The Market Perspective

Bear Raids on Metals Continue

Wed Feb 20, 2013

The bear raids on metals continue as gold drops below $1600 despite all the positive talk on kitco and other sites.  Where is the bottom?

GDX to Gold

Apparently I was wrong to think that the GDX to gold ratio would not revisit the 2008 extreme. This is a weekly chart but we are not to the end of th week. 

Daily 

Yesterday the ratio ticked toa  new low. This is an extreme. Beyond that there is not a great deal to say. 

While we have stated the stock market was overdone it continues to the upside. This morning's WSJ has a lead editorial on Obama's refusal to deal as well as an op ed explanatino by Boehner about how this happened. With the sequester set for Monday, perhaps this will be the catalyst for a stock sell off. 

What will that mean for metals?  I had thought they would rally at that point. At this point, well, we shall see. 

Monday after G 20, Chinese New Year

Monday Feb 18 2013

Mort Zuckerman outlines the grim jobs picture. I cannot tell if the link will work for all since I subscribe to the WSJ, But the highlights are

12.3 million fully unemployed (there's a rhetorical flourish for you)

48 million on food stamps 15% of the population compared to 7.9% in year 2000

11 million on SS Disability, half those have signed on since Obama became President

a drop of 6.4 million jobs since 2007

I note this not to be political but to make the case that this is happening  at new market highs. As our scenario plays out the next three years one can only imagine the strain on the social safety net as lay offs grow

A look Back at What to Expect

Oil Gold Silver 2007-20008

The end of bull markets during are marked by highs in commodity prices. These high prices also bring about the eventual collapse. Here the main panel is crude oi. Gold is at top and silver is overlaid with oil.

A top of some significance occurred that July. 

Oil Stocks Gold

We substituted the SPX for silver, SPX in green. Stocks peaked first

Then gold peaked

Then oil peaked

Once oil peaked the downturn in all three began with a venegance. 

As the markets topped at different times, most observers did not notice the transition. I am not so sure we wil have a collapse this time, seems more like a melt ala 1973-74 but we shall be open to various scenarios. 

Now let's move forward five years with the SPX oil gold

So far oil and stocks have pretty much moved together. Gold is lagging and has not participated yet. Regrettably we are not able to extend the chart to Dec 2013 which would be of considerable help. 

However we can update the realtionships to track possible tops. This suggests oil and gold have a long way to go. 

US Markets are closed today. Gold is quoted in Asia at 1608.  At least it did not tumble another $50 last night. I suspect last week was a concerted effort by banks to run gold bulls out of the market. The air pocket drop by gold on Friday looks like a typical bull market correction which is to say furious. Recall the stock market correction of 1987, same idea. 

Funds Go NAV; Futures versus Physical

Weekend Feb 17 2013

Another measure or optimsim is whether Central Fund CEF is trading above or below net asset values. It rarely traades below NAV. Friday CEF closed at less than one percent premium to NAV in both Canadian and American Dollars. 

Jeffrey Lewis  explains the difference between paper sales of gold and silver versus real delivery. 

This is a well done article. I should be doing more to explain how this process works. For example, the New York Mercantile was the old Potato Exchange. This sleep bourse came to prominence by adding crude oil futures. Interestingly the NYMEX helped create and trade conttracts for oil than there exists oil in the world. This is possible because the paper 'bets' on the price of oil can be closed out prior to expiration. At expiration one has to take physical delivery of the oil if one is long. But the majority of contracts are closed out before that happens. 

The following factoid is extremely important. Big banks with their near unlimited ability to borrow from Uncle Ben at near nothing, are free to create dark pools, unkown trading groups, to short whatever they want. This is often done in gold and silver. With the Asians on holiday last week, this was a great time to do just that. And so gold was sold all the way into friday. But, and this is what Lewis is pointing  out. that does not mean that anyone actually sold even one ounce of physical gold. Traders shorting gold at 1650 simply covered their bets at 1609. The physical gold stayed in the vaults. The open interest swells between expriations and then is scaled back. 

Let me make an analogy that might make this easier to understand. 

On big games like the super bowl, there is a betting line. I don't recall who was favored in this last one so let's just say you could bet on team X versus Y, you get X and three points. So as long as X is no less than three points under Y at the end of the game you cannot lose. Now suppose a group puts out more bets before the game. So many bets are placed that now X is favored by ten points a net change of 13 points. Now someone can take Y and get ten points. Looking at your original bet  you are terrified, X cannot possibly win by ten  points, and so you close out your position at a loss as no one really wants your bet where X has three points. 

