Cash is the Class Favorite

Friday June 21, 2013

Our analog with 1973-74 took on new meaning yesterday with the 2% drop in stock indexes. Notice they have rebounded a bit today, just as they did on each decline in 1973-74. Tom McClellan is comparing this with 1998 but the end of a positive 18 year era. We are deep into an 18 year period of economic contraction and 73-74 seems more likely.

At any rate a few observations. 

The world took a vote yesterday and the world voted for cash. 

Every analysis of the Commitment of Traders COT reports claiming that this is it, the most lopsided extreme since ____' and therefore gold has to rally, has been dead wrong, period.  In the face of world wide liquidation it apparently does not matter what the COT does. 

CEF closed at a -6.5% discount to its NAV yesterday. No one wants gold, A gold rally will not occur until CEF goes to a premium. For my money that is a simple, more reliable indicator than all the COT reports the CME can generate. 

It is all one market as stocks bonds and metals fell together. 

Interest rates are returning to normal.' A sub 3% rate on the 30 year Treasury is not normal.

It therefore follows that all the bonds the FED has purchased are now under water. Does that matter?

All the QEs have only generated speculation in markets rather than long term hiring. The problem is excessive regulation (Dodd Frank for example), high taxes, and uncertainty of who's ox will be gored next. 

The  Presidential Approval Rating is a mirror of the investing mood of the market. Recall the low in the market was last November and the high was May 22. Now look at the approval rating below. 

Presidential Approval Rating

Just like Nixon in 1972-73, popularity peaked right after the election. Since then it has collapsed and is now more negative than positive. We mention this not as a political diatribe but to emphasize that this time it is not different, it is just the same as 1972-74. That era ended with the Dow down 50% from its January 1973 high. The trip to Africa is not likely to calm his critics.  And we are a mere six months into the new second term.....

Crude Oil is the master emotional market. 

 As I speculated this past weekend, the move up in crude oil was a fake out.  The US Dollar rallied to a slight new high. This was uncofirmed by the RSI at top which registered a lower high. 

Note that crude oil in one day took out both the 13 and 34 day EMA MAs closing under them. But October observers will look back and see this as a significant event. The world will soon be awash in more things to buy, metals, luxury homes,  office buildings, than there are buyers. This is classic deflation. 

Crude and the Dollar are Negatively Correlated

Crude and the Dollar are negatively correlated as shown in the top panel. Commentators like Bill O'Reiley, forever railing against high oil prices as a maniacal plot by the international oil companies, have it all wrong. A strong economy can afford higher oil prices. A weak one cannot. I have wondered in this space for weeks why oil prices are so high. 

• The US has produced more than it has imported for the first time in years.
• The US Trucking Industry conversion to cleaner, plentiful natural gas continues
• OPEC is over producing.
• Nigeria worries about markets for its oil.
• Oil is all Putin has to sell.
• We are all driving more efficient cars. 

Bottom, line, this collapse in oil is signalling deflation. 

A few days back we posted the chart of GLD stair stepping down which foretold the collapse in gold yesterday. Now we can add the Dow Jones Commodity Index. 

DJ Commodity Index

Each rally into the ribbon of moving averages has failed. Now the index is below all of them and is accelerating to the downside. Cash is king see the crude and dollar chart earlier. 

From a trading standpoint we should have recommended a position with three puts in GLD for every call. That way if GLD had rallied, one would have recouped the premium on the puts. If GLD fell big, the money from the puts would have outweighed the loss on the call premium. But we did not start out to be an options letter. The trick here will be to hold on to capital the next two to three years. Already many charts look like DJAIG, expect more to follow. This is THE classic bear market pattern. Expect to spot more bears wandering the Wall Street Park in the near future. 

Thanks for reading The Market Perspective.

Richard Russell was dead wrong about gold moving through 1450 and beyond but retains his 10,000 paid subscribers. I must be doing something wrong here..... 

 

Comments

[Robert Takacs]

CEF trading at a discount when it did not at the 2008-2009 bottom confirms that people are more bearish on gold now than at the market crash bottom. When closed end funds trade at a higher than normal discount it usually is a buying oppotunity. Almost all commodity funds are showing bullish divergences on the charts with the funds making lower lows and RSI and MACD making higher lows.
In my experience multimonth bullish divergences usually signal that a bottom and trend reversal are near.

[Dennis Elam]

The closed end municipal funds I mentioned are also at substantial discounts. But multiple tons of gold have been dumped on the market, I suspect the intermediate low lies ahead in October.