So much to talk about…so little time…
The China/US trade war is still the dominant narrative in markets right now. Tariffs are scheduled to kick in on a range of Chinese goods on Sunday. But there are conflicting reports as to whether that will happen.
According to the Wall Street Journal…
‘U.S. and Chinese trade negotiators are laying the groundwork for a delay of a fresh round of tariffs set to kick in on Dec. 15, according to officials on both sides, as they continue to haggle over how to get Beijing to commit to massive purchases of U.S. farm products President Trump is insisting on for a near-term deal.’
Meanwhile, Trump’s economic adviser Larry Kudlow said the tariff hike is still on the table.
Who knows how it will play out? The likelihood is that you’ll see an extension. But as you’ve seen over the course of this trade war, Trump isn’t afraid to implement tariffs if he thinks China is playing games.
In fact, it’s hard to see how this war won’t drag on well into 2020. As I’ve said many times in the past, Team Trump isn’t mucking around. And China’s dictators aren’t used to being dictated to.
As far as the impact on the market goes, only a successful phase-one deal would push shares to new highs. But looking at things from a short-term perspective, the broader indices remain stretched here.
Let me explain…
Last week’s pullback (in the US at least) wasn’t really enough to constitute a ‘correction’. That’s why I think there’s more to come.
Let’s have a look at the US before turning to Australia…
I want to show you a chart of Apple Inc [NASDAQ:AAPL] today. Apple is a bellwether stock. It’s a liquidity absorber. EVERYONE owns it.
When EVERYONE owns a stock, there aren’t many left to buy it.
That’s what could be happening with Apple now. That is, it’s running out of buyers.
Have a look at the chart below. It shows the Apple share price with a momentum indicator known as the Relative Strength Index (RSI) at the bottom.
What you can see here are ‘non-confirmations’. The first occurred in 2018. It refers to the fact that a declining RSI countered the second share price peak. That is, while the share price rallied to a marginal new high, momentum declined. It didn’t confirm the move to new highs.
That doesn’t always mean the share price is going to fall off a cliff. But it does increase the odds of a decent correction playing out soon after.
You’ve just seen another ‘non-confirmation’ play out. The RSI peaked on 13 November as Apple’s share price continued to climb. The price then corrected, before recovering to make a new high this week. But as you can see, the internal momentum of the stock continued to decline.
As I said, that’s not a definitive sign that you’re going to see a big correction. But it does increase the probability that this is THE high in Apple for now.
What about Australia?
Let’s have a look at the All Ordinaries index…
The market is still trending higher. That’s a positive. But you can see that as the market moves higher, internal momentum, as indicated by the RSI, is on the decline.
That’s a concern. It suggests the correction that hit with a vengeance last week may not be over.
Still, another sell-off would not be a reason to hit the panic button. It may be what’s needed to restore some balance to the market before it can move sustainably higher again.
I would, however, be far more concerned if the August lows, around 6,500 points, gave way. That would increase the odds that the bull market is over.
You could ask the same question about gold. That is, is the bull market over?
Given it only started in June this year, I’d say that’s a low probability. (June was when gold broke out of a five-year trading range).
Let’s have a look at a chart for some perspective…
Gold had a strong short-term run in mid-2019. It moved from below US$1,300 an ounce to above US$1,550 an ounce in around three months. It’s now in the process of correcting that move.
In my view, gold will fall to at least US$1,430 before this correction plays out. Having said that, a firing up of the tariff war could put a rocket under it. But for now, the odds suggest the correction will continue.
The story of Aussie Gold Stocks:
As far as Aussie gold stocks go, that is the message from the charts as well. Below is the ASX Gold Index [ASX:XGD]. Like gold it has a massive mid-year run. But it’s on its way to correcting that entire move.
If the current trend continues (and I think it will) gold will likely hit support at the green line in early 2020.
That will likely be an outstanding buying opportunity. I’m looking forward to it.
So is my friend over at The Daily Reckoning, Shae Russell. You’ve heard from Shae a few times this week. She’s been working on a new project building a network of world class gold and resource experts that she talks to regularly.
And you can listen in on these conversations too. I urge you to check it out and see for yourself. Go here to find out more.
PS: I recently caught up with US gold expert Jim Rickards to talk about the truth behind the recent rise of the gold price in Australia. Click here to watch.