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Toronto Stock Broker David Chapman
September 23, 2014

Technical Commentary

This week…….

-          The week was all about the FOMC, Alibaba and the Scottish referendum. As expected the FOMC did nothing with regard to interest rates and it is going to be sometime before they hike interest rates but it will be based on economic data. Alibaba soared 40% after its record IPO. Scotland voted to stay in the United Kingdom but this is probably not the end of the question. There are numerous separation movements globally.

-          The US stock markets made (again) new highs. But not everyone is joining the party. The TSX Composite diverged and fell on the week. The advance is narrowly based.

-          Bond prices were mixed in Canada and the US this past week. There was relief that the FOMC did not hike interest rates although it was never made a lot of sense as to why a number of market participants thought that the Fed might hike rates.

-          Gold, silver, the gold stocks all fell again. Threats of higher interest rates and a soaring US$ were working against them. Silver made new lows. Bearish sentiment in the market is prevalent.

-          Oil prices were mixed this past week. WTI oil was up small but Brent oil jumped over 1%. Supplies are weighing on the market for WTI. But Brent oil is dominated more by geopolitical concerns.

September 22, 2014

Chart of the Week, Stock of the Week

Chart of the WeekWe live in an energy-centric world

Oil prices have been falling. That’s not new as oil prices have been going up and down for years especially after 1967 when the first Arab oil embargo got underway just after the Arab/Israeli Six Day War that started on June 6, 1967. Grant you at that time the actual impact on oil prices was muted but when the second Arab oil embargo hit in October 1973 following outbreak of another Arab/Israeli war known as the Yom Kippur War oil prices leaped from roughly $3.50 to over $10 in a matter of weeks. (more)

Stock of the WeekA rising natural gas producer

EnCana Corp. (ECA-TSX, NYSE) has been an underperformer for quite a few years. Back in 2009 EnCana split itself off into two companies – a predominantly integrated oil company Cenovus Energy (CVE-TSX) and a predominantly natural gas (NG) company EnCana. Initially at least it seemed to help EnCana and the stock rose from roughly $28 to $35. It didn’t hold and by January 2012 EnCana’s stock had fallen to just under $18. It should have been no surprise that NG prices had also been falling from about $6 to under $2 in the same period. (more)

September 15, 2014

Technical Commentary

This week…..

-          For the first time in five weeks the stock market faltered as the S&P 500 lost just over 1%. Could this be the top? Well at least a temporary one. It is after all September and October is approaching. An interesting seven year cycle of trend changes courtesy of Malcolm Bucholtz is discussed.

-          Fear of the Fed hiking interest rates early pushed bond prices lower this past week (and was also behind the stock market fall). The fear seems to be misplaced given both the Euro zone and Japan appearing to fall back into recession.

-          Gold and silver were down again. The gold stocks were hit as well. Everything in the gold sector is gloomy. Even some bulls are throwing in the towel. Gold appears to have potential to fall to $1,200. But will it fall further? The strong US$ was hurting gold. That and fear of the Fed hiking interest rates.

-          The US$ soared again as the Euro, the Pound and the Yen all took it on the chin. The pound is falling because of fear of Scotland separating. Canada got in the act as the Cdn$ fell sharply as well. Some are calling it a race to the bottom for currencies.

-          Oil prices fell as this past week. Too much supply and lower demand.

-          All in all a gloomy week unless you own US$. But beware the rise for the US$ has been too fast.


Chart of the Week, Stock of the Week

Chart of the WeekFear is in the wind!

The James Turk Fear Index has always been interesting www.fgmr.com. It is an easy concept. The Turk Fear Index is a measurement of gold’s relative value in relation to currency. The Turk Fear Index centres on the US by comparing gold’s value to money but a fear index could be calculated for any country and any currency and for that matter the world as well. The US being the world’s largest economy is most likely a good indicator for the rest of the world. (more)

Stock of the Week Some warning signs.

Berkshire Hathaway (BRK.A-NYSE) has had quite the ride. Warren Buffet’s signature firm recently had considerable front-page news. The news came because of Berkshire crossing $200,000/share. Yes, you read that right – $200,000 (Note: the chart says $20,000 as the Omega chart system can’t accommodate six figures). Seems that Berkshire has returned 22.8% annualized since 1977. Buffet purchased the company back in 1965 when it was actually a failing textile company and turned it into an investment management company. Berkshire has outperformed just about everybody. Berkshire has never had a stock-split nor can investors purchase fractional shares. (more)


September 7, 2014

Technical Commentary

This week…..

-          Another week another new high for the US stock markets. The Cdn markets didn’t co-operate and were actually down slightly on the week. The market climbs a “wall of worry”. Retail investors have poured in especially seeking yield. But the background remains dangerous, sentiment is overly bullish and numerous indicators are suggesting a top could soon be at hand. The supposed robust US economy surprised on Friday with a considerably lower nonfarm payrolls then people expected. That didn’t stop the market from closing at an all-time high.

-          The Cdn markets as noted fell this past week but it was mostly because of weak Energy and Materials. The Cdn jobs report said 11,000 jobs were lost in August and that the private sector lost 118 thousand jobs. But amazingly 89 thousand jobs were created through self-employment. Canada has had trouble lately with its numbers.

