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The VanAurum Market Report | Public Edition (delayed 15 days) | May 30, 2019

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Table of Contents

Newsfeed & Commentary


Selling pressure in Gold suggests higher GDX prices over the coming two weeks
In yesterday's report VanAurum alerted us that each time Gold's net sum of up days and down days fell to -6 or lower it has typically portended a bounce in the senior mining sector over the ensuing 10 trading days. There has been 138 occurrences of this in GDX's 3200-day price history, and this has happened 81 times in the last five years. Click below to see VanAurum's analytics for this.

10-day returns for GDX where Gold's 10-day net sum of up-days and down-days has been less than or equal to -6.0


Head-and-shoulders consolidation in XOP portends imminent upside break
In a prior post we raised attention to some of VanAurum's analytics regarding a high likelihood of an upside move in XOP.

Click here now: XOP on

We ended up getting that move, and after a sharp rise at the beginning of the year XOP has carved out a head-and-shoulders consolidation over the last two months. Last Friday we sold a large part of our position in Kirkland Lake Gold for a considerable gain and rolled it into this ETF in anticipation of an upside break. The energy complex as a whole looks to have put in an intermediate cycle low in December of 2018 and we think the related explorers and producers are broadcasting a move higher in oil prices.

Note that we are still bullish on Kirkland Lake Gold, but we have held it as a core position since 2013 and our redeployment into XOP is more of rebalancing manoeuvre to remove some concentration risk from our portfolio and to capture profit while the market is presenting it.


Waiting to get punched in the face
When you hold long positions in an asset that has become overextended, waiting for the correction can feel like waiting to be punched in the face. I have conviction in our precious metals long positions and I'm buying these pullbacks and using weakness to add to my personal portfolio.

Click here now: Gold with CFTC open interest and spec. longs

Since the CFTC data has started the Gold price has a 0.81 correlation with open interest (OI). This is interesting because CFTC accepts both long and short positions. Clearly, for the price to sustain an uptrend it's important for more people to be joining the party - either on the long or short side. In this chart it's clear that the trend in OI changed at the end of 2015. We don't have a moving average on here but it's clear that the trend in OI has started to move upwards convincingly since the December 2015 bottom. The latest data we have is for February 19th and OI has spiked to 826k contracts. Note that from 2012 to 2015 intermediate tops in the gold price (and OI) were within the context of downward trending OI. Spikes now are within the context of upward trending OI as they were during the prior bull market.

In prior posts we discussed how surges in sentiment in speculative activity are a necessary precursor to upward breakouts in the gold price, so I won't beat that horse here. From what I'm reading, this sell-off has gold bulls spooked - which is another necessary ingredient for a bull market breakout. I don't know how deep this correction is going to go. All of the overbought readings have been bled off and we're in "statistically uncertain" territory. If you look back in history there is typically some flirting that occurs with the 200 DMA that reverses quickly higher during uptrends. I'm not ruling that out here - but if price approaches the 200-DMA I'm going to be buying the mining shares hand-over-fist.

If you're long gold and the miners, as I am, these corrections can be very uncomfortable. I find it valuable to use your own emotions as a sentiment gauge. If you're feeling very uncomfortable with your position, chances are many others are as well. Everything I'm seeing here strongly suggests we're finally in the early innings of a gold bull market. We've got confirmation this week that Fed has capitulated to the market and will start monetizing debt to "end the balance sheet roll-off". The first time the Fed did this is was positive for equities and negative for Gold. I suspect most people are anticipating the same thing to occur - except this time around I think more market participants are realizing that eventually endless debt monetization by the world's central banks is going to be positive for real assets.

Enjoy your weekend everybody!


Copper rally likely to extend into the next 10 days
Copper has had a major breakout move and is currently 26% above its upper 140-day bollinger band. This has only happened on 215 trading days since the 1970’s, and the convincing majority of those instances saw copper rally higher over the following two weeks. See the analytics for this below.

Copper and 140-day Bollinger Bands


Overbought condition in precious metals not like the majority of overbought conditions
GDX, GDXJ, and now SIL are climbing the charts of VanAurum's most overbought assets, but when you dive into the data, VanAurum is showing that the nature of the overbought condition is arguing for upside bias - at least over the next 42 trading days. Traders should temper their expectations for a piercing moonshot through neckline resistance levels, however, because sentiment is already at elevated levels. I think the bullish outcome going forward will be for Gold to consolidate around these levels - make the bulls incredibly nervous - and then stage a breakout that catches most people off-guard.

