Erin Swenlin and Mike McGlone on Gold, International Breakouts and Fed Rate Cuts

Market conditions continue to improve showing possibility for higher highs. The Fed cut rates last week for the third time in 2019, with the potential for more down the road. Many people are also looking toward gold as an exciting opportunity. On this weekend’s edition of the Financial Sense Newshour we spoke with Erin Swenlin of and Decision Point as well as with Bloomberg’s Mike McGlone. In the Big Picture, Jim Puplava and Chris Preitauer discuss Fed rate cuts and the likelihood for more in the future.

See US Stocks Hit New Records for audio.

Technical Analysis Signals a Positive Shift

Swenlin said her technical analysis shows weekly indicators are positive and that all major indexes are signaling an uptrend. Her charts have also demonstrated that conditions are turning up. She has short, mid and long-term indexes, with the short-term models bases on five and 20 day estimated moving average (EMA) crossovers. If the five-day goes above the 20-day, that's a buy signal. All four indexes have given this buy signal, Swenlin noted.

The mid-term is composed of 20- to 50-day EMA crossovers. The long-term indicates the 50- crossing above the 200-day, and of course the reverse would be true for a sell signal. Swenlin explained that Stock Charts has come up with new indicators called the Silver Cross Indicator and the Golden Cross Indicator. These basically take all the components in the S&P 500 and indicates how many are on intermediate-term trend model buy signal.

A silver cross signal indicates a 20- to 50-day crossover, and gold cross indicates a number percentage for those with a 50-day above their 200-day. “That's something we've been watching very closely, especially with the U.S. hitting these new all-time highs,” Swenlin said.

She also tracks price momentum oscillator (PMO) signals, which are based on crossovers above and below the signal lines. All short-term PMOs are above their signal lines, she noted. Midterm PMO signals have all turned up to buy signals. The long-term is based on the monthly PMO and is especially important, she noted.

“I base a lot of my analysis on where that monthly PMO is,” Swenlin said. “We had a sell signal in August, and three of them in September—when you get those negative crossovers and you match it to the price action, they are very good at predicting those market tops. … those monthly PMOs are turning back up and that's a good thing.”

Caution Ahead?

Swenlin has been cautious about the markets lately and is watching for crossovers. Since the weeklies have now turned positive, she expects the long-term to follow suit, though, the indicators are slow movers.

So slow, that looking back to 1920s when Stock Charts began tracking these PMO crossovers, there have only been around 20 buy and sell signals combined. So, they’re good at picking major market tops, Swenlin noted. Seeing weekly PMOs turning up last week encouraged her that the market will be able to continue a rally past these all-time highs.

That said, Swenlin still has concerns. She has seen negative divergences in her short-term Swenlin Trading Oscillators and has not observed breadth in the markets.

“I looked at some of the charts today [Nov. 1] and the breadth and net advance-declines, new highs, all actually came in where I would expect to see it on a nice rally day,” Swenlin said. “But the two days hit new all-time highs. Those indicators were just flat. There wasn't much there. So I couldn't say I had confidence in a continuation of this move to the upside.”

Last Friday’s breakout seemed to point toward continued improvement. The ascending triangle on the S&P 500 is a very bullish formation and Swenlin’s indicators say to expect more bullish action.

“At this point it's starting to get a little bit difficult to not be a cheerleader,” she said. “It just really still gives me pause as far as the longevity of what we're seeing. It's been a great rally in October. There's really no arguing that, but maybe at this point it's starting to get to its last legs.”

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International Breakout and Gold

We're seeing the rotation we would expect to see in support of a rally in the broad markets, Swenlin said. Healthcare, technology and financials, are leading, while utilities, real estate, energy and staples are in last place.

International indexes are also trying to reverse bear market trends. The Nikkei is starting to break out. The U.K. is trying to break out of its bear market trend and the Toronto Stock Exchange (TSX) was trying to break out with the U.S. on that last move where we almost hit an all-time high, though it hasn’t achieved the same results yet. The German DAX has also broken out of its bear market trend, and the Nikkei is starting to perform better, along with India’s Nifty 50 showing signs it is ready to challenge its all-time highs.

Source: Stock Charts. Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.

Gold is turning positive from a technical perspective Swenlin said. We saw it break out on Oct. 31 and while it did pull back the next day, it is still outside of that declining trend channel.

