Good morning,

Stocks across major indexes traded higher this week, with notable significantly higher moves of both the DJTA and BKX index.  The record high of the DJTA this week suggests to ‘Dow Theory’ market technicians that the stock rally is probably not over.

From Mark Hulbert of MarketWatch:

[The DJTA] has been steadily climbing back since that mid-May low and has reached that new all-time high. Given that the Dow Industrials is also trading at a new all-time high, this means—according to the Dow Theory—that the bull market is alive and well.

For those of you who keep track of this sort of thing, you should realize that the Dow Transports’ new high doesn’t actually trigger a new buy signal from the Dow Theory, but instead confirms that the previous buy signal remains in force. Nevertheless, in the words of Jack Schannep, editor of TheDowTheory.com, this week’s development “is very favorable for the market.”

So, according to Dow Theory, we have a confirmation.  The bull may be ready for more upside, even at these nosebleed levels.  For relative newcomers and older hands at stock trading, we’re in the midst of a prime example of an expensive stock market becoming more expensive.  Remember this experience.

A contrary argument, yet less persuasive, to Dow Theory advocates can be made by pointing to recent weakness of those stocks that have led the eight-year-long rally: the FAANG stocks.  This week, each of the FAANG stocks (Facebook – FB; Amazon – AMZN; Apple – AAPL; Netflix – NFLX; and Google – GOOG) rose modestly, breaking the recent selloff we’ve witnessed in these names.  

I’ve been watching the five stocks that make up the FAANG closely, because it is there where an overall stock market sentiment (intervention?) may be gleaned.  For many months, deteriorating internal statistics have been masked by these overly weighted fab five stocks.

If weakness now becomes apparent to the FAANG juggernaut, trouble may lie ahead for the overall market—or, may become buying opportunity in these names if the DJIA and DJTA continue reaching new highs.  And if you’re thinking about shorting an index and going long FAANG stocks when the latter touches, say, a favorite moving average of yours while the overall market reaches new highs, that trade is flawed, in that, history demonstrates that high flying stocks drop the most during a big swoon, a la the 2000 NASDAQ crash.  The NASDAQ 100, which led the NASDAQ higher in 1999, was absolutely demolished at the bottom of that crash.  So, find another trade.

And to complicate the scenario further, remember, the Swiss National Bank, especially, has been buying FAANG stocks in abundance.  So, maybe we can look at the FAANG performance as a proxy for the effectiveness of central bank ‘management’ of stock asset prices in a way not different from any other key market these bankers manage.

In the bank sector, the BKX rose 1.60%, and was certainly helped by the rise in the UST10Y rate, the rate of which jumped another eight basis points on top of the 13 basis points of last week’s trade.  

Of course, as I pointed out last week, bank stocks are heavily managed by central banks as well, in which I also presented a chart superimposing a rapidly declining spread of the US Treasury yield curve on top of a chart showing a stable-to-rising BKX index since December 2016.  This seven-month-long dichotomy of declining yield spreads and rising bank stocks is not suppose to happen in free market of true price discovery.

And speaking of price discovery, did anyone notice the 7.08% spike higher of Deutsche Bank (DB) this week?  It appears the past couple of weeks of three bank failures in Europe have been long forgotten.

Back to the Treasury market.  In total, the 21 basis points added to the UST10Y is a very large two-week move for the note, and has been mentioned this week, but not within a proper context, in my opinion, as this shocking rise of the UST10Y rate suggests a trend of higher long-term interest rates may be developing.  

This trend, if pans it out, may help the Fed down the road when the next rate hike of the overnight federal funds target range is triggered—maybe at the December meeting.  The yield curve of the US Treasury market and eurodollar must remain positively sloped while the Fed hikes at the short end.  Let’s see if the rise in the UST10Y rate continues.  If it does, the Fed remains in control of the curve.  However, if these two weeks of rate rises only represent a ‘dead cat’ bounce, all hell may break loose this summer/fall.

While the yield curve steepened sharply during the past two weeks, the Fed appears to have also manage a downside move of the dollar-gold price.  The Fed must manhandle the dollar-gold price lower as to leave no clues of what the Fed is doing in its open market operations.  If the Fed loses control of long rates, it also loses control of the gold market.  It’s that simple.

However, my small legion of junior gold and silver traders must also keep in mind that pressure in the physical delivery market is building.  Commercial shorts have and, are covering, their short positions rapidly.  This suggests to me that the recent price slide of precious metals is nearing its end, as the Fed’s bullion bank operatives in the gold space know that large traders are smart enough to buy bullion when the ‘market’ price reaches close to all-in production costs of the world’s leading miners.  And at $1,210 per ounce offered, the stated price of gold now trades close to the industry’s all-in costs.

So, you gold short must be very careful here.  Either stay long gold stocks or remain neutral, but be careful on the short side.  We’re at a point of price where the risk of a huge move higher of the gold price outweigh a plunge.

And if you shorts want to take into consideration a good interview about the state of the physical gold market, King World News has reported some actual substance this week that may prove true in the very near future, and can be found here.

And speaking more on the subject of the PM market, the big drops of the GDX, GDXJ and SIL of 3.94%, 6.26% and 6.54%, respectively, point to the odds that a capitulation took place this week, and not that an extended downtrend has begun.  But these stocks are wild, and can become more oversold as we’ve seen many times before.