The one thing making me question the overbought readings at this juncture is that we're emerging from a long basing formation. If you go back in Gold's history, all of the major breakouts from basing formations were accompanied by excessively high technical readings. Contextually, we have already been through a major bear market in Gold, we have already made two major higher lowers, and we have tested neckline resistance four times since 2013. The data VanAurum is turning up on the internals of the move is saying we're going to burst higher, but sentiment is arguing that we should turn lower. The truth of the matter will likely fall somewhere in between.

We have January 22nd CFTC data (as of this writing), and it is nowhere near extremes. I doubt the readings in net speculative positions could jump to nosebleed levels in a matter of the four missing weeks. After assessing all the data I can't help but draw two similarities: The first being the Spring 2016 Gold market where we had a volatile up and down consolidation that confused bulls and bears alike. The second being the summer of 2009 where sentiment readings were similar to what they are now and Gold consolidated at the neckline for several weeks before blasting out and culminating in the parabolic move in the winter of 2009.

There's a frothiness in the market that is certainly raising caution flags, but the historian in me also knows that these are a prerequisite for major breakout moves. I'm long, but I'm not expecting the market to make this easy on me. Have a great weekend everybody!


New VaiSi variants added to VanAurum's indicator bucket
We have added 5, 10, and 20-day moving averages for our popular VaiSi sentiment indicator. For now, to access these variants you will need to use the plotting tool (found in the menu bar). VanAurum will also being analyzing the significance of the VaiSi moving signals on an automated basis going forward and presenting any significant findings in the daily reports.


S&P500 RSI is above 70, and it's not significant
I have read a few articles and seen a lot of tweets on twitter about the S&P500's 14-day RSI reading signalling immediate downside. This just isn't the case - returns for the S&P500 over 1-month, 3-months, and 6-months when RSI is at these levels or higher are indistinguishable from S&P500 returns for its entire history. This makes it an invalid technical signal taken in isolation. Another classic example of why I built this system. See VanAurum's analytics for this below:

Case 1: 1-month returns
Case 2: 3-month returns
Case 3: 6-month returns


Cladoptosis and Economic Recessions
Cladoptosis, or "self-pruning", is the natural process by which trees in a forest shed branches that are no longer productive - either they aren't getting enough sunlight, they are diseased, or a biological process within the tree decides photosynthesis might be better achieved elsewhere. If you have ever walked through a forest you have likely seen the dark joints left behind by the process, called "abscission" scars. It's a beautiful and elegant natural process.

The tree does this because it has limited resources - both in the ground, and from sunlight in the sky. When it competes with other trees in the forest, some of the most productive branches are at the top where sunlight is most prevalent. Branches at the bottom typically gather less sun and the tree sheds them over time. Once shed, the branch is broken down by the fungi and bacteria in the forest floor, and the nutrients are reabsorbed into the root system to be redeployed to another area of the tree where the "cost-benefit" of producing the branch is superior. The tree accomplishes this on its own using biological signals, without intervention or decree from outside lifeforms.

The economy can be thought of as the tree, individual corporations and persons can be thought of as the branches, and the limited resources available to the tree can be thought of as land, labour, and capital. To complete the analogy, one can consider sunlight as revenue and the product of photosynthesis (stored sap or energy for the tree) as profits.

Without the process of cladoptosis, a tree would eventually destroy itself - becoming overwhelmed by surrounding trees more adept at deploying resources to build branches. When sunlight is abundant and few other competing trees exist many branches on the tree can thrive and the process of shedding unproductive branches becomes unnecessary. In an economy, when the cost of capital is cheap many businesses can thrive. When conditions tighten, the economic version of cladoptosis becomes necessary to redistribute resources to the most productive areas. Economies, like trees, become stronger and more robust because of it.

Each time the Federal Reserve decides to intervene to ward off recession (cladoptosis) it does so at the expense of the long-term health of the economy. Keeping branches that no longer gather sunlight supports the branch in the short term at the expense of the entire tree in the long term.