Those flooding the markets with bets then close out their new positions on Y, before the game even starts. Nice work if you can get it. 

The point is that a drop in the futures price does not equate to a drop in the physical price until all the contracts are closed out. 

Price has come right down to our 125 week MA. CCI has about reached previous oversold extremes. 

Still the openning here Tuesday may be exhibit spectacular volatility. 

Re Thinking The Market Positions

Weekend February 16 2013

Wal Mart Feb Sales a Disaster The higher payroll tax kicks in and has an immediate effect at discount chains.

Gold benefits from a currency war.  Maybe but it did not this week as the dollar strengthened Thursday and Friday. 

G20 announces 'no currency war.' Take your pick of the above or this one. I suspect we have a parallel with OPCE trying to control oil prices. The problem is that OPEC members always cheat on their production. In the end nothing holds the G 20 together and it will be every country for itself. 

Half the states will not partner with the Federal Govt on Exchanges This is a continuation of the many dynamics of what we term The New Civil War. The New Civil War pits one area of the country against another. This dynamic takes multiple shapes of union shop versus open shop and now Obamacare splinters the states in yet another fashion. 

Socionomic Observation Recall that the US tried a Confederacy of State before it adopted a constitution. Even back then, a loose coalition of states without a Central Authority simply did not work. This is the problem with Europe adopting the Euro today, there is no enforcement mechanism. The New Civil War is causing one rift after another changing the country into red and blue, union shop and open shop, insurance exchange and no insurance exchange. I can imagine the government trying to strong arm states into this by withholding various Federal Funds which will only ramp up The New Civil War. Breaking News, speaking of the New Civil War an alert reader of TMP sent this week's cover of Barrons, Obama the Greek, The USA Can Be Greece.

Our belief that gold would bottom and rally waseither  negated this past week or delayed until next week. I regret not paying more attention to my own analysis here and less to the thoughts of others. I followed the latter rather than my own instincts. The result was incorrect advice in TMP which I sincerely regret. That is not an excuse but that is what happened. Recounting the last few months...

We were long commodity stocks, had nice gains and exited in mid September 2012. The charts and commentary are all still up. This was a correct move. 

Our mistake was re entering at lower prices thinking a low was forming in those same commodity stocks.  We did suggest a low occurred in stocks in mid November but have consistently warned to avoid the stock market the lst few weeks. Indexes have revisited previous highs from Year 2000 and 2007. 

Again we seriously regret our error. Now let's refocus on our longer term view that the markets are likely entering a repeat of 1973-74. The Wal Mart headline may well be the kick off to such an event. The fact that a two point increase in social security tax would be felt nationally at the reail level says a lot about just how fragile the economy is here. 

Markets are closed in the US on Monday but will be open in Asia. There is not a lot of point is speculating today, we might as well see what happens in Asia on Monday, we will comment again on Monday as the action unfolds. 

Gold

I have attempted to outline a five wave pattern. If Wave One equals Wave Five, 1575 might be support but clearly 1525 is longer term 'support.' If this is the start of our massive deflationary wave of course support means nothing. 

However, we know that extreme expression of social mood happens near the end of a trend. Gold has dropped $200 but it is only now that numerous posts are sounding the alarm. A panic represents irrational herding near the end of a trend. GDX below has lost a third of its value. It is individual investors cashing out causing sales of mining  stocks which further depresses the price at this time. 

GDX Weekly

Does 40 mean anything as support? At this point we cannot know. 

GDX Daily

The CCI indicator is higher  now than on the last drop. Price was 8 bucks above the 200 day MA at the top and is now six bucks below. Symmetry anyone?

US Dollar, Bonds

The Dollar Bonds Shorter Term

The Dollar moved up the last two days. But it has yet to take out the 200 day Moving Average. So far this is a third lower high. At top bonds have sold off. MACD is indecisive.

Stock Market

This weekly high low indicator now flashes an island reversal signal at the top of the recent run up. MACD is at max in the lower panel. 

Bottom Line

It is possible that a world wide massive devaluation began this past week. This would be the start of a world melt down in risk assets. That is one scenario.

Another scenario is that extreme mood is occurring near fo this trend. We would prefer this resolution! The resolution of gold will probably not be known until later this next week after the US markets open and the intial orders placed  after a three day weekend are executed. Blogs and gold sites  are chattering that importatnt support was taken out at1625, suggesting a waterfall decline ahead. That may be the most supportive comment but we have no way of knowing at this point. A failure of the US Dollar and a rally in the Canadian and Aussie Dollars next week would help gold. 

