Four Charts that are Acting in an Unintuitive Way
Prices often move in the opposite direction to the expectations of most investors and traders. In many cases, that happens because the latest news has already been factored into prices and market participants have already begun to anticipate the next development. For example, a group of institutions might like the longer-term prospects for a specific company, but a really bad earnings report is expected in the immediate future, so it's better to buy after the report has been published. As a result, the price sells off sharply following the report's release and the institutions, having got the bad news out of the way, buy into the dip, as they use the report as a low-risk accumulation opportunity. To the casual observer, this seems like a strange action, as the stock ends the session either well up from its lows or even up on the day.
That's not quite the same thing that I had in mind for this article, as I am more interested in comparing what might be expected from a generally accepted narrative to what the chart is actually saying. First, though, a quick word on gold.
False Breakout by Gold
Last week, I wrote a piecepointing out that the long-term technical position for gold was finely balanced, but that short-term action suggested that the indicators were moving in a positive direction that had the potential to tip things in favor of a positive breakout. I used the trendline break and outside bar in Chart 1 as evidence.
As you can see, that scenario did not play out, as the breakout was false. Also, the price has dropped back below its 200-day MA and the small support trendline. It can always regroup and make another breakout attempt, of course. Nevertheless, we need to be very careful, as false breakouts are typically followed by above-average price moves in the opposite direction to the breakout, but I digress.
Narrative: The Sanctions are Really Hurting Russia
Most of us would have expected the sanctions to badly affect the Russian economy, hurting the stock market and currency. However, if we look at a chart of the Russian Trading System, you can see that, since the Ukraine invasion began, the Russian market has gone up and the US down.
Now, I can hear some of you saying that the $RTSI is denominated in rubles whereas the $SPX is denominated in high-flying dollars. Consequently, this chart gives a false sense of strength.
However, Chart 3, featuring the ruble, shows that it has actually risen during this period and is now back to its late-2017 highs. It obviously faces some resistance in the form of its secular down trendline, but a positive KST and tentative breakout from a right-angled broadening formation, a particularly bullish pattern, suggests that the bearish narrative is unlikely to play out. More to the point, the recent positive $RTSI performance is not currency-based, but is even better when the rising ruble is taken into consideration. If the name "ruble" was left off this chart, I would have to say it is bullish.
Narrative: Gas Prices are at a Record High
That's true, but when adjusted for inflation, they are still very high, but certainly not at a record. That was established in 2008, as shown in Chart 4. For the record, inflation-adjusted oil prices are below both their 2008 and 1980 peaks. Unfortunately, they are getting close to both.
Narrative: The Economy is Headed for Recession
The recent sharp retreat for stocks has spurred talk of an imminent recession. Given 200-years of business cycle data that has recorded recessions on a regular basis, forecasting a business cycle one or two years out is not exactly a profile in forecasting courage. There are certainly many indicators pointing to a slowdown in growth, but, in my view, a consensus for a recession is not yet in place. It could happen if things unravel quickly, but that's not likely according to Chart 5.
Chart 5 compares the iBoxx High Yield ETF to the iShares 20+Year Treasury ETF (HYG/TLT). The two vertical lines approximate the beginning of two recessions. You can see that they were preceded by a decline in the ratio. That action indicated bond investors were beginning to become concerned about economic conditions and, therefore, possible defaults. What shocks me about this chart is that, far from showing concern, the ratio has instead broken above its secular down trendline and completed the 2019-2022 base. A rising ratio means that investors are growing in confidence, since they are favoring risky high-yielding paper over the lower yields and safety of treasuries. Consequently, the chart completely fails to support the recessionary narrative.
Good luck and good charting,
Martin J. Pring
The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Groupof Walnut Creek or its affiliates.
