Market Wrap
Week Ending 5/4/07
Economy
The U.S. Department of Labor reported that nonfarm payroll employment edged up +88,000 in April, and the unemployment rate was unchanged at 4.5%.
There were jobs added in several service-providing industries, including health care and food services, while employment declined in retail trade and manufacturing.
So far in 2007 monthly payroll employment gains have averaged 129,000 compared with average increases of 189,000 per month in 2006.
For the month of April the number of unemployed people stayed the same (6.8 million) and the unemployment rate (4.5%) remain unchanged as well. Since September 2006 the jobless rate has averaged 4.4 to 4.6 percent.
Manufacturing employment continued to decline in April - down 19,000. There were small job losses across the manufacturing industry, with significant declines in machinery (-5,000), motor vehicles (-5,000), and textile mills (-3,000).
The manufacturing workweek and factory overtime each fell by 0.1 hour to 41.1 and 4.2 hours, respectively.
Average weekly earnings edged down by 0.1 percent over the month to $583.05. Over the year, average hourly and weekly earnings grew by 3.7 and 3.4 percent, respectively.
In the 12 months ended in March, productivity rose 1.1 percent, down from a 1.6 percent year-over-year gain the previous quarter. Labor costs rose 1.3 percent from March 2006, compared with a 3.4 percent increase in the 12 months through December.
Compensation for each hour worked rose at an annual rate of 2.3 percent in the first quarter, compared with an 8.5 percent gain in the prior three months.
The Institute for Supply Management released its ISM Manufacturing index, which rose to 54.7 in April, the highest reading in 11 months.
The Commerce Department reported that factory orders rose 3.1% in March.
And You Thought Your Job Is a Pain
Gold & Silver
Gold gained $7.90 (1.16%) for the week, closing at $689.70. It was gold's highest close in 8 weeks. Its intraday high for the week was $693.20, and its intraday low was $670.00.
Below is gold's daily chart, which shows two support lines - the first is closest to the present price, and the second is further below.
Over the short term we are of the opinion that the first support line holding is the most probable scenario. If it holds then a test of the highs would be in order.
If the first support holds and a test of the high then follows, we do not think that the highs will be bettered by a significant amount for a sustainable time period. The most likely scenario would be for a retest of the lows before the next full fledged bull phase gets under way.
The second option is that the first support line does not hold for gold and gold corrects down to its second support line. If this occurs then it increases the likelihood that a test of the highs will be forthcoming, and the odds increase that it will be surpassed with a sustainable move for a few months before the next serious correction occurs.
These are just two of the many possible scenarios, however, it is the two we consider most probable. No guarantees - just probability.
After gold's daily chart is a weekly chart of GLD. Notice the CCI indicator at the bottom of the chart. If the 100 level is breached to the downside - the 2nd above scenario is most likely.
Silver
Silver was down -0.05 cents (-0.52%) to close at $13.53. Silver had a higher close on Monday of this past week, closing at $13.57. The metal has not been performing as well as gold as of late.
First up below is the daily chart of SLV (silver etf) that shows its bottom trend line recently held up and the price has bounced off and back up. It is just bumping up into and testing its 50 day moving average.
MACD appears to be getting ready to put in a positive upwards cross over - but that remains to be seen. RSI has turned up and may be headed back up to the 70.s. Several of the silver miners are performing quite well: SSRI, PAAS, SIL, and SLW, which tends to indicate that investors are looking ahead to higher silver prices.
The second chart is the weekly prices for silver. It is testing its bottom support line, and the MACD indicator has had a recent negative cross over to the downside.
The third chart show gold compared to silver. Silver had been out performing gold but the tide has changed. Gold is now stronger.
Precious Metal Stocks
Next is the daily chart of the GDM (gold miners index). Horizontal support is indicated. The index is rallying up towards resistance. The index closed well above last weeks low of 1059, which suggests further upside action is coming.
Next up is the weekly chart of the xau index. The chart clearly indicates both resistance and support.
Presently, the price is right in the middle of the top support line (150) and the bottom support line at 130.
Also, note at the bottom of the chart the comparison between the xau and the hui. The chart indicates that the hui is performing the stronger of the two.
Below we have the chart comparison between gold and the xau. The chart shows the times when the xau was oversold compared to gold. In the past such times offered a very good buying opportunity.
Right now, notice that the ratio has crossed above the beginning of oversold resistance at five (5).
Also, the xau has been going sideways for about a year now, yet the ratio is suggesting that the xau is oversold in comparison to gold; and that this may be a good buying time frame (a bottom).
Hui Index
The Hui closed the week out on a positive note - up 1.08 pts to 345.91. It was the highest daily close for the week.
The index hit an intra-day high of 351.85 on Friday before backing off into the close, and it made an intra-day low of 333.70.
This is significant price action, as 333 represented last week's low and a break of that low would have indicated there was still more downside action to come.
The positive weekly close suggests higher prices should be coming within the next few weeks, and quite possibly before the end of this coming week.
First is the daily chart of the Hui. It shows a mixed bag with some positive indicators or markers and some negative as well.
The index is clearly above its bottom trend line - a positive attribute. Last week's low price was not broken and for the week the index closed positive - both constructive events.