Stocks remain in a topping formation.  

Before there was CNBC there was Financial News Network FNN. FNN became CNBC. In the 1980s a chap named Al Frank was featured on the show. Al was an ordinary guy who had started his investment letter with a mimeograph machine. He was long stocks going into the crash of 1987. Of all the talking heads back then, he was the only one to come on the show after the crash  and apologized for his outright long positions. I admired that. 

I regret my overly bullish stance on gold, my apologies in the best Al Frank tradtition. Even if things turn out as we expected we were way way early and failed to follow our own instincts.  Gold may yet bottom as everyone is now so negative on it and the US Dollar may pull back. We will report. 

 

I would enjoy hearing from readers, several of you have written with extremely constructive and insightful observations about the markets. It is good  to know we have attracted such sophisticated readers. 

[email protected]

 

 

The Market Perspective bases its information on techniques and sources that have been found to be reliable in the past, and The Market Perspective tries to base opinions on sound judgment and research, however, we do not guarantee that future results will match past performance ands no guarantee can be made that advice will be profitable. The Market Perspective accepts no money for stock recommendations and is purely motivated by its own research in recommending any stocks.  Put another way, the responsibility for decisions made from information contained in this letter lies solely with the individuals making those decisions. The editor and persons affiliated with The Market Perspective may at times have positions in securities mentioned.  Nothing contained herein represents an offer to buy or sell securities. The Market Perspective encourages investors to be diversified, and to maintain sell stops and risk control over their valuable investment capital.  No guarantee can be made to the accuracy of text or charts.

 

Re Defining the Concept of an Extreme

Friday Feb 15, 2013 Posted 10 30 CST

Heinz Sold as Deals Take Off

Shopping Spree for Wall Street

A flurry of acquisitions announced within hours of each other Thursday for everything from ketchup to airlines to drug wholesaling, suggests big time deal making is back after a nearly six year absence form Wall Street. 

The Dam has burst says one Wall Street Veteran

Front Page Wall Street Journal Today

Socionomics is hardly an exact science. But deals like this don't originate yesterday over a dinner napkin, they are months in the making. The fact that all of them came together yesterday suggests a peak in social mood commensurate with the market's third high over the last fourteen years. The real burst of the dam is probably a few months off, but no one is noticing the obvious comparison to past market tops now. As we said Feb 3 Party On, It's Spuds McKenzie Time Again.

On a personal note, I dropped my  2009 Cobalt SS (purchased with 10,000 miles on the odometer for $16,300) off for a brake check today. The showroom featured a $62,000 supercharged Camaro. Outside there were five new Corvettes at around $67,000 each. Pickups are bargain priced at $36,000. It is fair to say this sector also shows a 180 degree turn around from 2009. We noted the emergence of the $100,000 + SUV in a recent post, even Maserati has joined the parade.

Our exit last September 18 from long commodity producer positions was near perfect. Our failure to buy puts or go short on the sector was well less than perfect. An old saying has it that the markets can remain irrational longer than one can bet against them, let's take a look. 

It's been an humbling experience.

John Bollinger on then Financial News Network commenting on being long the market during the October 1987 crash.

I admit to feeling now a bit like John did then but I have reduced my exposre well below Sept 18 levels. 

GDX to SPX

Perhaps the best way to view an extreme is a ratio chart. Here we graph a major gold ETF GDX against the SPX. In late 2008 at the height of the sell off, the ratio hit a new low. There were literally no buyers so the price of GDX fell and fell. But notice that it only lasted three months and then GDX reversed as SPX fell into March 2009, you cannot tell that by this chart but that is what happened. I drew the red green resistance line to show that this ratio has entered irrational valuation nly seen at market extremes. Which is not to say it cannot become more irrational short term. 

GDXJ Life History

This chart represents the entire history of GDXJ since its creation in 2009. It has almost reached the extreme of last summer. At top its ratio to the SPX has gone to a new low. 

GDXJ to Gold

The ratio of GDXJ to gold hit a new low this morning. Again this is not to say it cannot go lower but to show, eyeballing all the last three charts that these relationships have reached or are near historic extremes. 

KOL XME REMX have all pulled back today. Crude oil is down today but has enjoyed a nice run from $84 to $97.

We are wondering if gold and silver find their bottoms when stocks finally register a short term top here.

When will that be, well the summation index and bullish percent charts are no longer rising.

Note MACD rolling over at bottom. The bullish percent charts show a similar sideways action.

And in the social mood can turn on a dime department we present Rackspace.