-          US and Cdn bonds fell this past week after the ECB cut interest rates to virtually zero and some to interest rates to negative. Prices bounced back on Friday following the negative nonfarm payrolls report.

-          Gold and silver both fell this past week and the gold stocks broke falling a sharp 7%. As in the past gold’s big drops came early in the morning on big volume. Bearish reports abound.

-          Oil and gas also fell sharply this past week as peace was breaking out in Ukraine. The energy stocks also fell but overall they continue to hold up well despite the drop in oil prices.


September 1, 2014

Technical Commentary

This week…..

-          The US stock markets continued to “chug” to new highs even against the backdrop of the ongoing war in Eastern Ukraine and the threat of new sanctions against Russia. But as I have noted many times sanctions do not work. It is a trade war and trade wars are lose-lose. Negative signs continue to abound for the stock markets. US stocks are currently testing the top of a bull channel once again. A break of 1,960 on the S&P 500 could suggest further declines. Major support remains in the 1,875 area.

-          The TSX Composite also make new highs again but unlike the US stock markets further new highs could be seen. The European stock markets rebounded this past week on word that Mario Draghi might provide more stimulus.

-          Bonds rose again this past week but both the US and Cdn bond followed are once again touching against the top of a bull channel. Stronger economic numbers offset safe haven buying for bonds.

-          Gold was up but silver barely budged this past week. The gold stocks enjoyed a strong up week and are once again just below a potential major breakout area. The gold stocks continue to lead. But the key is for gold and despite the gains this past week it continues to languish.

-          Oil prices jumped this past week breaking out of its down channel. Oil prices could move back towards $100. Tensions in the Ukraine helped oil prices this past week but WTI oil prices were up primarily because of stronger than expected economic numbers this past week.

Chart of the Week, Stock of the Week

Chart of the Week – Bank stocks at a top? Gold stocks at a bottom?

I was struck by the apparent symmetry between bank stocks and gold stocks. The KBW PHLX Bank Index (BKW) represents the bank stocks and the gold stocks are represented by the Gold Bugs Index (HUI). The KBW Index has underperformed in 2014. While the S&P 500 has gained just over 8% thus far in 2014, the KBW Index is up just over 3%. The KBW Index topped back in March 2014 and since then appears to be making a series of lower highs. The 150-day exponential moving average has acted as solid support since the lows of 2011 the last time the index dropped below that key EMA. (more)

Stock of the Week – The market digests a merger.

Ok. I couldn’t resist. Who could. This almost seems to be a merger made in heaven. The iconic American burger in a marriage with Canada’s double-double. The “Booger King” hooking up with “Timmys”. Burger King (BKW-NYSE) and Tim Hortons (THI-TSX, NYSE) are hooking up in a $12.5 billion merger. Warren Buffet of Berkshire Hathaway (BRK.A-NYSE) is supposedly kicking in $3 billion in financing for the deal. Everyone is hailing it as a beneficial marriage for all. (more)


August 19, 2014

Technical Commentary

This week….

-          The stock market was rebounding this past week until Friday when it was learned that Ukraine forces clashed with Russian forces who apparently had crossed over the Ukraine border. Russia denied the incursion and there were numerous unanswered questions concerning the event. Nonetheless it had the effect of reversing the stock market, sending bond yields lower and gold prices higher. The S&P 500 hit a key level of resistance this past week before weakening on Friday.

-          As noted bond yields fell further this past week on a flight to safety following the news that Ukraine forces clashed with Russian forces. Cdn bonds generally followed the US bond yields lower. German bund yields fell to record levels. The US economy continues to send out mixed signals as to its strength. Meanwhile the EU is sliding into recession given weakness in Germany because of sanctions on Russia. Support for sanctions against Russia from the EU are weakening.

-          Gold prices were off small this week while silver prices outperformed to the downside. On the other side, gold stocks put in another up week. Could the gold stocks be leading? Gold fell sharply early on Friday due to another mysterious large sale but rebounded sharply on the Ukraine/Russia clash news.

-          Oil prices were down early in the week but rebounded Friday following news of the Ukraine/Russia clashes. Oil prices are in the weak seasonal period and could stay suppressed until into September/October.

August 13, 2014

Technical Commentary

This week…..

-          After a holiday absence the weekend report returns.

-          Stock markets fell this past week against the backdrop of rising geopolitical concerns particularly the ongoing conflict in Ukraine/Russia. On Friday the markets reversed to the upside following reports of the rebels in the Eastern Ukraine wanting a cease fire. For whatever reason the market acted positively to the news and the US markets managed to eke out a small gain on the week. It is possible that they have made a temporary low. Key support on the S&P 500 at 1,950 has broken and the next key support zone is at 1,875. EU stock markets fell sharply this past week on geopolitical concerns. There is also growing concern over tit-for-tat trade sanctions with Russia. In a trade war, no one wins. The EU stocks are now in a sell mode.

-          US Treasury bonds rallied this past week on a flight to safety because of the growing geopolitical concerns. I have provided some commentary on the recent employment numbers in the US plus some charts.  Cdn bonds were also higher on the week especially following the dismal jobs report on Friday.

