Low Fed Rates till 2014 Sparks Gold

In today's FOMC announcement, the Fed signaled that they will be keeping rates ultra low thru most of 2014. That even raised my eyebrow...

This news put some giddy-up into gold, which vaulted about $50 this afternoon on the FOMC news.

I used this leap to sell my GLD position. It's up about 10% from its lows, price is now filling the gap, and stochastics are getting twisty in the overbought zone.

Am also concerned about the re-hypothecation issues surrounding these metal ETFs on the back of the MF Global situation last fall.

Selling this position puts me just about 0% net long (long metal and ag commodities against short equity index). Feels about right given the current field position of various asset classes.

position in commodities, SPX

Silver Gaining Strength

The technical picture for silver continues to improve.

With today's +5% jump, white lightning knifed thru its 50 day moving average and left little doubt that it has officially left behind its multi-month downtrend line.

One would think that further upside progress from here will be more difficult--given the damage done on the way down late last year. Using SLV as a proxy, 34ish should serve as significant resistance.

That said, silver is quietly up about 20% from its late December lows.

position in SLV

Bullish Pattern Resolution

The bullish reverse head and shoulders pattern forming recently in the equity indexes has indeed resolved to the upside.

The action hasn't been voracious out of the set up, but the tape has a persistent 'buy the dip' tone. Now that SPX 1280 has been cleared, this move technically 'works' to 1360.

I remain slightly net long (long commodity ETFs against short equity index). Should commodities continue to lift with stocks, I'll look to piece out of long exposure and add to my index short.

position in commodities, SPX

Why Wealthy People Own Gold

Straightforward explanation of why wealthy people own gold. The key point here is that the primary reason to own gold (in its physical form) is not to speculate in near term price moves.

Instead, wealthy people own gold to preserve their wealth against problems like inflation, bank collapses, and aggression.

Viewed thru this lens, owning gold is less of a 'buy-and-hold' investment strategy and more of a buy-and-will-to-the-next-generation family wealth preservation strategy.

Inverse Head and Shoulders Pattern

Back in early November technicians were eyeing the pennant patterns forming in the major indexes, and largely opining that the resolution of that pattern was likely to be higher. As we now know, the bulls were fooled as prices moved lower.

Now, technicians are eyeing a forming inverse head and shoulders pattern with similar optimism.

Will Hoofy's heros bring home the bacon this time? That seems to be the growing consensus.

Personally, I'm not playing it that way. There is far too much macro overhang for my tastes, not to mention overvaluation at the micro level, to merit holding a bunch of long equity risk.

Am currently about 10% net long, but that long exposure is in commodities. It is offset not quite one for one with an index equity short. This hedged position has not proven to be as effective this time around because of recent weak commodity performance relative to stocks.

Currently, however, my MO remains the same. Use price to my advantage to a) add exposure at lower prices and b) unload exposure at higher prices. All the while, I want to maintain sizeable dry power (read: cash and short term fixed income).

position in commodities, SPX

Lightly Buying

Buying some gold and silver this am into the continued smeltage. Support is coming up fast. Stochastics getting there as well. Stated differently, risk/reward is getting more attractive.

Nothing crazy, just some incremental adds. Truth be told, would welcome lower prices for more substantial buying.

position in GLD, SLV, CEF

Gold Moving Lower

Never got off a comment last week on the head-and-shoulders (bearish) pattern setting up in gold. This morning gold is down nearly $50, which essentially validates the 'dandruff.'

Why the thrust downward in the yellow metal? Not sure, cookie, as there is no 'obvious' gold-related news on the tape. Over the weekend, however, there were some rumblings that last week's EU summit outcomes 'did not go far enough' in resolving the debt crisis. Swap spreads are generally widening today, with Greek spreads crossing the 10,000 bps mark--implying a 100% chance of default.

Am starting to sense that gold may be a leading indicator of another round of 'risk off' in the markets. Added to my short equity position this am, and may do more in the upcoming sessions depending on how things unfold.

position in GLD, SPX

Durable Rally, or Short Term Relief?

If we were to assign news-related causes to today' 2-3% stock market rally, it would probably be a blend of better than expected Black Friday sales plus the spectre of (another) Euro bailout. Of course, we learned today that a) the IMF had no Italian bailout program in motion, and b) last week's retail sales numbers may be greatly exaggerated.