I bought RAX last year at 40, below its 200 day MA and sold in the 60s. Interestingly RAX was chosen as the target study for a CFA contest involving college students Our students concluded it was an $80 stock. They were right for one day. They had picked a sell signal. The fact that even successful companies like this change in price every day is a display of the vagaries of mood. The media excuse for the sell off was less than expected earnings. But RAX was way over its 200 day MA, and as Bob Farrel noted, things return to their long term trend. 

So while Wall Street parties on, those holding gold and silver have the exact opposite experience. Which group will be right over the next few weeks, stocks at new highs or the now orphaned mining stocks? 

A Few Socionomic Observations

Thursday Feb 14 2013

From today's Wall Street Journal

Good times bring on inclusionary feelings. On the front page, Broad Trade Deal on Table. The US and the EU are launching a broad trade pact which may 'take two years to work through.'  There is no surprise that this would happen at a market high, the very expression of positive social mood. What is dubious, is whether the pact can endure what are sure to be hardening attitudes over the next two years as markets are likely to fall. I suspect the creation of the pact will not survive the hardening of feelings and beginning of the currency wars we address in the next paragraph. 

Earlier this week we mentioned the beginning of the currency wars. Today the WSJ has a graph of the plunging yen on the front page. The editorial page wonders about the appointment of Lew as Treasury Secretary who did not seem to know much in his hearing. That lack of experience will be tested as the currency wars become more serious. We will update on how this plays out at the G 20 meeting. Market tops happen over time not on one day. The emergence of currency wars is another warning shot that a change in market direction is coming. 

We have written about the massive changes coming in Higher Education. Just this week we read about one political science major, thinking that would land him a government job, who is out of work with a $100,000 tuition debt. I suspect he could have read Real Clear Politics and Moveon.org and learned as much for nothing. On page A3 an animal science major in Iowa lands a $50,000 job. That graduate actually has some useful knowledge. How long before the dawn breaks over  this factoid over the Higher Ed Scene?  

But the Personal Journal is where the social mood is really on display. Recall our observation a couple of weeks back that emerald green was a popular color this season, Chevy had chosen it for a special Camaro?  I added the bold to highlight the mania with color.Positive social mood expresses itself in bright colors of clothing, as welll as the desire to show off success, see our last story. 

Go Long on Teal, Purple

Designers have been sneaking some new colors into the palette, and teal and purple (two colors that pair well) have been fresh and popular, if not exactly daring, in many collections, including those of
Nanette Lepore, Vera Wang, Naeem Kahn, Patrick Ervell and Tracy Reese. Some retailers seem pleased. "I'm loving purple right now," Ken Downing, Bergdorf's fashion director, hollered across a runway at the Tory Burch show.

 

 

Rent a Porsche

In Middle Age Crazy, Bruce Dern drove a Porsche 928, it's a Porsh A he said. In Risky Business Tom Cruise let Dad's 928 roll into a pond. Then and now, Porsche, there is no substitute as the ads say. So as Porsche runs with lexus in the quality survey, we have the Rise of the Rent  Porsche. Enterprise Rent a Car is adding an Exotic Car Collection as high disposable income  locations. Customers are more likely to upgrade just seeing the exotics from the counter. 

Recall that in 1967 Hertz featured r   black and gold Shelby Mustangs for rent. That too occurred at the top of the 1948-1966 stock market rise. Times change, people don't, high times make for a show it off attitude. 

 

Minute by Minute

Thursday Feb 14 2012

But minute by minute by minute by minute 
I keep holding on 
Oh, minute by minute by minute by minute 
I keep holding on 

Michael McDonald, Doobie Brothers

it's tough to watch holdings falling in value. One's natural reaction is not to say

Hey this is wonderful I get to buy for less money on the next purchase. If we were buying avocados at the grocery that would be our take on it, but on Wall Street buyers want purchases to advance in price. 

So we have been watching minute by minute, and as noted yesterday afternoon, buyers have been quietly tiptoeing in on some purchases. 

OH but first

Central Banks  purchase the most gold since 1964

The Central Bankers know the money printing game will end badly, they are preparing for it now, gold is the money politicians cannot print from trees. 

Eurozone Recession Deepens as Germany Falters

All markets do not top simultaneously. Think about the progression. Several years back I put on my student blog, Iceland Melts. Then ireland melted. Then the Club Med countries Greece Portugal Italy Spain were all in trouble, and still are, nothing has changed, just like our sub prime mortgage crisis. These are like a 1950s sci fi movie, the Monsters That Won't Die!  Now Germany slows, of course it does, as the rest of Europe is out of work there are fewer customers for Germany's higher priced goods. 