Relative strength is turning up, which is another good sign, and both the stochastic and the CCI indicator are turning up from oversold condition.
The MACD indicator is still in a negative cross over position. This needs to be resolved to the upside if any kind of sustainable rally is to occur.
Next is the weekly chart of the Hui. It has more negative indicators then positive ones.
RSI is still showing a negative divergence. Both the stochastic and the CCI indicator have turned over and down from overbought territory.
MACD remains positive, however, it wouldn't take much downside price action to turn the MACD down with a negative cross over. The histograms are also receding back towards zero.
The present price is just about in the middle of its trading zone, and well above its bottom trend line by about 15 points.
Below are two different charts showing the Hui/Gold ratio comparison. The first chart shows the daily numbers for the last half year. The Hui had been performing better than gold but has again turned down. This needs to be turned up in positive territory and trend.
The weekly chart of the ratio below indicates that the ratio is in a pronounced but oversold area.
We think it worth mentioning that the Hui Index is a weighted index and that just a few stocks represent 40% of the Hui value (price). Below is the break down of the Hui.
As can be seen - Newmont (NEM) and Gold Corp. (GG) each represent 15% of the index with FCX another 10%. Hence 3 stocks account for 40% of the total weighting.
Both Newmont and Gold Corp. have been in significant corrections due to company specific issues. Thus their performance has been skewing the overall performance of the Hui to the downside. The remaining 12 stocks constitute 60% of the index (5% per).
HUI: AMEX Gold BUGS (basket of unhedged gold stocks). A modified equal dollar weighted average that is designed to be roughly capitalization weighted. As of 3/19/07, it is composed of fifteen issues. NEM (15%), GG (15%), FCX (10%), AEM, AUY, CDE, EGO, GFI, GOLD, GSS, HL, HMY, IAG, KGC & MDG (5% each).
I have been receiving a fair amount of emails questioning why the hui is down while gold is up, and while the overall stock market is up making all time new highs.
In 2000 - the Dow was around 11,500 - today the Dow is at 13,264.00 (13,264-11500=1764) (1764/11500=15%).
I'll easily give the Dow the low of 7500 (13,264-7500=5764) (5764/7500=77%).
In 2000 the Hui was at 35, while today it is at 350 (350-35=315) (315/35=900%).
During the same time frame gold has increased by approximately 200%.
So, while the Dow gained 77%, and physical gold 200%, the Hui gained 900%. The winner - the gold stocks - by a mile.
Individual Gold Stocks
Up next are the charts of four gold mining stocks. The first two we already own: EGO and MNG. We may add more on weakness that holds support, or we may sell into significant strength.
The second two: Royal Gold (RGLD) and Randgold Resources (GOLD) we are watching and considering.
The charts are self-explanatory so no further comment is needed.
Summary
Stock markets around the world continue to float upwards on a sea of paper fiat debt-money that has inundated the world. How long will it continue - until it doesn't?
In April corporate buy back totals set a record of $154.1 billion, which is equal to 0.74% of the total market cap of all US stocks.
The Fed once again has its coveted inverted yield curve. Once again we say - how long can this go on?
The debacle in the US subprime mortgage market is long from over. This past week saw first-quarter earnings expose further mortgage-related losses at GMAC, Swiss Bank, and UBS. There will be more - much more, which is why we keep saying that any surprises in interest rates will be to the upside.
Since with think that any surprises in interest rates will be to the upside, we also think that any surprises in the bond market will be to the downside. We note that either the dollar goes down and bonds go up, or bonds go down and the dollar goes up. And of course both could go down together.
The dollar is the equivalent to the walking dead, but it may have a short covering rally at any time - one which could be short lived, although violently powerful short term. Which coincides with our outlook in the precious metals arena.
Gold and the U.S. dollar are not joined at the hip, however, they do over time tend to move to the inverse of one another. We do not believe that weakness in the dollar causes the price of gold to go up per se, nor that strength in gold makes the dollar go down.
What is of importance is the perceived future expectations of the dollar retaining or losing its purchasing power. If expectations rise then gold will react accordingly by rising as well.
Presently there is a large short position in the dollar. This could cause a short covering rally if the dollar begins to turn up. Last week the dollar started to rise, but Friday's unemployment report put a quick stop to that.
As we stated in the precious metals segment - there are the two most likely scenarios for gold. One would be for it to immediately test its old high, or to test its lows. We favor the first.
Further to the above, if the pog rises there are also two subsequent scenarios most likely to occur. Gold tests its high and then backs off, or gold tests its high and keeps on trucking. We favor the first.
Regarding the gold stocks we have two most probable scenarios as well. The gold stocks after a bit more consolidation continue up and test the old highs, or they go down from here to test their lows. We favor the first as most likely.
Just as with gold there are two subsequent scenarios for the gold stocks if they test their old highs in the near term. They will test the high and then fall back, or they will test the highs and break through and continue on into the next phase of the gold bull market. We are inclined towards the first.
Some of the possible contributing factors to this view are:
- The gold to gold stocks ratio is in overbought territory
- Many individual gold stocks are showing oversold levels
- Daily charts more bullish than weekly charts
- Daily charts show oversold levels
- Weekly charts show overbought levels
- May should record either a bottom or a top
- Based on the weight of the evidence last week - it's most likely a top
Invitation
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