-          Gold was higher on the week but silver fell. The gold stocks enjoyed a solid up week. So far the current gold rally appears feeble despite the so called positive background of geopolitical concerns and the growing trade war with Russia. This keeps open the possibility of another sharp downswing if the geopolitical concerns should lessen.

-          The US$ was up small on the week. The US$ is also benefitting from the geopolitical concerns. The Cdn$ fell as a result of the dismal jobs report.

-          Oil prices fell marginally. The bombing in Iraq is far away from Iraq’s main oil fields in the south. Energy stocks enjoyed a positive week but they are in a short term downtrend. (more)

August 7, 2014

Email Commentary

August 6, 2014

I was away for two weeks (three weekends) mostly without internet and cell phone. And I never left Ontario. So it was always a bit of a surprise whenever I was in a position to check markets and the latest in the geopolitical wars. Gold as of today has barely budged. It was at $1,309 when I left on July 18 and it is trading at $1,308 today although we did get down near $1,280 before rebounding again. The S&P 500 on the other hand broke important support at 1,950 and is today hovering somewhat above 1,900 for a loss of roughly 3% or so.

The biggest impact on the stock market appears to be geopolitical with the conflicts in Ukraine and Israel/Gaza. Both are equally dangerous and could trigger a broader conflict. But the most dangerous is Ukraine and it is not necessarily the military conflict. The real conflict or the most dangerous one to the global economy is the economic sanctions.  Quite simply sanctions against Russia, which has been the main response from the West, simply do not nor will they work. Sanctions threaten the global economy. The West (US, Canada, EU primarily) are leading the way on sanctions but the reality is most of the world is ignoring them. The sanctions are a form of a trade war. The sanctions for example have grounded a subsidiary of Aeroflot the Russian airline. In retaliation Russia is threatening to ban all EU flights over Siberia and the Russian government has been directed to prepare retaliatory measures against the West.  Russia has also in the process of cutting a massive $20 billion deal with Iran that will allow Russia to help develop Iranian oil fields and even have Russia buy oil from Iran. The deal includes 500 thousand barrels of Iranian oil per day in return for Russian goods, equipment and services. Considering US sanctions against Iran, Russia is basically snubbing the US with regards to those sanctions. Sanctions don’t work especially with the world’s 8th largest economy even though it may work on a smaller country that has little economic clout like North Korea. China also appears prepared to bust or ignore any western sanctions against Russia bringing the two Eastern powers closer together. While China has not been targeted they are gravely concerned about the West`s reaction to Russia. In a global trade war no one wins and everyone loses. The Great Depression hammered that concept home but then history is being largely ignored. The response it seems is that “this time it is different“. No it is not different it is just the players that are different.

On the military side there has been renewed buildup of Russian troops on the Ukraine border and there have been constant stories of NATO buildups as well although that news is not printed widely (or at all) in the western press. For every action there is a reaction. What comes first – the chicken or the egg.

With the S&P 500 breaking support at 1,950 one has to focus on more important support now. That line in the sand is currently at 1,875. If that level breaks it will end an uptrend that has been in place since October 2011. Given current oversold levels expect some sharp volatility over the next week. The market is still buying the dip but the background is negative and as I have noted continually over the past few months the negative divergences have been becoming more pronounced. On a monthly basis the key breakdown point is under 1,737. The market is still quite a ways from that level. There has been no substantial correction in the markets since 2011 so one is considerably overdue. The good news is that this is probably only the first wave down so there could be a sharp up move that follows this correction. However, that top should be even more important as the market is indicating that the move up from the lows of 2009 is most likely complete. The ensuing bear could return the market to the 2009 lows.

As for gold its now three year correction (and counting) is getting long in the tooth as well. The danger short term for gold is that the final low is still not in and I have consistently pointed out that there remains downside risk including serious downside risk even to $1,000 until gold takes out in order $1,380, $1,430 and $1,550. While I might not believe that the Goldman Sachs (and others) gold target of $1,000 is going to happen the admission is that it does remain a possibility. The good news is that the gold stocks (HUI, TGD etc.) appear poised to break out before gold. This is the kind of positive divergence one needs at the lows.

The geopolitical front is becoming potentially more dangerous from a military standpoint and especially from an economic standpoint. Russia has numerous economic weapons to use against the West depending on how far the West is prepared to go with sanctions. An ace in the hole for Russia remains the roughly $500 billion of external Russian debt that is owed primarily to EU and US banks. Russia could default as a final action against sanctions. An event such as that could cause a panic in EU and US stock markets.

A full report will return over this weekend including some catch up commentary on the recent US GDP numbers and the recent US employment numbers. The GDP number on the surface looked good but underneath it is rot.

David Chapman


Investment Advisor, Technical Strategist

Industrial Alliance Securities Inc.

26 Wellington Street E, Suite 900

Toronto, ON M5E 1S2

Phone: 416-604-0533

Email: dchapman@iagto.ca

Email: david@davidchapman.com

Web: www.davidchapman.com

Twitter: @Davcha12

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