XLE, Select Sector SPDR Energy update

June 28, 2015June 28, 2015 Hamilton

The little chart is from Sept. 2013, not quite two years ago, and the big chart is as of last Friday. We were a little early, always preferring caution to hope, but the main theme and the EW count has not really changed so now with the benefit of hindsight we can argue that the XLE needs to fall further to $55 as a minimum. Between $40 and $35 is likely and $20 a distinct possibility. Oddly, it does not matter all that much which particular interpretation you prefer, the triangle and 5th wave or the B-wave. The ultimate level does not, but the way you get there does!

Here are some possibilities. Even if the substructures are not patently clear (is there a series of 1-2s?) it is clear that a first wave down was completed in Dec. or Jan. and that a correction followed, in other words that correction is simple becoming more complex. Presently we are in the b of a more complex a-b-c correction. This can become irregular so a new low is still a possibility (RDS.B ?). Then we should have a fairly extended period in which the XLE makes tradable gains. Best guess is to wave 4 (of 3 or the entire sequence). Then it all breaks down again and $55 is within reach. This particular scenario fits best with the XLE having topped in 2014 (there is a 5th wave) and not with 2008 (a B-wave).This is because if there was a big B-wave we would now be in a c-wave down and C-waves must subdivide in fives so it is unlikely that wave 2 would elongate as much as shown.

The XLE contains about 40 companies. Names like Exxon, Chevron, Schlumberger, Kinder Morgan, Conoco, Anadarko are all in there together with lesser names. The big ones dominate the index. As with all ETFs the stock specific peculiarities are evened out so the XLE does not represent any individual stock. WMB,The Williams Companies, as an example, made a new high recently. On the other hand, RIG, Transocean which is also in this ETF, is doing as predicted (see blog) and soon will be down by about 80%.

LIF, Labrador Iron Ore Royalty Corp.

June 27, 2015June 28, 2015 Hamilton

Royalty corporations really do not do anything, they simple own a stake in the underlying company which in turn pays them a royalty or commission. The main expense is salaries for the senior executives etc. but no real operating expenses. Not too much can go wrong, that is it is hard to get negative earnings. Even so this company saw its earnings drop by 61.9% yoy last quarter. That is an eye-catching Fibonacci percentage. If I am not mistaken this used to be a very popular income trust – also a flow-through vehicle – B.F, before Flaherty.

In EW terms, the eye-catching feature of the Globe and Mail chart, the big one on the left, is the picture perfect B-wave. These are dead giveaways that there is something terrible wrong in Labrador. After the peak wave C should carry the stock price to a new low, here about $10, and do so in a 5 wave sequence. In the detailed chart the four tops drop over time but not by a lot, this is in contrast to the G&M chart perhaps because they use monthly or weekly data instead of daily. The lower resolution gives a more grainy result but this can actually be a benefit as it filters out a lot of noise. All this leaves us guessing whether we are now in wave 4 of the entire sequence or just in wave 4 of 3. Either way we should go down at least to $10 but quite possible to about $5 or so.

The last 10 plus years the idea took hold that there was a shortage of iron ore and therefore the price could only go up. Ironically (no pun intended), iron measured by mass is the most common element on Earth and there never was a shortage. If there was an imbalance it would have been due to a burst in demand (China, Qatar, Dubai etc. or simple too much CB money manipulation ??). The chart below convincingly demonstrates that;

For twenty or so years the stuff is scraping the bottom and only comes to life in about 2001/2 Then it rockets from $10 to almost $200 peaking in 2011. That is roughly 20X. At around $60 today it is still well above (6X) the long-term trend so despite the a-b-c shown in the chart we would keep an open mind to further price declines.

Interestingly, the dates 2001 and 2011 have an awfully familiar ring to them. It is the exact same period in which gold made it’s move all though it had a more interesting history before that.

Roughly from $240 to $1900, or 8X. Presently it is still about 5X more expensive than in 2001. Who would have thought that when the financial world is about to blow up, you are twice as well off holding iron ore than gold! Even the most gullible investor would not have believed that.

Shanghai update

June 26, 2015June 26, 2015 Hamilton

All is well in China, for the moment. If you look a little closer however you will see that this index is down about 20% just in the last month. What goes up, must come down appears to be the prevailing philosophy, that is if there is any philosophy at all. This market resembles a casino more than any other. EW works when a large numbers of people pursue their individual instincts. In a collective mindset it may not work the same way. In any event, if it does, the above depicts what might happen. The main catalyst would probable be Schumpeter’s constructive destruction in the context of colossal misallocation of capital and the resulting overcapacity.

ATG Athens revisited

June 25, 2015June 25, 2015 Hamilton

Athens is worth another look. Earlier this year we thought that, given the clear a-b-c corrective move from the 471 low, this index had to go down and make a new low. It was at around 800 so it did go down but just a little.

Corrections can take a lot of different forms but the most common is an a-b-c down, a zig-zag. These are 5-3-5 structures and get to there target relatively fast. Often the stock or index has not gone down enough so the exercise is repeated creating a double zig-zag. This can even be repeated a third time, but not more than that. In this particular case the index comes from a little over 6500 and goes to 471. That is roughly 93%. Moreover, the two zig-zags are clearly visible and are perfectly vector equal. It all strongly suggests that the correction is complete. Further support can be derived from the simple observation that between 471 and zero there really is not enough room for another zig-zag. The 3-wave structure from the lows if that is what it is, of course, argues against this.But that may only be the a wave and now we are in the b with a c to follow perhaps to , say, 2400. In any event when all is said and done we would favour buying this index.

Fundamentally a stock index represents REAL , not nominal , assets. Therefore it is not entirely clear why the value of those real assets should drop any further. Even a default of the Greek government would impact bondholders a lot more and these we understand are 80+% concentrated in the ECB and IMF. On top of that Greece has only two industries, tourism and shipping. Tourism would get a tremendous boost from drachmas instead of euros and shipping is done mostly in US$$. So even though there will be an initial currency hit, on a slightly longer term basis this might be a real good buy.

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