Rumors of the End, Are Premature

According to the St. Louis Fed, the velocity of money “is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy.”

The velocity of money has only recently started to come off a historical low, and it indicates that finally the economy is starting to use the money that was created by the increased money supply (QE), which in-turn implies that business activity is expanding and that growth in GDP will be sustained for the foreseeable future.

The chart below shows the velocity of the M2 money stock going back to 1958. Notice that during five of the last six expansions, the velocity of M2 decreased during the first half of the expansion and increased during the second half. The lone exception was the 1992–2000 expansion where M2 velocity did the reverse; increased during the first half and decreased in the second half.

Since the M2 velocity is only now starting to increase, there is a high probability (approximately 80%) that we have only experienced half of the current expansion. In other words, there is a “whole lot of expanding” to do yet (chart below).

Claims that the end of the bull market is near, are premature.

Equities

Sentiment

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The National Association of Active Investment Managers (NAAIM) exposure index 50-week MA has flattened but has yet to start move up. This index leads market down-turns and lags market up-turns.

The put-to-call ratio has a strong negative-correlation with the SPX; down-spikes in the 8-week MA indicate local market tops, while up-spikes indicate local bottoms. A down-spike formed in early June, marking the local high in the SPX, after which, the market dropped until the final week of June. Since then, the 8-week MA has been on the rise, which normally correlates with a decreasing SPX. This time, however, the SPX has been rallying along with the Put-to-call ratio. The last couple of times it has done this (September and December 2016), the SPX continued to rally after the put-to-call ratio spiked without forming a local bottom (blue ovals). This implies further strength in the SPX.

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Technical

The long-term technical picture continues to strengthen:

  • The 8-month MA remains above the 12-month MA.
  • The RSI is rising. The S&P 500 has bounced off the 8-month MA.
  • The MACD continues to diverge away from a bear cross-over.
  • The ADX +DI has started to turn back up, and the -DI has started to turn back down.
  • The stochastic has turned up.

This pattern is similar to what happened during the 1998–2000 trading period (pink rectangles on the chart below). The only worry we have is that the ADX trend strength (black curve) has reached the down-sloping trend-line (dashed blue-line) which has acted as a turning point for the trend strength in the past. This indicator can, however, continue to rise above the blue dashed-line like it did in 1998 (chart below).

The short-term technical picture:

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Fundamentals

The 10-year minus the 2-year Treasury rate differential increased slightly this week, but its overall slope continues unchanged. At this pace, inversion would happen before the end of the year. Inversions lead recessions by between 6-and-18-months, making the Spring of 2019 as the earliest likely start date for a bear market (chart below).

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The Fed kept rates unchanged, as expected, but the probability of a hike at the next meeting September 28, is nearly 94% (chart below).

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Gold

On a long-term weekly time-scale, the situation remains the same as last week; the current pattern is very similar to 2013:

  • The RSI has dropped below the rising trend-line and is almost over-sold.
  • The 20-week MA has crossed under the 50-week MA.
  • The gold price remains below its 200-week MA.
  • The MACD has completed a bear cross-over and continues dropping.
  • The stochastic remains at over-sold levels.
  • The ADX -DI is increasing, as is its momentum, while the +DI is decreasing.

In addition to the 2013 similarities, today’s pattern has some unique features: the head-and-shoulders pattern has been maintained, the 200-week MA has been breached, and the long-term upward-sloping trend-line has also been breached

If the pattern similarity continues, then further weakness in the gold price is to be expected in the medium-term (chart below).

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The dollar continues to grind higher/sideways, and rates are doing the same. This has maintained pressure on gold. If gold breaks below $1210, then there is only weak support at $1200 and again at $1180. And if it was to lose below $1180, there is no support until $1130 (chart below).

We have been expecting the USD/JPY pair to turn down (at least a little) for several weeks now, but the pair just keeps moving up (and gold down). The stochastic has moved out of the over-bought zone, but the ADX, RSI, and MACD are all bullish. A small correction would be reasonable, but we are not holding our breath on that one. It looks like the pair will continue to rally, and gold will continue under pressure (chart below).

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We wish our subscribers a profitable week ahead and ask that email be monitored for Trade Alerts.

Regards,

ANG Traders

Join us at www.angtraders.com and profit from our 40-years of experience.

Forty years of private equity trading, and still learning.