The argument can be made that an about-face by the Federal Reserve is in violation of the natural processes that govern the economy. I can't help but cringe when I see this occurring on a global scale. The message here is that the wise investor should own the healthiest branches on the healthiest trees. In the absence of that, you will want to own the resources required to grow new trees when conditions permit it.


Gold market update

Please click here now: Gold with CFTC metrics

CFTC data is being rolled out on an accelerated schedule, and we're seeing the picture for the Gold market getting "roughed" in. The most recent release is for January 22nd, but it surprisingly showed a sharp drop in net-speculative positions as a percentage of open interest. Something that stands out as resoundingly bullish is that speculator longs, as a percentage of open interest, dropped to its lowest on record as Gold made its second higher low from the December 2015 bottom. We will need to wait a few more weeks to see the balance of futures activity but my suspicion is that these readings are going to get much more extreme than people expect before a sizeable correction.

Note that the largest reading ever for net speculative positions (almost 60%) occurred during immediately following the major price breakout in 2009. The price would rally another 20% before a correction began. Contrary to what you read about CFTC reports, you want to see a surge in speculator activity because that's what fuels buying and encourages momentum buying. Like everything else in the markets, context is the key. Surges in speculative activity after a bottoming process are a different beast than surges in speculative activity during bear-market rallies.

There's a lot of strength behind this move and it's going to be very interesting to see how the market behaves when it approaches the major neckline resistance again at $1350-1375. We're seeing major breakouts in a lot of developed world currencies, which should be a sign of things to come for Gold priced in USD.

Without question, if the market catches people off-guard and breaks above the neckline resistance I suspect most market observers are going to be stunned by the velocity of the move towards $1600. If you're bullish on precious metals, as I am, it's important not to get too cute with the technicals. The hallmark of strong trends (either up or down) is that they tend to confound most analysts and technicians. Build your core positions on weakness, prune them on strength, and ride the trend if it unfolds.


Rally in PM sector looks set to resume
The entire metals sector has been quite firm and resilient to its overbought condition - especially over the last week. On February 4th we posted that the technical action in GDXJ was calling for more upside despite its overbought technical conditions. After an orderly pullback, we have seen buying re-enter the market that has refused to let Gold drop below $1300. It looks like our initial projection of a test of the major $1350-$1370 price area is in the cards over the coming weeks.

Platinum looks to be gaining a strong footing this week as well and is surging significantly today after falling below $800 earlier in the week. Although the trend in the Platinum market is still down, it has successfully tested the $750-800 support level multiple times. We feel a major rally in Platinum could be imminent given the bullish posture across the rest of the sector. A rally in platinum could be particularly explosive considering how badly oversold it is relative to its peers.

We are reluctant to actively trade the PM market right considering the bullish posture its assuming. Keep in mind that in bull markets and in strong rallies the market tends to surprise to the upside and stay overbought longer than people anticipate.

Perhaps the most interesting in all of this is Silver and the silver mining shares. VanAurum put out a 10-day bullish signal on the 11th of February, and so far that appears to be materializing. Silver has been quite muted, and the Silver shares have been lagging the action in the Gold sector noticeably. If a significant rally unfolds in the Gold space, look for the silver mining shares to outperform significantly.

In addition to all of this, the strength in this sector has been occurring alongside significant strength in the broad equity markets, which is bullish. We're going to be watching these developments closely.

Note that on Monday, February 18th US and Canadian markets will be closed. Have a great weekend!

Disclosure: We currently own long positions in GDXJ, Gold, Platinum, and SIL and have intent to add to these positions conditional on market activity over the coming two weeks


Australia poised to be first developed nation to see new all-time high Gold prices
It is no secret central banks global are intent on increasing money supply. They have no choice, really. In fractional reserve banking systems operating with debt-based currency, the supply of money actually needs to increase or the system will collapse in on itself.

It is but a matter of time before the price of Gold reaches new all-time highs in all currencies not tethered to anything tangible. We have seen new all-time highs in the Gold price in emerging market currencies, but it has been almost eight years since we have seen a new all-time high in developed market currencies.

Click here now: Gold priced in $AUD

The gold price in $AUD continues its relentless march higher and is "knocking on the door" of the 2011 highs. In fact, on a weekly basis we saw the highest close last week. I don't view this as an aberration, but rather an inevitability. I suspect the Canadian dollar will be next, followed in lock-step by the rest of developed nation currencies.


