A Big Bullish Sign for Gold

A big bullish sign for gold... Warning signs are still flashing for crude oil... Speculators are still as bullish as ever... Rig counts continue to rise... Demand could be faltering... A new concern for housing?... Why mortgage rates could be headed much higher... 'Your best chance to make 10 times your money from a single stock'...

Yesterday, gold broke above a key technical level...

It closed above its 100-day moving average ("DMA") for the first time since last fall.

A DMA is a popular gauge of price action. It measures the market trend by averaging prices from, in this case, about five months of trading.

As you can see from the chart below, the market clearly finds this line important. It acted as a floor – what traders call "support" – during last year's big rally. It then acted as a ceiling – or "resistance" – during last year's correction...

Seeing gold close back above this level is one more sign that the bull market has resumed. The last two times gold broke above its 100-DMA, it rallied nearly 18% and 13%, respectively.

Meanwhile, gold stocks – which tend to lead the price of gold higher in bull markets – are doing even better.

The VanEck Vectors Gold Miners Fund (GDX) blew through its 100-DMA late last month. And as you can see above, GDX just closed above its 200-DMA. Many traders consider the 200-DMA to be an important longer-term measure separating bull markets from bear markets.

Elsewhere in the commodities market, the warning signs are still flashing for crude oil...

Regular Digest readers know our colleague and DailyWealth Trader editor Ben Morris has been highlighting the "froth" in the oil markets. He has warned his subscribers that much lower prices are likely.

But the situation has become even more extreme since he first issued his warning...

The latest Commitments of Traders ("COT") report from the U.S. Commodity Futures Trading Commission shows speculative bets on crude oil futures rose to a new all-time record for the second straight week.

Last week, a Wall Street Journal report put the size of these bets in perspective. From the article (emphasis added)...

Long, or bullish, positions last week exceeded short, or bearish, positions by 370,939, marking the largest net bullish position in 10 years of data from the Commodity Futures Trading Commission. That compares with a net bullish position of 159,415 contracts in early November.

The more than 420,000 bets on rising oil prices in place last week represented nearly all the crude held in U.S. commercial storage tanks.

The weekly COT report shows what futures traders are doing with their money. It's often a good contrarian indicator when it hits extreme levels.

And as we explained last month, the last time speculators were anywhere near this bullish was June 2014. And as the chart below shows, this was a terrible time to be long oil...

Crude plunged more than 70% over the following year and half, from more than $100 per barrel to less than $30.

At the same time, U.S. shale producers continue to ramp up operations...

The latest rig-count data from oil-services firm Baker Hughes show U.S. oil firms added another 17 rigs last week, bringing the total number of active rigs to 583...

>

This marks the third straight double-digit weekly increase... suggesting U.S. oil production will continue to rise rapidly.

Meanwhile, concerns about oil demand are growing, too...

According to news service Reuters, U.S. inventories of gasoline have been rising for four straight weeks. In total, gasoline stockpiles rose by nearly 21 million barrels in the first 27 days of 2017. This compares with an average increase of just 12 million barrels during the same period over the past 10 years.

Why is this important? Because gasoline production accounts for nearly half (47%) of total U.S. oil demand. So soaring stockpiles suggest weaker domestic demand for crude. And that's exactly what has been happening...

Reuters notes U.S. demand over the past four weeks – which is already a seasonally slow period for gasoline – totaled just 8.3 million barrels per day. This is a drop of nearly 5% from the same period last year.

This mix of speculative fervor, rising production, and weakening demand is a dangerous combination...

It's a recipe for dramatic declines if the rally falters. And according to some analysts, it could quickly jeopardize the oil-cartel OPEC's recent deal to cut production. As Steven Kopits, president of Princeton Energy Advisors, recently noted to clients (courtesy of financial blog Calculated Risk)...

The OPEC deal is looking at trouble ahead – three more weeks of this and the OPEC deal will fall apart.

As always, there are no guarantees in the markets.

The COT report isn't a precise timing indicator... And these extremes could grow even more extreme before they reverse. But if you're still long the oil sector, be sure to keep a close eye on your stops.

Last week, we noted the Federal Reserve could become a major headwind for the bond market...

As we explained in the February 2 Digest, the Fed has been talking about cutting the size of its massive bond portfolio for the first time since the 2008 financial crisis. And this could cause long-term interest rates to rise even more quickly.

But the Fed's actions could weigh on more than just the Treasury market...

You see, during its quantitative-easing program, the Fed wasn't just buying Treasurys. It was also buying mortgage debt to help support the housing market.

As a result, nearly $1.8 trillion worth of the Fed's $4.5 trillion portfolio is in mortgage-backed securities ("MBS"). It now owns nearly one-third of the entire MBS market.

Worse, the Fed has been buying nearly $400 billion worth of MBS each year just to maintain its current holdings... making it the single largest buyer of mortgage debt.

In other words, any move to reduce the size of its MBS portfolio is likely to push mortgage rates much higher. As Bloomberg reported on Monday...

Getting out of the bond-buying business as the economy strengthens could help lift 30-year mortgage rates past 6 percent within three years, according to Moody's Analytics Inc.

Unwinding QE "will be a massive and long-lasting hit" for the mortgage market, said Michael Cloherty, the head of U.S. interest-rate strategy at RBC Capital Markets. He expects the Fed to start paring its investments in the fourth quarter and ultimately dispose of all its MBS holdings.

