The Federal Elephant In The Room

First it was the pandemic trade. Then it was the re-opening trade. On Thursday, after the Fed, it looked like a return to tech but not much else. Oil stocks were sold hard. Gold stocks were buried. Bank stocks got hit hard. Lumber got cut. But the indexes portrayed a relatively calm day. The Nasdaq 100 had a nice push to break out of the range.

The XOP dropped hard in the morning, then drifted sideways throughout the day. Quite frankly, I can’t figure out why anything I heard the Fed say would change the difference between the acceleration of demand and a shortage of drilling.

One day doesn’t make a trend, but some of the charts look hurt by more than just a one-day move. Looking in on the gold chart, talk about losing its luster. You’d think it was coal nuggets in California’s daily save-the-world conference.

For lumber, it was a continuation of the trend, but another drop.

Even Copper couldn’t withstand the Fed comments. It has been a big plunging drop in Copper this week after breaking the uptrend.

Lastly, the banks were hit. This is an update on the chart I used last week. It clearly looks significant, with a drop to two-month lows and less then $2 from completely rolling over below the topping structure support.

The swings are vicious. The more amazing part was that the Fed Chair basically reiterated what we knew.

Friday is quad witching. I’ll be watching to see if Thursday was just a whipsaw or something more permanent by early next week. But, at the current drop rate, it wouldn’t take long to wipe out the first-half gains.

Careful out there.

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Are The Financials About To Break Lower?

The banks have been rallying since August. Who expected the banks to make this massive run? Well, a hoard of technicians saw the breakout last fall, and it has been a smooth sustained rally. However, the yield curve spread (the distance between different yields) has been shrinking. As an example the 10 year minus the 2 year is narrowing. This puts pressure on bank earnings. So in a few charts we can see what is going on and what to watch for.

The yield curve is breaking down over the 30, 10, 5 year time frames.

When I look at the Bank ETF’s they are starting to show the strain. This regional bank ETF is breaking the trend line and the PPO is threatening to go below zero suggesting negative momentum.

For the Big Bank ETF, the picture is a little brighter. It is not approaching the long term trend line yet, but the chart is up against the March highs like the chart above.

The individual bank charts don’t look as dramatic.

Here is Citigroup.

Both of the examples, C and JPM, still looks solid and have been in fantastic uptrends. With yields breaking lower, these charts might start to give up gains. For position traders, it might be a good time to have an exit in mind, but the charts are remarkably resilient so far.

Good trading,
Greg Schnell, CMT,MFTA

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Surprisingly Light Momentum

While the commodity trades have been working, it seems that the broader indexes just can’t get running higher. The Nasdaq has done nothing for 7 days. The relative strength in the purple shading shows the weakness compared to the $SPX.

But now we have come to a crossroads. We are making a lower high on the right shoulder. This continues to look like a typical topping pattern. The PPO failing to achieve any sort of strength on the bounce is another clue that we are struggling with upside momentum.

When we look at a 60 minute chart, it also shows the lack of conviction higher.

The $SPX is not much better but it is a little. However, we still have not moved much from the April 16th Options Expiration date or the last Fed meeting on April 28th.

Commodities have been powering higher, and more commodity related companies trade on the NYSE or the AMEX. The chart below is the NYSE Composite including all companies listed on the New York Stock Exchange (NYSE).

So the question is:

Will the Nasdaq topping structure roll over and pull all of the charts down?

I was chatting with a new home sales person who is also the neighbourhood developer. He gave me a shocking statistic.

At the start of the year, they had some starter homes pricing at $350K. With all of the construction material increases, including cement, lumber, drywall, shingles etc. the uptick in costs is $100k so the starter home has moved from $350K to $450k in 6 months! These are Canadian dollars, and homes in Calgary have basements so the cost structure might be a higher number than most people associate with a starter home.  Here is lumber.

The amazing message is that commodities have really surged and may impair a lot of sales in the second half. Not just in housing, but cars, and new energy sources like wind farms and solar farms.

A finance manager for a group of dealerships was mentioning they have a massive showroom with only 8 cars in it. Truck orders are so backlogged.

So where does that leave us in the markets?

We all know the price of lumber has soared. Oil just broke to 3 year highs. Gasoline is a pump handle away from 7 year highs.

When we look at sector rotation, commodity highs line up with the stock market topping typically. Notice when energy and materials are doing well, that coincides with a stock market top (orange). The chart shows the stock market topping out before the real economic data starts to top out. Typically the high cost of commodities ends up slowing the economy.

Now this can be the basis of an intermediate term top, that lasts through the summer, or it can be a longer term primary top. The last 20 days have seen the growth sectors rally, and real estate is having a great surge. The weakness in consumer discretionary might be the price inflation coming at us, slowing down the economic momentum.

I recently did a world insights video looking at stock markets around the world. They are all breaking to new highs.

World Market insights

It would seem that once COVID vaccinations are able to curtail the virus, we will be able to get back to normal densities of people working inside factories and sawmills, providing more materials to the market which will help pause this massive inflationary pressure.

Without question, starter home prices can’t really climb $100k every 6-months and expect home buyers to be able to afford that with rising rates.

It’s time to watch closely to see if it is just a summer pullback coming our way.

Good trading,
Greg Schnell, CMT, MFTA

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Opportunities Popping Up | Greg Schnell, CMT | Your Daily Five (06.01.21)

Greg brings up an energy name that look like there’s trying to popup again. There’s also Magna International in the Consumer Discretionary/Auto Parts. Next, is Nutrien in Specialty Chemicals which merged with Potash Corp. a couple years ago. There’s also Scotiabank where there’s lots of opportunity to rise especially if commodities pick up. Finally, he finishes with Wyndham Hotels which is on the rise as travel increases.

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