Market Lab Report - Premarket Pulse 8/31/16

Published : August 31 2016 at 9:15 ET

Major averages closed down though roughly midbar yesterday on higher volume after a late day bounce. This morning's ADP jobs number came in at 177,000 new jobs vs. expectations of 170,000 as futures remain roughly flat to slighly down at the time of this writing. The big number comes on Friday when the Bureau of Labor Statistics releases its monthly jobs report.

Gold and silver continue to stage a minor correction in the face of hawkish Fed-speak. Some Deutsche Bank analysts are saying gold should be trading around $1,700 an ounce. “Let us be clear; we are not saying that gold will trade up to $1,700/oz in the near term, but when viewed against the aggregated balance sheet of the ‘big four’ global central banks (the Fed, ECB, BoJ and PBOC), the argument can be made if we view gold as a currency, the metal is worth closer to $1,700/oz, versus the spot price of $1,326/oz," according to DB analysts. 

The relationship between the price of gold and the aggregated balance sheet has closely correlated over the past decade though the correlation decoupled twice —once during the global financial crisis in 2008 and once in April 2013, when the Fed said it was ending quantitative easing. Gold then staged a sharp correction through the end of June 2013, but then proceeded to trade in a sloppy, wide, mildly downtrending pattern until the end of 2015 when it found its floor. It has since been catching up with the aggregate balance sheet which continues to relentlessly rise.

So as long as those balance sheets continue to expand as they have been doing at a steady pace since 2005, gold should continue to trend higher. Keep in mind that many other factors can affect the price of gold over a shorter period so any uptrend will probably be in keeping with past uptrends- wide and sloppy- thus we suggest buying gold or silver on constructive weakness.

One headwind for gold would be if the Federal Reserve actually jumped the gun on hiking rates. But that could also signal a buying opportunity much as it established a major low last December 2015 when the Fed hiked rates for the first time since 2006 since any hike is perceived to be a one-off event given the global economic situation. 

So what is the Fed to do? "To hike or not to hike" seems the equivalent of "Damned if I do, damned if I dont" as central banks have painted themselves into a corner, unable to jump start global economies via quantitative easing (QE) since 2009. To admit defeat and tighten monetary policy would be to undo the artificially induced bubbles wrought by all this excessive money printing. Letting the air out slowly is not an option at this late stage and would undo the US and global markets which has been artificially boosted by QE.

Based on his Investment Outlook reports, bond guru Bill Gross would agree. He has suggested the Fed hike rates meaningfully but sees that as a huge improbability and sees negative rates as ultimately destructive. He writes in his latest Investment Outlook:

"I and others however, have for several years now, suggested that the primary problem lies with zero/negative interest rates; that not only do they fail to provide an “easing cushion” should recession come knocking at the door, but they destroy capitalism’s business models – those dependent on a yield curve spread or an interest rate that permits a legitimate return on saving, as opposed to an incentive for spending. They also keep zombie corporations alive and inhibit Schumpeter’s “creative destruction” which many argue is the hallmark of capitalism. Capitalism, almost commonsensically, cannot function well at the zero bound or with a minus sign as a yield. $11 trillion of negative yielding bonds are not assets – they are liabilities. Factor that, Ms. Yellen into your asset price objective. You and your contemporaries have flipped $11 trillion from the left side to the right side of the global balance sheet."

Alan Greenspan, Ed Seykota, and Jim Rogers among others have all said these are unprecedented times which are unlikely to end well because central banks refuse to do what is necessary. 

Pocket pivots:

Network optimizer Gigamo (GIMO) had a pocket pivot off its 10-day moving average. It has been on our Focus List as one to watch for constructive pullbacks as possible entry points. Earnings and sales are strongly accelerating, ROE 21.4%, institutional sponsorship has grown over the last 6 quarters, group rank 57.

Project management software developer Atlassian Corp. (TEAM) - has had two 5-day pocket pivots in a row. 5-day pkts qualify when they are preceded by low volume, constructive price formation. TEAM bounced off its 50-day line and now appears to be moving higher with greater conviction. TEAM has also been on our focus list.

Web development platform provider (WIX) - Extended here, but watch for a constructive pullback to its 10-day line. WIX gapped higher on its prior earnings report. Earnings and sales accelerating, institutional sponsorship has grown since the company went public 11 quarters ago, group rank 4.

Wearable fitness tracker maker Fitbit (FIT) - This is a bottom-fishing pocket pivot (BFPP). FIT is rounding out its base. The time value could be big here as its next point of resistance is 13% away at its 200-day line. When a stock with the right technical pattern is still near the bottom of its base, it can sometimes make big strides in a matter of a few days.


LN - low volume retest of 20-dma.
TWLO - constructive low volume last two days after bounce off its 20-dma.
SQ - nice low volume pullback into 10-dma.

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