“I've been a fan of gold for quite a while,” Swenlin said. “I think a lot of the technicians have. … Gold is finding favor. I've got a PMO buy signal that just came in, and just like oil, it's now in positive territory. The chart looks really good to me. I would be looking for gold to make a move back up and challenge that high that we saw back in September pretty soon, especially if this rally and the broad market starts to struggle, or just starts to look a little bit shifty.”

McGlone on Gold Heading Higher

McGlone is Bloomberg’s senior commodity strategist and he explained how the Fed’s most recent cuts indicate that gold is likely to head higher. He posited as long as the Fed continues to ease, gold will continue to rally. It isn’t just the Fed action, either. Interest rates globally are plunging. Unless we expect those trends to reverse—for bond yields to change course or the Fed to the reverse tightening—it's unlikely that gold will break its uptrend.

Gold is having its best year since roughly 2010, McGlone said. It’s up 16 percent on the year, in dollar terms, and has already made new highs in several other currencies. Gold is showing divergent strength compared to the dollar index. When it rallies in an environment when the dollar is strong, the question becomes, what will gold do when dollar actually stops rallying? Traditionally, gold and the dollar move in opposite directions.

Source: Bloomberg. Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.

“It's just a matter of time before gold hits a new all-time high in terms of dollars,” McGlone said. “Gold is going up despite the stock market making new highs. … Technically and fundamentally gold is just breaking out. It needs a good reason to not go higher.”

Will the Fed Keep Easing?

The Fed has engaged in an about-face, Puplava said, and is in the process of undoing all that it did to tighten interest rates last year. In 2018, the Fed raised interest rates four times. Since then, the Fed has cut rates three times, and the market is anticipating a fourth cut sometime in December of this year or in January of 2020.

The Fed is also undoing all quantitative tightening, Puplava noted, and will add $60 billion of liquidity into the market through the second quarter of 2020. The Fed likely cut rates due to slowing, though still positive, GDP numbers. “Quite honestly, the Fed can't afford to make a mistake,” Puplava said. “There's just too much in the market. There's too much corporate debt, there's too much government debt out there.”

What Really Triggered the Cuts?

Overall, the economy was not in bad shape, Puplava noted. So why did the Fed feel the need to cut? There was no indication that the economy was overheating. Inflation was below the Fed target rates, and there does not appear to be a bubble in the market.

The simple explanation is that the Fed felt it needed to reload its chambers, so to speak, meaning that it wanted to have the ability to respond if a downturn set in. With interest rates starting from such low levels, Fed officials likely felt that they had to raise rates just so that they could lower rates if recession took hold.

This is what we saw the Fed do in January, when it reversed course. It saw that stocks, bonds and commodities were all down, and it could not risk making a policy error.

The Economy Is in Good Shape

There are some headwinds in manufacturing, which has a lot to do with ongoing trade policy issues between the U.S. and China. This is likely why business investment has remained weak.

Many businesses have indicated they’re unsure where to relocate factories due to uncertain trade policy. As a result of global supply chains being rearranged, manufacturing has gone into contraction, which is having an impact on the economy. However, consumer strength continues to drive the economy, Puplava said. We have the lowest unemployment levels in 60 years and wages are beginning to rise as well.

We do not have real wage inflation yet, but the good news is workers are getting pay increases, Puplava noted. As a result, they are spending money and that's reflected in positive retail sales.

“Right now, there is no sign anywhere of a recession,” Puplava said. “We need to keep an eye on some numbers, but as long as consumers are spending and getting wage increases and we're creating jobs, that should be enough to carry the economy going forward.”

Bonds Signal the Fed’s Pause Is a Mistake

The Fed changed its language in its forward guidance indicating that it’s now on pause. This is intended tell markets not to expect a December rate cut. The yield curve is flattening, Puplava said, which indicates the bond market disagrees with the Fed’s guidance.

It will be interesting to see how the Fed responds in the months ahead, because it tends to follow what the bond market is indicating, Puplava explained. The Fed is likely going to have to follow the bond market’s lead going forward.

To listen to this podcast, see US Stocks Hit New Records, or for a full archive of past shows, visit our Financial Sense Newshour page.

Written by Ethan D. Mizer

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