The risks to my present thinking of what happened this week include the possibility of a ‘deflationary’ panic and plunging commodities prices across the board this year, a scenario that would not be favorable to the Fed’s plan of raising rates.  In my opinion, this scenario is very real in the short term, and would suggest the market is finally biting from many months of deteriorating economic fundamentals—globally!  Would the Fed still raise rates?

So, what I’m saying is, increased volatility in all markets may be the only outcome that I can rely upon as the most likely to manifest during the second half of this year.  At this point in the central bank rate rising scheme, predictions of direction of prices of any market may be futile.  And after reading reports from Goldman Sachs, CitiGroup and Bank of America, about the protracted and profound lull in the level of hedged risk they see, I’m more convinced that we have a long five months ahead of before the expected rate rise by the Fed in December.  

No one knows when volatility will come back to US stocks, but it’s certainly overdue.  Isn’t it?  And don’t count on the summer doldrums this year.  

The other big move this week came in the oil market.  A barrel of WTIC got crushed again this week following a timeout of the prior week.  By Friday, another $1.81 was shaved off NYMEX crude, closing the week at $44.23 per barrel.  The rejection of the 50-day MA is now complete, with no jawboning coming out of the Kingdom of Saudi Arabia throughout the past three weeks assuring this rejection.  Why the sudden silence in Riyadh?  I smell a rat somewhere.

For now, crude inventories are sky high, while global demand falters.  I don’t see a reason for high crude prices until I find that rat.  

And did anyone catch the shocking declining trend of gas demand in the US, which has recently accelerated to the downside (y-o-y) from the peak in August 2016?  Zerohedge published a good article about the latest print in the gas market.  Read it.  In short, the US demand data aren’t particularly flattering to the bullish narrative of Yellen and Company.

And again, from Zerohedge, who reported this weekend that Andy Hall (the biggest oil bull out there) has “capitulated,” and is now an oil bear.  Ha!  It’s about time.  Where has Hall been during the record run of oil inventory volume builds of the six months?  I beat Hall to that punch by a ‘country mile’.

Anyway, apparently, the Fed’s con of its narrative of continued economic growth is falling apart each passing week, with occasional bright spots of the US economy reported and overemphasized by its minions at Bloomberg, Yahoo Finance, CNBC and the like of many other captured MSM financial outlets.  

Are mom and pop catching on yet to the con, or are the media still keeping the economic illiterate in the dark?  I really believe the former is true, which spells trouble for the Fed’s credibility with mom and pop, as this lack of credibility will come into play during the next financial crisis, which of course is surely unlikely during “our lifetimes,” according to Fed Chair Janet Yellen.  Who is Yellen directing her comment to?  Alan Greenspan (91), Paul Volker (89) and Kirk Douglas (100)?

Doesn’t Yellen’s recent assurances of stable markets for as long as another two generation remind anyone of maybe a lesser-absurd comment about the state of the US housing market that was made in 2007 by the then-Fed Chairman Ben Bernanke?

“Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited,” Bernanke told an audience of bankers and staff at a conference held by the Federal Reserve of Chicago on May 17, 2007.

Source: Forbes Magazine

So, what happened next to follow Bernanke’s huge gaff?  The “subprime sector” collapsed, of course, taking down Bear Stearns and Lehman Brothers as fast a overnight demolition operation.  And now Yellen states a financial crisis is unlikely in “our lifetimes?”  If, say, you’re 40-years old, statistically speaking, Yellen forecasts an unlikelihood of no financial crisis within the next 40 years.  

Of course, I find Yellen’s latest comment very strange, indeed, with the knowledge of the fact that there has never been a 40-year period void of a financial crisis.  Why on the world would Yellen feel it is necessary to utter something so overtly nonsensical?  Is this a demonstration of abject hubris, or is there something else at play?  And didn’t the preeminent economist of the 1920’s, Irving Fischer (1867-1947), say prior to the 1929 crash, that stocks have reached “a permanently high plateau” of valuations?

Creepy.  Doesn’t Yellen know she’s going to eventually be added to the list of famous last words, along with Irving Fischer’s and Ben Bernanke’s epic gaffes?

So, I’ll repeat myself from previous reports with the following:

So far, we’ve made some good money this year with my stock picks.  Don’t become too confident with your positions in your other trades you may have on.  Remember, as I’ve demonstrated time and time again, making money by playing stocks is not very hard.  It’s keeping your hard fought gains from evaporating due to carelessness that’s hard.  

Arguably the greatest stock trader of all time, Jesse Livermore (1877-1940) talked about how difficult it was for him to realize a loss quickly, or abstain from trading for extended periods of time.

So, stay diversified in your retirement accounts to any outcome, from outcomes as diverse as a massive deflationary scare to the other side of the spectrum of rapidly rising consumer prices.  What you may see now in the way of price direction in any market may change, abruptly.  But for now, the new high of the DJTA of this week is confirmation of a Dow Theory the ongoing “buy” signal.

History is on my side about abrupt changes to market trends, so stay tuned to the LT Weekly report for those occasional moments of inflection in any of these markets, because catching these inflection points is where a bulk of your profits will come from.

My current portfolio: LQMT, LC and short SC. I think this is a good basket for now given the market environment and will issue research reports, as seen here, from now on when I have a new long-term trade idea.

Trade Wise and Green!

Jason Bond