VNQ Real sector surges to all-time high, pace of move supports bullish S&P500 thesis
The VNQ real estate sector ETF has surged to all-time highs amidst the recent broad equity rally. The velocity of this move (as measured by the 5-week rate of change) has registered on only 79 days in the history of the ETF. Greater than 85% of these occurrences have coincided with higher prices in the S&P 500 6-months later. The average 6-month return in the S&P500 when the real estate sector has rallied this hard has been 23.28%.

We have seen a confluence of technical events portending positive returns for the S&P500 over the coming 6-months, and this is the most recent data-point that supports this thesis. The S&P500 is at critical technical levels that should reveal the market's hand. If we see a continuation of this SPX up-leg towards the all-time highs it would be unusual price action for a bear-market rally, and would likely be a signal that this long bull market still has room to run to the upside.

See the analytics for this here: VNQ and the S&P500


10-Day signal for Silver Miners ETF (SIL)
It's not common to see a 10-day signal from VanAurum, and I always find them interesting when they surface. Right now VanAurum is pointing out the connection between the 56-day buying pressure (measured by BOP) and positive 10-day returns in SIL. We are already long SIL in a core portfolio and won't be adding positions or acting on this signal, but I will be watching to see how it plays out nonetheless.

See the analytics for this here: SIL 56-Day BOP-MA


Intraday buying patterns arguing for higher USD Index levels over 6-months
Intraday buying, as measured by the 24-day Balance of Power moving average, is arguing for higher USD levels over the next 6-months.

Click her now: USD / 24-Day BOP-MA

This has registered on 147 days in our price history for the USDX, with the average 6-month return being 4.31%. This signal isn't iron-clad, but roughly 68% of the occurrences have resulted in high price-levels 6-months later.

It is also worth mentioning that yields on 10-year US treasury are currently more attractive than its two largest counterparts - the Germany 10-year bund (0.088%), and UK 10-Year bonds (1.15%). All else being equal, this should be supportive of USDX levels in the short to intermediate term.

This isn't intended to be a bullish discourse on the US Dollar, as I believe the overarching macro situation is negative for the USD index. However, there are those that believe the bottom is set to fall out from the dollar imminently. In my opinion the data suggests that dramatically negative expectations for the dollar should be tempered.

VanAurum also pointed out that this has been historically negative for emerging market ETFs as well, which fits with our thesis for a consolidation/correction in the short term.


Update on CFTC reports
For those unaware, the CFTC did not release reports during the government shutdown. The CFTC commitment of trader reports are now on an accelerated release schedule - they are releasing a report on Tuesday and a report on Friday until the backlog is worked through. I'm not sure why all the reports don't come out at once - but I suppose one can only expect so much productivity from a government entity. The February 8th report was for January 8th data. According to the new CFTC release pace, my understanding is that data will be released accordingly:

  • January 15th data will be released on Tuesday, February 12th.
  • January 22nd data will be released on Friday, February 15th.
  • January 29th data will be released on Tuesday February 19th.
  • February 5th data will be released on Friday, February 22nd.
  • February 12th data will be released on Tuesday, February 26th.
  • February 19th data will be released on Friday, March 1st.
  • February 26th data will be released on Tuesday, March 5th.
  • March 5th data should fall back on the regular schedule and be released on March 8th.

This is my understanding of the CFTC's back-log release schedule. If anyone finds something to the contrary please let me know. Unfortunately, we'll have to wait a few more weeks to get fresh trader positioning data.

See the media release from the CFTC here: CFTC media release on modified schedule

Daily VaiSi Summary

The following chart is a summary of the VaiSi values for all the assets VanAurum analyzes, ranked highest to lowest. Learn more about Vaisi.

