Eighty

Those that follow precious metals know that when the gold to silver ratio reaches 80 that it is a trigger to buy silver instead of gold.  Historically, the ratio rarely gets and stays above 80. When it happens, some sell all their gold and convert it to silver, wait for the ratio to crash, then flip their silver back to gold. There are others who make a pairs trade and go long silver and short gold. The point being that historically when the ratio tags that 80 level it sets up a high probability investment opportunity.

Below is a 15-year chart of the ratio of gold to silver (the blue line). What you can see is that if you had purchased silver (price in bottom pane) after the ratio crosses above 80 and then below the (red) 50 day moving average it would have been a very profitable investment. I have marked those cross-overs with a red vertical dashed line. The first instance of the cross-over occurred in 2003 and silver went on to rise more than 300%. The second occurrence in 2008 saw silver rose more than 360%. The third and most recent instance in 2016, silver went on to make a modest 30+% over a short 5 month period. 

Fast forward to today and the ratio closed out the week still stuck at 80.  The longer the ratio stays above 80 the likely the bigger the reactionary move. The current chart of silver looks horrid as it has gone nowhere for more than a year and a half and can’t get out of its own way. I don’t know when it will happen (its definitely not right now) but it is my belief that when it does, the silver will present one of those rare triple digit profit opportunities that investors should not miss.

May 2018 Charts on the Move

The sideways chop continues but for how long? No one knows for sure but i think it will be months before we escape. What about you?

My latest Charts on the Move video which talks about this and a lot more can be viewed here ...

https://youtu.be/ntXq6MnE9rY

Two by Four

I went to my local hardware store over the weekend to pick up some lumber to finish off a task I was doing in the backyard and was caught completely by surprise. Granted it has been a year or two since I last had any need to buy a 2x4 but WOW. Of course, I had to come home, jump on the computer and look at the chart of the of lumber. It’s all so clear now.

 As you can see in the chart below, the spot price of lumber has been in a steady uptrend since its intermediate term bottom in Sept of 2015. Since that time, it has risen almost 170% (~2.5 years) and the most recent touch of the trend line support it has risen parabolically.  We know what happens to parabolic rises (they eventually fall back to earth and typically much faster than they rose), we just don’t know when. 

From the chart, lumber looks as it has more upside. Buyers are in control (as is noticeable in the bottom volume pane) and the strength of its rise (RSI momentum in upper pane) is expanding with no divergence in place. Because lumber can be a good proxy for the strength of the economy, its price can provide an early warning sign for the possibility of a slowdown as such it is garners further scrutiny..

The Trouble with Stocks

It should be no surprise to investors that stocks have been struggling since the short term parabolic rise completed back in late January. The subsequent 12% correction followed by extremely choppy, sideways action is not at all unexpected and is unfortunately far from being complete.  Besides this being “normal” action after a double digit decline and an “easy-peasy” 2017 market, investors should look no further for additional explanation than what is happening in the bond market.

As you can see in the above chart of the 10-year treasury yield, it finally tagged the psychologically important 3% handle yesterday (although it actually closed a whisker below), a full 50 months since its last visit. Round numbers, whether they happen in stock indexes, bond yields or other investments are important as they act as magnets for potential future moves. The fact we hit that level yesterday is not a surprise as the setup unfolded in late January (I blogged about this possibility here). Breaking out of it box and moving higher could be a real impediment for the advancement of stocks. Stock investors need to keep a close eye on the bond market right here because as rates rise, eventually yields become attractive enough that  stock owners throw in the towel shunning the wild volatility involved with owning stocks and instead opting for a more steady, fixed return that bonds have historically provided. As more and more investors switch out of stocks and into bonds, stock prices tend to fall as sellers eventually outnumber buyers.

So Far So Good

The Advance Decline Line (ADL) is a breadth indicator that reflects participation. A broad-based advance shows underlying strength that lifts most boats. This is bullish. A narrow advance shows a relatively mixed market that is selective. Narrowness of participation in an advance (or decline) sets up the possibility of divergence signals. An advance with narrow participation is unlikely to keep up with the underlying index and a bearish divergence will form.

Simply, the ADL rises when there are more stocks rising in the index than are falling and vice versa. I find the usefulness of the ADL is if/when it diverges from price as it CAN provide early warnings of a potential reversal of the current trend (it helps find tops in rising markets and bottoms in falling markets). Below is a chart of the ADL and SP500 going back to 1965 and as you can see the ADL has done an excellent job of forewarning of an upcoming correction. Looking to the present market conditions ... so far so good as there is no divergence.

Keep in mind, the ADL is not perfect (no indicator is) and just because there is no divergence does not mean a correction is NOT ahead. Instead it is just another investor’s tool and when used in conjunction with everything else in the toolbox, using a weight of the evidence approach, it can help substantially keep investors on the right side of the market trend.