Professor’s Comments June 27, 2016

Posted by OMS  at June 27th, 2016

On Friday, one of the things I mentioned was that I’m staying out of the market until the dust settles. The reason I’m doing this is because a few of the ETFs on the Dean’s List are giving conflicting signal.

For example, while UUP, the ETF for the US dollar, is back on the Dean’s List, several other ELF’s, like GLD, are also present. This is a concern.

When UUP appears on the Dean’s List, it tells me the dollar is getting stronger relative to other currencies.  And after Thursday’s vote on Brexit, when we saw the  pound to drop 9 percent, this is exactly what I expected to see.  Same for the appearance of TLT and TMF.  This tells me that investors are moving money from European Bonds into U.S Bonds. In times of crisis, the dollar and U.S. Bonds are perceived as safe havens.

But as I discussed in my recent Update Webinar, normally when the dollar gets stronger, we usually see gold get weaker. This does not appear to be the case right now.

On Friday, both the dollar and gold rallied as European investors fled to safety.

Last week I talked about my concern if the dollar and gold started to get stronger at the same time.  This would be a very problematic situation. It tells me that there are major structural problems with the Euro and the European Union that could lead to a major breakdown in world equity markets.

It’s the reason that I’m only going to be scalp trading until I see a bit more clarity.

Like I said in the WSR, with the market so oversold, we could see a significant bounce on Monday. There are no guarantees that this will happen.  Oversold markets can remain oversold and then move into downtrends. If the Dow breaks below the 20 April low, it’s probably headed toward the February lows of 15,500. If this starts to happen on Monday, and the market begins to trend down, you might want to pay attention to some of the stocks I posted on the Honor Roll. All of these stocks have negative patterns with negative money flows.

On the other hand, if the market starts to rally on Monday, I don’t expect it to develop legs. I would also expect to see gold stocks pull back a little.  Some of the gold stocks I have been watching are not having the kind of money flows that I would expect.  And without money going into these issues, they are ripe for a pullback. I don’t believe that this changes anything about my longer term outlook for gold (the metal).  I strongly believe that the actual metal is going higher.  However, with money flow levels where they are now in mining stocks, it tells me that they might not fare as well as the metal itself.

Yesterday I received an email from George H. asking why the miners didn’t rally as high as gold (GLD) on Friday.  I reminded George that GLD is a Trust that actually owns physical gold.  It’s gold that has already been mined or gold above the ground.  When you buy shares of a gold mine, you’re NOT buying physical gold.  You’re buying a mining operation.  This operation is very similar what you buy when you purchase shares in an oil drilling company.  Oil drilling companies tend to move with the price of crude oil, but when you buy one of these companies, you are NOT buying the actual product.  All you’re buying is the hope of getting some oil. There is no oil stored out behind the drilling rig.  Same for a gold mine.  There is no pile of gold stored out behind the mine.  These companies sell their product as soon as it comes out of the ground.  So IF you want to own gold, you might want to buy the actual metal. If equity markets start to crash, you could easily see the metal rise as investors seek a safe haven, while mining companies fall along with the market.

I want to add another stock to the Honor Roll.

When the Brits devalued the pound by 9 percent on Friday, it made taking a cruise on a U.S cruise line, like RCL or CCL, a lot more expensive. That’s because someone living in the UK or Europe will now have to buy expensive dollars to pay for their cruise. Combine this with the fact that Europe appears to be in turmoil with immigration issues, seniors like myself are rethinking their cruise plans for next year. Marcia and I decided months ago that if we go cruising next year, it won’t be to Europe!

When I went to the Caribbean last year on Celebrity, about 1/3 of the passengers were from the UK and another 20 percent from the European mainland, mostly Germans and Dutch. But with the Pound and the Euro now down about 9 percent against the Dollar, I don’t think you’re going to see as many Europeans taking cruises. And if the dollar continues to rise, cruises will continue to get even more expensive.

Also, looking back at the Brits I have met on previous cruises, a lot of them were financial types from London. If these people feel that their high paying jobs are in danger because of Brexit, I don’t think they will be planning on taking a costly cruise anytime soon. I could be wrong, but that’s just how I feel.

Anyhow, I noticed that RCL was one of the stocks highlighted by Emeritus this weekend. And after looking at its pattern and negative money flow, I decided to add it to the HR as a short.

RCL was down over 7 points on Friday and is now very oversold. If it can rally a point or two early this week, I’m going to short it for the first time in years. My target is below the February lows.

That’s what I’m doing,

h

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