Some Charts That Are Catching Our Eye

We thought we would have a look at a few charts this week that are catching our eye or have piqued our interest. So, less words this week and more pictures; which should make it nice and easy to skim through.
First up, we want to show the quarterly chart of the S&P 500. The candle stick pattern that covers the first quarter of 2018 shows that the index closed down for the period (blue body to the candle) having traded quite a bit higher during the quarter (represented by the large upper wick or shadow). Trying to predict the future from a single candle is not practical, however, what we would suggest is that having been up by over 7% at one stage during the quarter, only to close down, shows a level of indecisiveness over the three months. Oftentimes, this sign of indecisiveness is followed by further corrective price action, sometimes it is the start of a topping pattern.

Chart 1 – Quarterly S&P 500 (Candlestick) with 5 period moving average

We made the case earlier this year that Gold was in the process of carving out a large basing pattern. We said that we expected Gold to eventually breakout to the upside and that the advance maybe quite significant, but we also suggested at that time that the timing may not be quite right. A couple of months later, and the basing pattern appears to be closer to completion. Our view remains that a move above the recent highs around $1,360 to $1,365 will signal a new bull market. In that context, it makes sense to look for buying opportunities around or below $1,300 in the next month or two. For those interested, similar price patterns are apparent in Silver and Platinum, and we would note that Silver should outperform in a true precious metals bull market (and looks relatively cheap compared to Gold).

Chart 2 – Monthly Gold price

Moving to Europe, the equity market bumped up again against a ceiling in Q1 2018. Chart 3 below shows the EuroStoxx 600 Index with a resistance zone marked in red at just above 400 and a support zone marked in green around the 300 level. The Q1 candlestick pattern, with its large blue body is bearish in itself, and the fact that the index rallied to well defined resistance and failed only enhances the significance of the resistance zone.
The bullish interpretation is that European markets were simply not yet ready to breakout, and that a consolidation period lies ahead that will act as a launch pad for a true breakout. The bearish interpretation is that 400 or so is such resistance still and that the Q1 failure will lead to a retracement to support around 300.

Chart 3 – Quarterly Eurostoxx 600 chart with 5 period moving average

As for other things European, The European Commission publishes a number of confidence indices that we follow. At the turn of the year, everyone was enthusiastic about the synchronised global recovery, and it appeared Europe was contributing to this narrative as growth was above potential for all of last year. However, as can be seen in chart 4 below, these confidence indices covering the large segments of the economy have the look of topping out at the end of 2017. Of course, this may be a temporary pause and the economy may remain a bright spot in the future. Or, it could be a sign that things simply could not get much better and that the strong Euro currency and glacial normalisation from the ECB will begin to take their toll.

Chart 4 – European sentiment indices

Finally, last week saw the monthly release of money supply and lending data from the ECB. Every ECB press conference, Mario Draghi hails the positive year on year growth in M3 and bank lending as proof that his policies are working. We wonder whether, if we have seen Europe doing as well as it gets, economically speaking, what will happen in the months ahead as QE is ended and talk of rate rises becomes more urgent.
Chart 5 below shows year on year lending growth to the private sector alongside the index of banks which is advanced by 8 months. The correlation is reasonably clear, in that when banks are struggling (as measured by their share prices) they are either less keen to lend, or the environment is such that demand for loans is less. It is therefore of interest that, as stocks in Europe have generally struggled in Q1 2018, so have banks share prices. If this continues, we worry that bank lending will be curtailed in the period ahead which is not a positive for the broader economy.

Chart 5 – European banks versus growth in lending to the private sector

As with our comments last week, we remain fully of the view that markets have entered a multi-month topping process. We are also of the view that sentiment and the narrative of synchronised global recovery peaked at year end, and is faltering with the markets. But this is all a process, and in the very short term, we think that a period of relative stability (compared to recent weeks) is more likely than not as Q2 gets going. But the big picture thought remains the same. Things are changing, and investors need to shift their thinking from buy the dip to sell the rally.
Stewart Richardson
RMG Wealth Management

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