While this won't necessarily put an end to the housing recovery, it could be the first significant headwind since the rally began.

In the meantime, if you've been considering taking advantage of historically low mortgage rates, your opportunity to do so could be limited.

Finally, a quick "heads up" before we sign off today...

As many of you know, our friend Chris Mayer – chief investment strategist at our corporate affiliate Bonner & Partners – held an investment "master class" last Saturday.

During the event, Chris revealed his proprietary research into identifying the small, high-quality stocks most likely to become the biggest stock market winners of tomorrow… stocks with the potential to become "the next Starbucks" or "the next Apple" and return 100 times your money or more.

Chris also arranged for a special introductory offer for his new service dedicated to this strategy: Chris Mayer's Focus.

But if you still haven't taken advantage of the special risk-free offer – which includes a bonus year to his service, two incredible free gifts, and a no-questions-asked, 100% money-back guarantee – you must act soon. This offer ends tonight. Click here for all the details. (Or click here to read a transcript of Chris' presentation.)

New 52-week highs (as of 2/6/17): Apple (AAPL), American Financial (AFG), Axis Capital (AXS), Bancroft Fund (BCV), BlackRock Floating Rate Income Strategies Fund (FRA), Huntington Ingalls Industries (HII), short position in Hertz Global (HTZ), Nuveen Floating Rate Income Opportunity Fund (JRO), PNC Financial Warrants (PNC-WT), Pretium Resources (PVG), Shopify (SHOP), TTM Technologies (TTMI), and W.R. Berkley (WRB).

In today's mailbag, more great responses to Porter's Friday Digest request. Send your questions, comments, and criticisms to feedback@stansberryresearch.com. Good or bad, we read them all.

"Porter, I thought this idea was going to be a god send but had no idea just how much of one. For today's busy pace this is a real gift. At first I thought oh just another list, more to read, but after I read it all, (a couple of times) and got familiar with the website and tools that your team has put together, I think I get it. I love the one page summaries and have copied them all to put with the portfolio I think I will use. I will now figure out how many shares of each position I can get with my reduced size account, to keep within the allocation guidelines. Also, I will determine if I will use income techniques to get the ones I can. I think after years of hit and miss, go here go there, read this, read that, and then do nothing sometimes, I will soon be on the right track. Going in a direction.

"I can understand your frustration with some questions that have come up. But I think you need to consider that you boys live and breathe this stuff. It is perfectly clear to you. The answers you give to the questions, however, give us some of that knowledge that you take for granted but we don't have your vast knowledge base to draw on. I love to read your answers to the questions because it makes me look in places I hadn't noticed such as the one pagers and it gives me some insight as to how or what you are thinking. (Hope that makes sense). I have been with you guys since the beginning, but this is the best of the best. Thank you." – Paid-up subscriber Linda B.

"To: Porter and team, I am writing into say as an Alliance partner I am very happy with the new Portfolio Solutions offering. It is the best new product introduced in years. For me the last one was Income Intelligence. What I like most is that you all are teaming up to provide the service. That's great, a little consensus for a change.

"I had been raising cash most of last year and last half of 2015 waiting for an opportunity. Looked over the portfolios for a few hours and felt very familiar with the positions and strategies having read all the newsletters over the years and owned some of the positions already. So I just made up a basket trade for The Total Portfolio and the purchase was made in seconds. Well almost. This was done in a IRA so it did not allow [two positions]. I assume my IRA doesn't allow MLP's to be purchased. Bought them anyway in an after-tax account... We are off to the races. I imagine we will have a good picture of the results in a couple of years... Thanks. Great job." – Paid-up Stansberry Alliance member John P.

"Howdy, I think you are all smart and know much more about finance than I likely ever will (and not for your lack of trying). First, I did not subscribe to one of your portfolio offerings. Second, I did glance at your responses to questions and noticed your sarcasm. I was slightly disappointed. Y'all go so far out of your way to help investors, I didn't really understand why you chose to use sarcasm in your responses. Also, I thought several readers had similar questions, which made me think maybe the letter was not written clearly. Without reading your actual letter, I have no idea if it was clear. However, if I had saved up a few hundred thousand dollars, I would want to make sure I understand the instructions clearly. Anyway, y'all are great, and I generally really enjoy your Digests." – Paid-up subscriber Evan

"Dear Porter, you state 'Portfolio Solutions represents the ultimate evolution of our business.' And you thank us, but I want to thank you for genuinely caring about your subscribers to allow us to reach the ultimate evolution of our own businesses. The Portfolio Solutions is a God-send for me.

"I'm one of the earlier Alliance members who used your publication info to develop a substantial international business. It began when I joined the 2nd group (the fun group) to Argentina. I now have properties and B&Bs in France, Argentina, Texas, and Rancho Santana and thus travel extensively.

"The Portfolio Solutions offers me a sense of confidence with a growing peace of mind. This is my goal for this ultimate evolution." – Paid-up Stansberry Alliance member Mary P.

"Great Job on the [Stansberry Newswire] morning recap. I've missed Jeff Clark's market recaps, so this suits me just fine. As always you provide excellent service. Thanks." – Paid-up Stansberry Alliance member Don Sarrazin

Regards,

Justin Brill
Baltimore, Maryland
February 7, 2017