Summary of market extremes

Note: Click on the asset description to see the charts of VanAurum's selected market indicators

Asset Insights Description # of extremes
LEAN_HOGS_D Lean Hog futures 179
LIVE_CATTLE_D Live cattle futures 159
CORN_D Corn 113
TLT_D iShares 20+ Year Treasury Bond ETF 97
OATS_D Oat futures 71
UST10Y_D 10-Year US Treasuries 65
EURODOLLAR_D Eurodollar futures 59
US30YR_TREASURY_YIELD_D 30-year US treasury yields 56
US20YR_TREASURY_YIELD_D 20-year US treasury yields 55
UST30Y_D 30-Year US Treasuries 54
GBP_D the British Pound 52
US10YR_TREASURY_YIELD_D 10-year US treasury yields 52
US2YR_TREASURY_YIELD_D 2-year US treasury yields 51
US3YR_TREASURY_YIELD_D 3-year US treasury yields 51
US7YR_TREASURY_YIELD_D 7-year US treasury yields 50
US5YR_TREASURY_YIELD_D 5-year US treasury yields 46
YC10Y3MO_D 10-year to 3-month US treasury yield spread 46
LIT_D the GlobalX Lithium and Battery Tech ETF 44
VDE_D the Vanguard energy sector ETF 42
UST5Y_D 5-Year US Treasuries 41
RATIO_PLAT_GOLD_D the Platinum to Gold Ratio 36
XOP_D the SPDR S&P Oil & Gas Explorers ETF 36
UST2Y_D 2-Year US Treasuries 33
ROUGH_RICE_D Rough Rice futures 31
NZD_D the New Zealand Dollar 26
RATIO_VDE_SPX_D the Energy Sector to S&P500 Ratio 25
WHEAT_D Wheat futures 25
PLATINUM_D Platinum 24
US7YR TREASURY_REAL_YIELD_D 7-year inflation-adjusted US treasury yield 24
US5YR TREASURY_REAL_YIELD_D 5-year inflation-adjusted US treasury yield 23
RATIO_HYG_GASOLINE_D the High Yield Corporate Credit to Gasoline ratio 20
ORANGE_JUICE_D Orange Juice futures 19
US30YR TREASURY_REAL_YIELD_D 30-year inflation-adjusted US treasury yield 19
RATIO_FXI_SPX_D the Chinese Stock Index to S&P500 Ratio 18
COFFEE_D Coffee futures 17
RATIO_TLT_WTICRUDE_D the 20+ Year Treasury Bond to WTI Crude Oil ratio 17
RATIO_HYG_WTICRUDE_D the High Yield Corporate Credit to WTI Crude Oil ratio 16
US10YR TREASURY_REAL_YIELD_D 10-year inflation-adjusted US treasury yield 16
YC5Y1Y_D 5-year to 1-year US treasury yield spread 16
RATIO_RSX_SPX_D the Russia Stock Index to S&P500 Ratio 15
US20YR TREASURY_REAL_YIELD_D 20-year inflation-adjusted US treasury yield 15
EWL_D the MSCI iShares Switzerland ETF 14
EWI_D the MSCI iShares Italy ETF 13
US3YR TREASURY_REAL_YIELD_D 3-year inflation-adjusted US treasury yield 13
CORN_COT_FO Corn committment of traders report 11
HEATING_OIL_D Heating Oil futures 11
RATIO_COPPER_GOLD_D the Copper-Gold Ratio 11
COTTON_COT_FO Cotton committment of traders report 10
RATIO_SPX_UST10Y_D the S&P500 to 10-Year US treasury Ratio 10
RATIO_GOLD_SILVER_D the Gold-Silver Ratio 9
SILVER_COT_FO Silver committment of traders report 9
XLB_D SPDR Materials Sector ETF 9
COPPER_D Copper 8
RATIO_GDX_GOLD_D the GDX-Gold Ratio 8
RATIO_VDE_WTICRUDE_D the VDE Energy ETF to WTI Crude Oil Ratio 8
US_TREASURY_BONDS_COT_FO US Treasury Bond committment of traders report 8
WTI_CRUDE_OIL_D WTI Crude Oil futures 8
AUD_D the Australian Dollar 7
EURO_STOXX_50_D the Euro Stoxx 50 Index 7
XLF_D the SPDR financial sector ETF (XLF) 7
SOYBEANS_D Soybean futures 6
SPX_D the S&P 500 Index 6
GASOLINE_D Gasoline futures 5
IYT_D iShares Dow Jones Transportation ETF 5
USD_D the US Dollar 5
CHF_D the Swiss Franc 4
COPPER_COT_FO Copper committment of traders report 4
ETHEREUM_USD_D Etherium ($USD) 4
NASDAQ_100_COT_FO Nasdaq 100 index committment of traders report 4
VNM_D the VanEck Vietnam stock market index ETF 4
GASOIL_D Gasoil futures 3
ISRA_D the VanEck Israeli stock market index ETF 3
LIVE_CATTLE_COT_FO Live cattle committment of traders report 3
PLATINUM_COT_FO Platinum committment of traders report 3
RATIO_SIL_SILVER_D the SIL to Silver Ratio 3
SIL_D the GlobalX Funds Silver Miner ETF (SIL) 3
VCR_D the Vanguard consumer discretionary sector ETF (VCR) 3
BITCOIN_USD_D Bitcoin ($USD) 2
PALLADIUM_D Palladium 2
RATIO_PLAT_SILVER_D the Platinum to Silver Ratio 2
VIS_D the Vanguard industrial sector ETF (VIS) 2
VOX_D the Vanguard telecommunications sector ETF (VOX) 2
YC10Y2Y_D 10-year to 2-year US treasury yield spread 2
CANADIAN_DOLLAR_COT_FO Canadian Dollar committment of traders report 1
E-MINI RUSSELL_2000_COT_FO E-mini Russell 2000 Index committment of traders report 1
E-MINI_SPX_500_COT_FO S&P500 committment of traders report 1
FRZN CONCENTRATED ORANGE JUICE_COT_FO Frozen orange juice committment of traders report 1
GOLD_COT_FO Gold committment of traders report 1
MEXICAN_PESO_D the Mexican Peso 1
RSX_D the VanEck Russian stock market index ETF 1
US1YR TREASURY_REAL_YIELD_D 1-year inflation-adjusted US treasury yield 1
VDC_D the Vanguard consumer staples sector ETF (VDC) 1
VHT_D the Vanguard health care sector ETF (VHT) 1
VPU_D the Vanguard electric utilities sector ETF (VPU) 1