So perhaps today's move is just one more rally to blow off some near term selling pressure.

Technically, an upside move 'works' to SPX 1220.

Other technical evidence, however, is not in synch with a sustained upside move. After an early move lower, Treasuries recovered most of the day's losses. Bank stocks gave up a big chunk of their early gains. The dollar also closed near even after early selling. Oil closed near its lows.

Hard not to view these 'divergences' with some skepticism about the prospects for big upside from here. Time will tell, of course.

Personally, I did a whole lot of nuttin' today. Will likely put back on some of the incremental short exposure ditched last week should prices continue higher toward 1220. Other than that, I continue to be active in the physical metals market, buying both gold and silver.

position in SPX, gold, silver

Cash Rich, Balance Sheet Poor

Interesting weekly comment by John Hussman, particularly the back half devoted to corporate balance sheets. Many bulls claim that corporations are 'flush with cash' and that corporate balance sheets 'have never been stronger.' As Dr J demonstrates, these claims have little merit.

When compared to the amount of debt on corporate balance sheets, cash has been coming off historical lows. Cash as a fraction of net worth and total assets is also small (in the 5-10% range).

As such, much of the 'cash' on corporate balance sheets comes from debt. Corporations have been building cash in this manner due to cheap financing terms.

Make no mistake, the dominant feature of today's corporation continues to be debt and leverage, not cash.

John also comments on another eye-opening trend: the decline in tangible assets in non-finance corporations. The fraction of tangible assets to total assets is now below half. The remaining assets are financial assets such as debt securities and stocks.

As John notes, "This is striking, in that we presently have a menu of prospective returns on financial assets that is among the most dismal in history."

This is another argument for tangible assets (e.g., commodities) over financial assets, and for companies that are weighted toward more tangible assets.

position in commodities

Flag Pattern Resolved

Last week's question about which way the pennant pattern in major market indexes would break has been answered. The pattern has resolved to the downside.

The reason being assigned to the rhyme this morning is the budget supercommittee's (gotta like that term) failure to come to an agreement over $1.2 trillion in spending cuts. No deal inked by Wed means across-the-board cuts of like amount commencing in 2013.

This sets up the 2012 elections as a referendum on Big Govt.

Of course, other issues are weighing markets as well. Europe is still on fire, and fallout from the meltdown of MF global is wreaking havoc in commodity markets.

Personally, am leaning slightly net long--about 5-7% of liquid assets. In other words, the value of long positions (primarily commodities) outweights the value of short positions (SPX index short) by a small amount.

Should stock slippage continue another 30 SPX handles or so, I'll start looking to cover some of my short position (support resides in SPX 1120-1140 range). With precious metals getting slapped around today (gold and silver both off 3-4%), am itching to add to those positions as well.

positions in SPX, gold, silver

Bullish Silver Pattern

Silver appears to be tracing out a cup and handle-ish pattern. Added to my SLV position this am and may add a bit more around here.

Should SLV start to 'fill the gap' precipitated by the mid Sept meltdown, then a trade 'works' to 38ish.

position in SLV

Ags Look Interesting

Have been adding to my agricultural commodity position (RJA) over the past few days. From a technical standpoint, looks like a multi-month reverse head-and-shoulders to me w/ a gap directly above (gaps tend to be magnets for price).

From a fundamental/macro standpoint, we've waxed about the bullish set-up in commodities before (dollar heading to dust, capacity not keeping up w/ demand, gov't policies that favor famine).

As such, I'm digging this for the long side of my hedge book.

position in RJA

Minding the Gap

Bought some DBC early last week when prices were falling into the abyss. My thought was that if markets reversed higher, then this might be good for a trade up to about $28.

Why $28? Because once prices broke below that level last month, $28 defines a formidable resistance level. In the context of technical analysis, resistance defines a price level likely to retard further price advances due to the presence of latent supply--such as all those people who bought around $28 early last month and are now trying to get out at a price that lets them come close to break even. Short sellers may also lean on this level and sell come shares short with tight defined risk (i.e., if prices go north of $28, then shorts consider that as an indicator that this was a bad trade, and subsequently stop themselves out).

Moreover, gaps similar to the one that reflected the price breakdown in mid Sept often serve as magnets if/when prices retrace. Indeed, there's a saying among technicians that 'all gaps are meant to be filled.'

