Long Wash Cycle (TLT,SLV,XLB,XLK)
Intermarket analysis is a helpful tool for the technical trader attempting to anticipate the next big move in the investment universe.
What is it, exactly? Well, over time, certain cycles are evidenced in the movement of stocks, bonds, commodities and the dollar, with associated relationships also seen between Emerging Market debt and equity, as well as in the play between large and small cap stocks.
In general, however, the main body of evidence points to 1) rising commodities (and a falling dollar) preceding 2) a turn lower in the bond market, followed by 3) a retreat in stocks.
That is, when inflation is driving the cost of raw materials higher, interest rates are eventually forced upward, pushing investors out of their fixed income holdings and ultimately equities.
It should be noted that the process is anything but clean, meaning it takes place over the long term, and is accompanied by rolls and rises in each asset class, such that it can best be seen only with a wide angle lens and often only after a significant time span has elapsed. Attempting to time one’s investment shift decisively out of one asset class and into another with any measure of certainty is bound to lead to mistakes, and not a little pain.
For the wise investor, legging into the next strong move over a period of months or even years, and out of the less beloved category, offers the benefit of diversification and a better likelihood timing errors will be avoided.
And it’s with that in mind that we now turn to a long term, monthly chart, of the Thomson Reuters/Core Commodity CRB Index (XX:CRB).
It’s ten years’ worth of data, and what’s most prominent is –
Price has been ‘scooped’. That is, the 28 month moving average has now curled up and under the current bid/ask (blue line),
- RSI has surfaced above its midway ‘waterline’ (in green), and
MACD looks poised to confirm with its own move higher in the next 60 to 90 days.
And that’s all very bullish. But perhaps most significant is that price now sits on the verge of a breakout above its ten year descending trendline (in red), a move that – if it should transpire – would trigger a volcanic buying spree on the part of technical traders.
Tighten The Timeline
Let’s move now to the CRB weekly chart for the last four years, a graphic that offers even more encouragement.
A deep, weekly oversold condition that marked the bottom-scraping period for commodities for a great deal of 2015 into 2016 (in red). Weekly oversold RSI reads are a very reliable indicator of long term bottoms.
- Next, we saw a surfacing of both RSI and MACD above their respective waterlines in late 2017, indicating a powerful change in momentum that, to date, has yet to flag (in green).
Beyond that, a head and shoulders bottom formation that began in early 2015 has run its course (in blue), and, depending upon where one draws the neckline, is now set to advance to anywhere between CRB 245 and 295 to complete its count. That would constitute a whopping gain of between 20% and 45%.
And that’s very good news for the bulls.
But what’s even more exciting, according to the daily chart, is that the move appears to be commencing now.
Have a look –
This is daily data going back to the summer of 2015.
Key takeaways here are as follows –
Two long-term hurdles have been negotiated, resistance at 197 and 204 (in red), with no obvious further overhead resistance emerging until CRB 225.
More than that, all the salient moving averages are trending higher, they’re nearly fully unfurled, and price is trending above them all.
And that, too, is promising.
There could be some play around the current 204 level or a break and retest back to that mark, or we may see a temporary surprise retreat to the 197 line – but those moves notwithstanding, it’s abundantly clear that the intermediate- and long-term trends are now up.
What’s even more bullish, perhaps is the following piece of chartitude, brought to you by Bloomberg.
It’s a chart of the Goldman Sachs Commodity Index (GSCI) divided by the S&P 500, and what it shows is a commodity sector that’s on offer for a cheaper price than at any time in the last 50 years.
A smart investor, betting with the full weight of history behind him would be perfectly within the realm of logic and good sense to go long commodities and short equities at this stage.
And so long as he had deep enough pockets to be wrong for a while, he’d likely turn a big buck.
But before we get to trades and buck-turning, we have one open initiative to address. It was opened last week in a letter called The Nutella Market, wherein we urged you to consider selling the XLB July 20th 60 CALL for $1.30 and buying the XLK July 20th 70 CALL for $1.36. Total debit on the trade was $0.06.
Since then, things have moved in our favor. The XLBs trade for $0.74 and the XLKs for $1.39. Buy back the former and sell off the latter, and you come away with $0.59 net on just six cents spent. That’s 983% in a week.
Go Blow it at Starbucks!
And now this week’s trade.
We’re going to match the commodities against bond market today in a very long term effort to catch the shift in favored asset classes that we believe has just commenced.
For the commodities we’re employing the iShares Silver Trust ETF (NYSE:SLV), silver being representative of both the industrial and precious metals, and among the cheapest of the widely traded commodities currently available to us in ETF form.
And on the bond side, we’re employing the iShares 20+ Year Treasury Bond ETF (NYSE:TLT).
Here’s how the two stack up over the last seven years –
And now the time looks right to bet on a reversal.- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
Wall Street Elite recommends you consider buying the SLV January 17th (2020) 16 CALL for $1.96 and selling the TLT January 17th (2020) 133 CALL for $2.21. Total credit on the trade is $0.25.- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
With kind regards,
Hugh L. O’Haynew