Asset-Specific Analysis

Lean Hog futures | 179 indicators at extremes

Live cattle futures | 159 indicators at extremes

Corn | 113 indicators at extremes

iShares 20+ Year Treasury Bond ETF | 97 indicators at extremes

Oat futures | 71 indicators at extremes

VanAurum Analysis

VanAurum has identified a significant relationship between this signal and one or more of the 2-week, 2-month, or 6-month returns for at least one asset. These are shown below, along with the analytics for each:

42-day returns for Oat futures where the Oat futures 25-day net sum of up-days and down-days has been greater than or equal to 9.0
Signal: -9.99

10-Year US Treasuries | 65 indicators at extremes

Eurodollar futures | 59 indicators at extremes

VanAurum Analysis

VanAurum has identified a significant relationship between this signal and one or more of the 2-week, 2-month, or 6-month returns for at least one asset. These are shown below, along with the analytics for each:

42-day returns for iShares MSCI EAFE Index Fund ETF where the Eurodollar futures price proximity to the 80-day upper bollinger band has been greater than or equal to 1.19975229567798
Signal: 6.38

10-day returns for the FTSE 100 Index where the Eurodollar futures VaiSi 10-day moving average has been greater than or equal to 0.982
Signal: 7.09

42-day returns for the US Dollar where the Eurodollar futures VaiSi 20-day moving average has been greater than or equal to 0.973499999999996
Signal: 8.68

30-year US treasury yields | 56 indicators at extremes

VanAurum Analysis

VanAurum has identified a significant relationship between this signal and one or more of the 2-week, 2-month, or 6-month returns for at least one asset. These are shown below, along with the analytics for each:

126-day returns for the iShares High Yield Corporate Bond ETF where the 30-year US treasury yield's price proximity to the 120-day upper bollinger band has been less than or equal to -0.240565735418746
Signal: 7.55

20-year US treasury yields | 55 indicators at extremes

VanAurum Analysis

VanAurum has identified a significant relationship between this signal and one or more of the 2-week, 2-month, or 6-month returns for at least one asset. These are shown below, along with the analytics for each:

126-day returns for the iShares High Yield Corporate Bond ETF where the 20-year US treasury yield's price proximity to the 120-day upper bollinger band has been less than or equal to -0.179418870502701
Signal: 8.84