Weekly Market Wrap: 12 Dec 2012

This regular column serves as a review of general market conditions and covers stocks, commodities, precious metals, currencies, bonds, and other areas that may be of interest such as rare earth metals and graphene.

Stocks

The US stock market, as represented by the Dow Jones industrial average, remains in an intermediate term uptrend. As the chart below shows, the Dow made a low on 16 November and has been in rally mode ever since.

The stochastics (circled) indicate that short-term momentum is reversing and that a retest of the lower uptrend channel (green line) is likely. The RSI indicator (not shown) also puts the Dow in overbought territory and therefore a pullback is likely.

A 40 day (60 min) chart of the Dow (Click on the chart for a larger version)

A 40 day (60 min) chart of the Dow (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

This second chart shows the major stock indices of six major economies: The US (Dow), Canada (TSX), France (CAC 40), Germany (DAX), Japan (Nikkei), and the UK (FTSE 100).

The chart clearly shows Germany’s market as the leader of the group with a 1 year performance of 31.4%, and Canada and the UK as the laggards with a performance of 4.4% and 7.9% respectively.

A 1 year (daily) chart of the Dow + 6 other major stock indices (Click on the chart for a larger version)

A 1 year (daily) chart of the Dow + 6 other major stock indices (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

Commodities (Energy)

With tensions escalating in the Middle East there is around a $10 risk premium built into the price of crude oil. Despite this however, as the chart below shows, the price has fallen significantly over the past 3 months.

When Brent crude, which is now the global oil benchmark, enters the red zone on the chart it acts as a drag on the global economy, and the higher it goes the more it disrupts economic activity. Conversely, when Brent enters the green zone on the chart it lowers the cost of doing business and acts as a stimulus for the global economy.

A 1 year (daily) chart of Brent & WTI (Click on the chart for a larger version)

A 1 year (daily) chart of Brent & WTI (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

Although over the past 12 months Brent crude is only down 0.9%, WTI (West Texas Intermediate Crude) is now down 14.5%, something which provides considerable relief for the US economy.

Natural Gas

Another thing that is providing considerable stimulus to the world’s largest economy is the low price of natural gas. As the long-term chart below shows, the price of natural gas began a long decline after it reached a peak of $13.69 on 2 July 2008.

The decline in the price of natural gas has come primarily as a result of the boom in hydraulic fracturing, or “fracking”, a process which involves injecting fluid underground at high pressure in order to fracture the rock and release the surrounding gas.

A 5 year (daily) chart of Natural Gas (Click on the chart for a larger version)

A 5 year (daily) chart of Natural Gas (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

The price of natural gas made a significant bottom in April this year at $1.90 and has since established an uptrend.

The National Oceanic and Atmospheric Administration (NOAA) projects temperatures that will be near normal this winter, however they will be much colder than last year’s mild winter and therefore we could see an increase in the use of natural gas for heating.

Longer-term, low gas prices have led to a structural shift toward using more natural gas for power generation and that is a trend that is likely to continue.

Those looking for more on the opportunities in the energy sector should read the article: Despite all the doom & gloom the energy sector still looks attractive.

Precious metals

The gold market has been in a long sideways consolidation since it reached a peak of $1,923 an ounce back in September 2011. As the chart below shows, on three separate occasions the price has found strong support at around $1,525 and resistance at around $1,800.

Despite the fact that gold has fallen over the last two months, there has been a marked increase in demand for physical bullion.

The amount of bullion in gold-backed exchange-traded funds (ETFs) has risen to record levels, and in the month of November the US Mint recorded its best month for sales of gold American Eagle coins since July 2010.

A 1 year (daily) chart of Gold (Click on the chart for a larger version)

A 1 year (daily) chart of Gold (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

Gold began a powerful move up in mid-August and has since been consolidating those gains and building a base for the next move up.

For the most part the action in the silver market has been mirroring that of gold and it too is trapped in a range between around $30 to $35.

We expect both metals to resume their secular uptrend in 2013.

Currencies

US dollar

The US dollar is in a long-term secular decline, however since mid-September the dollar index has been oscillating around the 80 area and no clear short-term trend has emerged. The dollar, as with many other markets, is waiting for a catalyst, and the Fed could be about to provide one. See below.

For more analysis on the US dollar see: Dollar breakdown could fuel Santa Clause rally in US stocks & precious metals.

Japanese Yen

Over the past two months the Japanese Yen has begun to decline versus the US dollar. This is the second time we have seen sustained weakness in the yen this year, and as we have pointed out before, and major trend reversal is long overdue.

A 4 year (daily) chart of the USD/JPY (Click on the chart for a larger version)

A 4 year (daily) chart of the USD/JPY (Click on the chart for a larger version)

Chart courtesy of fxstreet.com

Bonds (Government)

Government bonds are in a multi-decade bull market, and because prices and yields move in opposite directions, interest rates on government debt are in a multi-decade bear market.

As the chart below shows, the interest rate paid on a 10-year US Treasury Note (T-bill) has been falling for the past 20 years. In fact, the bull market in US debt began in the autumn of 1981.

A 20 year (daily) chart of 10 Year US Treasury Note yields (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

Government bonds are in a massive bubble and sooner or later the bubble will burst. When it does the trend in borrowing costs will reverse, and the money that has been flowing into bonds will go in search of a new home.

The bursting of the bubble in government debt is also likely to be the pin that bursts Britain’s property market bubble.

Graphene

Research in to the incredible potential of graphene continues apace. Researchers from Monash University in Australia have managed to grow 3D graphene “towers” that make graphene more elastic. The new 3D material supports 50,000 times its own weight and will spring back into shape after being compressed by up to 80%. The material retains graphene’s conductivity and has a very low density.

Researchers from NASA are also working with graphene, developing nano-sized sensors that could detect atomic traces of oxygen and other elements within the atmosphere.

Some of the companies that could benefit from the continued growth in demand for graphene were profiled on 247bull.com back in July and we will provide an update on their progress soon.

In other news…

Fed to announce more quantitative easing (QE)

At around 12:30 pm EST (5:30pm UTC/GMT) today, the Federal Open Market Committee (FOMC) will release a statement on future Fed policy, which will be followed by a press conference by Fed Chairman Ben Bernanke.

The Federal Reserve is widely expected to announce the open-ended purchase of $45 billion a month in Treasury bonds. This policy action will replace the Fed’s Operation Twist program which is due to come to an end at the end of the year.

The Fed (together with other central banks around the world), will continue to pursue aggressive monetary policy with the aim of pumping liquidity into the global economy, providing a lifeline to banks, and trying to prevent a deflationary depression. For more on this, read the article: The outcome will be inflation & investors need to prepare for it.

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