Home Experience MGI Securities Subscribe News Contact Us
Toronto Stock Broker David Chapman
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

July 21, 2014

Chart of the Week

Chart of the WeekGold mini plunges!

Note: I am away over the next two weeks returning the week of August 5. As a result there will be no reports.

It was a jarring wakeup call this past Monday July 14, 2014 when everyone discovered that gold had plummeted some $30 overnight. It was the largest one-day drop for gold in 2014 and it almost was as large a down as the up day on June 19, 2014 following the June FOMC. It came just as gold appeared poised to move above $1,340/$1,350 and challenge the March 2014 highs up to $1,380. It was it seems not to be. (more)


July 13, 2014

Technical Commentary

This week…..

-          A hitherto unknown bank in Portugal, Banco Espirito Santo, caused the stock markets to roil this past week. By Friday, however, the market determined that things were not as bad as it seemed and the market rose. European stock markets were hit hard and their short term trends have turned negative. So is this just another little shot across the bow making a lot of noise and signifying nothing? The bull market may be long in the tooth but until it breaks the bull remains. A break under 1,950 for the S&P 500 could suggest a small correction but a break under 1,860 and especially under 1,800 could signal the end of the bull market. The market is a long way from the latter. The negative divergences continue but they are just a warning sign not a sign that a top is in.

-          If the stock markets pulled back bonds rallied following the Euro zone banking problems. A treasury bond issue of $61 billion of notes and bonds was snapped up. But there remains numerous negative warning signs for the US economy. And it is somewhat disconcerting to learn that the Fed has purchased some 80% of Treasury bond issues in 2014. That has helped keep bond prices in a bull market thus far.

-          Gold, silver and the gold stocks were up again this past week as they responded positively to the troubles in Banco Espirito Santo. Bullish sentiment is rising but is not yet in the danger zone. The commercial COT has fallen sharply over the past couple of weeks offset by a sharp rise in the large speculators COT. That is discussed. On the surface the switch in the COT appears negative. Gold needs to take out 1,370 to suggest higher prices. A break under $1,315 would be negative.

-          The US$ went nowhere this past week and neither did the Euro despite the travails of Banco Espirito Santo.

-          Energy prices fell again as things calmed in Libya and there appeared to be no threat to the important port of Basra and the Basra oil fields in the south of Iraq. On Sunday a news story came out that there was fierce fighting at Tripoli airport in Libya. So Libya might once again be roiled and help push oil prices back to the upside. The energy stocks appeared to break their recent bull channels. (more)


July 10, 2014

Chart of the Week, Stock of the Week

Chart of the WeekRising banking problems!

This morning I woke up to the following headline: Before the Bell: Stocks set to plunge on Fed, Portugal worries (Globe and Mail, July 10, 2014). While many would no doubt centre on statements from the June FOMC meeting one of more important aspects of the story may well be that Banco Espirito Santo of Portugal was covering up a potential $1.8 billion hole in its accounts through accounting chicanery. Banco Espirito apparently missed a debt payment. (more)

Stock of the WeekCopper prices are rising.

Copper prices have been on a bit of roll. After hitting a low of around $2.88 back in March 2014 copper prices have rebounded to $3.26. At the time copper prices appeared poised for a free fall with potential objectives down to about $2. It turned out to be a false breakdown. Demand has been rising particularly in China due primarily to stockpiling coupled with a turnaround and uptick in demand. As well some new laws in Indonesia designed to spur local demand has seen the government put on higher export taxes. This has negatively impacted exports to China. The result has seen two large miners, Freeport McMoran (FNR-NYSE) and Newmont Mining (NEM-NYSE) stop exports. Making it worse the current election has pushed the issue to the backburner and Newmont has shuttered their mine. (more)


July 6, 2014

Technical Commentary

This week……

-          Once again the stock markets soared to new all-time highs. There are some who believe nothing can stop it. Maybe they are right. It would appear that only a sudden “black swan” event might stop this market in its tracks. But the stock market is rising against a bevy of negative divergences that should eventually prove to be the markets undoing. All the stock markets are confirming each other as the S&P 500, the DJI, DJT, NASDAQ and even the TSX soar to new highs.

-          The nonfarm payrolls number got market pundits excited that the US economy is poised to soar. Stocks rose, the bond market faltered, the US$ jumped and gold slipped. All according to expectations. The US bond market is slipping and there is an important auction this week. Two year Treasury note yields are the highest seen in 2014 and the highest since a blip in September 2013. The nonfarm payrolls are more closely examined.

-          Gold prices slipped following the higher than expected nonfarm payrolls on Thursday. But by the end of the day, gold had recovered roughly 2/3rds of the drop and end the week with a tiny gain. Gold is faltering under $1,330/$1,335 resistance and the bears remain. No COT this week and the previous week’s COT seemed to indicate that a top was pending. Or is it? China continues to import gold.