An interview with Jim Rogers is always fun.

As Ed McMahon used to ask Johnny Carson, how tough is it?  Well it's so tough that even the 

Bars and Strip Clubs feel the pinch As Barclays lays off thousands there is less discretionary income for such frivolity. 

Okay now that I am back at my MacBook Pro we can look at some charts. 

GDX

These charts explain today's title, minute by minute. At top the XME bottomed at the end of January, see the pattern of higher lows. 

At bototm, REMX looks to have bototmed Feb 7, sure it could falter here but so far so good.

In the main panel GDX lags these two but sellers have not really decisively broken 41.50. We might see a spike lower in GDX and GDXJ, one reader wonders if we see 17.50 in GDXJ today. 

Canadian Dollar

Currency charts are end of day on stockcharts so we cannot show an intrady hourly as we did with GDX but, the effect is much the same. The Canadian loonie  made its low at the end of January and then re tested it Monday, at a higher level. 

This is why it is important to examine intraday actions in multiple markets to sense when bottoms might be forming. They don't happen at once. CNBC will likely still be crowing about new lows in the gold price as many commodity producers have already bottomed.

New York Stock Exchange Index

Another reader suggests that major stock indexes peaked yesterday.   With the summation index above its Sept high in the lower panel and the price index in the main panel 800 points over the 200 day MA, that looks to be the case. Over bought signals have been flashing for the last two weeks. 

Bonds

Money continues to exit the bond market shown by TLT. Notice the MA ribbons are turning down? Three of them broke the 200 bar MA, the rout shold begin shortly.  The dollar is marking time in the bottom panel. I am thinking there is too much weakness in Europe for the Dollar to really break here but it ain't over for another few months. 

Okay,we hope this was a ray of assurance along with your morning coffee that we are on track for

a pull back in stocks perhaps over the next two weeks

a re surgence in out of favor commodity producers

if you are doubting our advice, call a Central Banker and ask what they are buying!

thanks for reading TMP.

 

Remember Bottoms happen in Fractals as Well

Wednesday Feb 13 2013

I admit I am subject to social mood myself and my mood was not improved by GDXJ dropping agagin today. But let's take a look at the end of the day results for this class of risk assets. AS we have shown many times, topping and bottoming a a process. There is no such thing as THE top of a market, markets top and bottom at different times. Here is such an example.

Charts referred to are set for one hour and a 50 bar Moving average.

REMX made a low Feb 7 and has moved above its 50 bar one hour moving average.

KOL did the same thing.

XME made a low January 31 and completed two higher lows since.

SIL made its low January 28 and has recorded two higher lows since.

GDX broke down through 41.50 this in late afternoon trading,

GDXJ also had a poor showing dropping late this afternoon to the 1781.

It seems fair to say that GDX and GDXJ are laggin the pack of commodity producers and may well the last to form bottoms.

The Reuters Jefferies CRB index remains in an uptrend off its November lows.

Stocks are still moderately extending gains but have gone sideways at 1515-1520 the last few days. It may be that commodity producers are attracting attention as stocks continue in their overbought position.

What Recession?

Wed Feb 13 2013

Peter Schiff  still believes gold is headed to $5,000

TARP was more expensive than you might think. Thanks to a reader for this one. 

On page B 1 in today's WSJ the story reads

What Recession American  Regain a Craving for Luxury

Page B8 features a photo of the new Maserati SUV, Tata is betting on its $110,000 Land Rover, etc

All of this is in synch with top of the market expansive social mood. We have noted the simultaneous increase in the Mansion Section on Fridays.  Courtney Cox seems to be makin gmore money trading houses in Malibu than acting on television. 

As gold hits a six week low, this morning KO, COPX, SIL, REMX are up and what can it be, GDXJ actully ticked up!

Commodity plays should start moving up as the last sector in rotation in this bull cycle. Has that begun on the heels of another knockout low on Monday in gold and silver, that 
Chinese New Year thng? 

PWND and TAN wind and solar are up no doubt on the State of the Union last night. 

Stay the course, patience. 

When the Turn Comes

Tuesday Feb 12 2013

Here is a look at just how faast social mood can reverse. This is the End of Day chart indicating the bullish percent of stocks in the gold miners group.

After languishing with no interest and decling for months. the mood switch flipped in late  July. I drew the blue box to make the point that the ensuing run up took a mere month and a half from bottom to top. The chance of getting on board or waiting for a pullback was zero zip nada once the train left the station. How long will the BP wander down here before that switch gets flipped again we cannot know. 

Semper paratus.