. It’s part of what makes bull markets bull markets.

Yet another perspective can be seen in the updated bull market analogues chart above, from Jordan Roy-Byrne at  www.thedailygold.com which I showed you an earlier version of a couple of issues ago.  Jordan updated the chart shown on this page after Friday’s reversal.  The similarity between the current advance and that of 2008 onwards is even more apparent.  This advance doesn’t look much like the 2001 version at all anymore.  Tellingly perhaps, if the advance continues to closely mirror the 2008 version the correction is probably over and we’ve got a summer of higher prices ahead of us. 

While I believe the news looks unequivocally good for the gold and junior resource sector I’m considerably less comfortable about the major markets after the latest payroll report.  The chart below displays the S&P for the past two years.  As you can see, the index has again climbed to levels where it has been unable to overcome resistance and move higher several times in the past two years. 

The bullish scenario, and it’s been flogged heavily since the payroll report, is that the number was a one-off that won’t be repeated but it will be enough to scare the Fed into holding rates steady for at least few more months.  Since everything else is “strong” and the economy is “improving” so rapidly this rate hike reprieve should be enough to guarantee new highs. 

Believe me, that is not an isolated opinion.  I saw variations on the theme just about everywhere I looked in the financial press and in Wall St strategy notes after the payrolls release.   The argument is ridiculous at so many levels I barely know where to start. 

I agree that the odds of a rate increase just went to zero for June or close to it.  I think there is still a chance of a move in July though it would be very stupid of the Fed to do it unless some recent trends reverse.  The steady Fed message may be enough to drive NY markets higher, at least for a while. If some of the trends that developed further with this latest release continue however, the party may be short.

This was not a one-off, as much as Wall St wants it to be.  Take a look at the chart above which displays the monthly change in non-farm payrolls going back to the beginning of 2013.  The right side of the chart shows a very clear trend that even Wall St couldn’t miss.   Payroll gains have been declining for several months now. 

Bulls would point out that there have been “outlier” reports before and that the payroll number is very noisy.  Both of those statements are true but the current pattern does not look like past episodes of outlier payroll counts.  You can see couple of those on the graph.  The job count would bounce right back a month or two later.  That’s not what’s happening this time. The payroll number has been weakening fairly steadily since the start of year.

Wall St and, apparently, the Fed insist its all about jobs.  So let’s take a look at how the latest payroll report fits into the picture.  Most of the talking heads that were waving off the poor number pointed out, correctly, that a strike at US telecom firm Verizon would have reduced the payroll count by 35,000.  That’s true, but even with that added back the number was dismal.  More to the point, all the prior month revisions were negative so the overall “miss” was in the order of 200,000.

The more ominous payroll chart is actually the one below, which displays monthly changes in temporary help service sector.  I’ve noted before that payrolls are a lagging indicator.  Temporary help services are the only part of the payroll set that is actually leading, or at least coincident.

When companies are starting to hire coming out of a recession or thinking of layoffs going into one it’s the temporary workers that get hired or laid off first.  The pattern of multi-month declines that we are seeing now are only seen in advance of recessions and this is not an indicator with a history of false positives.  

Changes in temporary help have been a reliable advance indicator of recessions but not consistent in terms of timing.   It has rolled over in the past anywhere from a couple of months to a year before the official start of a recession.

I think it provides a warning that should be taken seriously but we still may not see the economy roll over before the end of the year. That would provide plenty of time for the NY markets to make a new high.  I don’t think it will happen but it doesn’t really impact what I think the resource sector will do so I’m agnostic on the subject.

In the near term the market is happier about the Fed (presumably) putting off rate increases and than it is concerned about why the payroll report was lousy.   Even though the charts above should make it obvious that we are dealing with a negative trend Wall St is still oblivious.

Let’s hope for the market’s sake the FOMC ISN’T oblivious, though their recent actions make me wonder.   They were either dazzled by consumer spending increases (that were mainly higher gas prices) or they either didn’t notice or care about a trend in employment that already looked entrenched even before the May Miss.

This isn’t just an academic concern.  If it turns out the Fed is also in the “one off payroll miss” camp they may still consider the July meeting very much live.  If FOMC members start jawboning a July increase they had better be right about payrolls this time.  Another weak number delivered to Wall St that expected the Fed to tighten would go over very, very badly.

One of the biggest casualties of the weak payroll report was the US Dollar as you can see from the chart above.  Gold bugs are hoping for more of the same.  They may get their wish if the Fed really does stand pat for months.

Assuming a June rate hike is off the table the biggest near term driver may be the Brexit vote.   I’ve been ignoring that issue until recently as the polls were consistently showing the “stay” side would win.   That has started to shift in the past few days and a large number of weekend polls now indicate the Stay and Leave camps are neck and neck.

That news generated heavy selling of the British Pound.  An actual vote to exit the EU would be expected to generate selling of both the Pound and the Euro.  The USD would be the winner by default in that scenario.  That could put some pressure on gold prices unless it’s a trigger for broader equity declines. 

I think the interim bottom in gold prices is real. How high it goes and how quickly depends on outside markets (and Yellen). It doesn’t need to be anything but stable to slightly bullish to support gold stocks though, since the resource bull is the real thing too.  It should be a long hot summer in the resource space.

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