-          The US$ fell then bounced back following the release of the nonfarm payrolls. The Euro slipped because the ECB now has negative interest rates. But the Pound rose and so did the Cdn$.

-          Oil prices fell as it was perceived that the crisis in Iraq wasn’t as bad as initially thought. The major Iraqi oil fields in the south (Shia controlled) appear to be safe from the Sunni insurgents. (more)

June 27, 2014

Technical Commentary Update

June 27, 2014

I am away this weekend but thought I would get out a short update before leaving. There will be a full report next weekend.

Everyone would be forgiven if they thought that the onset of summer has also brought to the markets the summer doldrums. Markets seemed to be almost standing still this past week. If there was any action it was in Iraq with the ongoing civil war or the ongoing civil conflict in Ukraine. As of about 3:00pm on Friday the S&P 500 had barely budged all week. It was off a small 0.3% on the week. This was despite the release on Wednesday of the 3rd estimate for Q1 GDP that showed the US economy contracted at the rate of 2.9%. This was revised down from the previous release that showed a contraction of 1%. This steep revision to the downside should have stopped any thoughts of a complete rebound for Q2. But it hasn’t. The belief is still out there that Q2 should be ok and Q1 was just a bad winter aberration. Trouble is most of the numbers that have been coming in during Q2 are pointing to a possible contraction  as well. Housing is going nowhere as only luxury housing is benefitting. Durable goods orders this past week for May fell 1% when the market had been expecting a gain of 0.5%. Personal income for May was up 0.4% but personal spending was only up 0.2%. One can only presume that the differential is either going into savings or paying down debt. Retail sales have been anaemic at best and the trade deficit is widening not contracting. The Michigan sentiment indicator was steady as expected at 82.5 but that remains far below where it was in 2006. The expectation remains rosy for Q2. But the numbers are suggesting otherwise.

The S&P 500 has been treading water now for seven days. This shouldn’t last. The S&P 500 can’t seem to make any headway above a 1,970 ceiling and even if it did there is a bigger ceiling up around 2,000. Maybe they want that magic number. The risk is below where a break first of 1,945 then under 1,930 would spell trouble with a decline to 1,900 and even down to 1,865. Ok so the market has had numerous pullbacks over the past few years as it just keeps on rising. So a pullback to 1,865 is not a big deal. But a breakdown under 1,825/1,850 would be. The expectation is that Q1 GDP was an aberration not to be repeated for Q2. They might be in for a surprise.

Next week is the nonfarm payrolls for June and the market is looking for 210 thousand new jobs and the unemployment rate to remain at 6.3% (U3). Despite the rosy report it has been acknowledged that U6 unemployment should remain high in the 12% plus area (includes part time workers and discouraged workers).

If the stock market has appeared to be standing still so has the precious metals market. Gold and silver are both up this week but barely. The gold stocks have barely budged as well. All of this is probably putting everyone to sleep. The US economy is showing signs of weakness and a civil war is raging in Iraq. The markets seem to shrug. Gold has resistance at $1,325/$1,330 and support down to $1,305/$1,310. If there was a worst case it would be for a drop to about $1,290 to test the most recent breakout level. The major resistance is up around $1,360/$1,370 and that appears to remain a reasonable objective for this move. Again as I have stated in the past I am not sure whether this up wave is merely a continuation of a pattern that has been forming for the past year since the low of June 2013 or is the start of a potential new bull up move. If it is a continuation pattern then risks remain to the downside including the risk of a breakdown under the double bottom June/December 2013 low near $1,180. A firm break above $1,370 would be positive. A break above $1,390 even more positive and a break above the August 2013 high near $1,430 would be quite positive. Until any of those points are taken out risks remain to the downside.

Even oil prices failed to move this week. Indeed they are off slightly despite the war continuing to rage in Iraq with the Sunni rebels seizing more oil facilities. Potential objectives for oil prices still appear to be up to around $111/$112. Currently there is resistance up to $109. Below a break of $103 would be a sign of weakness but a break under $100 would end any thoughts of higher prices for now. Maybe oil is pausing as I have seen stories that the US might be amenable to a break up of Iraq with the Kurds in the North forming Kurdistan along with the Kurdish area of Northern Syria; a Sunni country to be formed of out the northern part of Syria and the western provinces of Iraq; and, a Shia country (Basra?) formed out of the Shia dominated parts of eastern/southern Iraq. Probably logical except the Shias might not agree, Turkey with its large Kurdish population would not be pleased with the formation of Kurdistan, and Assad of Syria might not be happy to lose over half his country. In the interim the civil war in Iraq keeps showing signs of spilling over into other countries such as Jordan and the Iranians could become more involved on behalf of the Shia government in Baghdad. A further deterioration of Iraq would be positive for oil prices.

As to the market well this narrow range trading shouldn’t last forever.

Previous Posts »