To add one more tidbit of rationale to my DBC sale, short term stochastics (e.g., the MACD shown above) were looking pretty toppy, suggesting an 'overbought' condition in the near term. Markets tend to ebb and flow between optimism and pessimism on multiple time frames; presently we may be approaching an excess of optimism in the near term.

As such, when DBC lifted into the gap area today, it was time for me to go.

no positions

Late Day Reversal

Markets continued to sink on the opening bell this am. An hour or two into the day, I felt a tinge of remorse after unloading my short position yesterday.

Weakness continued until late in the day, when chatter surfaced that the European officials were creating a 'bad bank' entity to dump troubled securities tied to the sovereign debt crisis in the EU. In the final 45 minutes of the trading day, markets went from being down 1.5% to being up 2%. The SPX recaptured the 1120 level and had nearly a 50 handle intra day range.

Naturally, any remorse still pulsing thru my veins suddenly vanished.

Coupled with reclaiming previous support, the long tail pattern on the charts suggests a 'flush' and perhaps a near term low. Add to that my growing sense that sentiment was getting pretty ugly (e.g., I got a call last night from a distraught friend who was down big and wanted to sell all of his stocks), and perhaps we have the makings of a durable rally.

I do know that I'm in no hurry to re-engage on the short side right now. Would rather sit back and observe for a bit.

Did nibble on some DBC this am as commodities have been getting hammered and many are sitting on technincal support.

position in DBC

SPX 1120 Support Decisively Broken

The battleground support level that was SPX 1120 finally gave way today in a significant way, with the index spilling lower to about 1100 by day's end. Technically, the 1025-1050 provides the next substantial layer of support.

I unwound my short position into this move. Covered about half into the initial break into the 1115 area and the remainder into the thrust toward 1100.

Why cover it all here? First, for me shortin's hard mon, even when I'm using it as a hedge. Was starting to worry over the position a bit too much and, after this thrust lower, felt prudent to take the position off and look at the situation with fresh eyes tomorrow.

Moreover, some measures of sentiment point toward extreme near term bearishness. It would not take much news to ignite a pretty strong short covering rally.

Should stock melt lower from here, I'll be looking to put on some long side risk for a trade. Should we rally, I'll likely look to re-engage the short side to some degree.

With my hedge off, I'm currently at ~15% risky assets (CSCO, scattered commodities) with the remainder in cash. Yes, I feel a bit 'naked.' But something tells me that this feeling won't last long.

position in CSCO, GLD, SLV, RJA

Doctor Copper

Copper is often referred to as 'Dr Copper,' because it is said that the metal has a PhD in economic activity. The metal has so many uses that copper prices are thought to be a valid forecaster of economic strength.

What is Dr Copper telling us right now?

no positions

Venezuela Siezes Gold Mining Companies

Venzuela is nationalizing its gold industry. This is one of the big risks with owning natural resource companies in general and precious metals miners in particular.

Political risk looms large in this sector.

On the other hand, the physical commodity itself does not carry political risk--at least of the kind that amounts to expropriation of producer property.

position in gold 

How Weak Currency Initiatives Could Hammer Gold

Fil Zucchi shares an interesting thesis that actions by central banks to weaken currencies could put downward pressure on the price of gold. This is counterintuitive because interventions to weaken a currency are typically viewed as bullish for gold.

Because there is building political pressure against weakening a currency via money printing, Fil posits that central banks might sell some of their gold reserves, and use the proceeds to buy foreign currencies (forex). Price of forex would rise, and domestic currency would weaken as per the objective.

I hadn't given this scenario much thought but I do think Fil has an interesting angle. Domestically, the Tea Party movement and other social awakenings seem to be sensitizing the public about the dangers of money printing by the Fed and other central banks. By selling gold to weaken the currency, central banks can achieve their goal in a politically expedient manner--i.e., they cannot be accused of pure money printing to manipulate currency cross rates.

Should such actions occur, it would almost certainly drive the price of gold lower. How much lower and for how long would be anybody's guess. What we do know is that central banks could not engage in this operation indefinitely as they would run out of gold to sell at some point.

Fil notes that, while the selling of gold by central banks would be bearish for gold price in the near term, it would likely set up a very bullish scenario for gold at some point. Once central banks deplete their gold, then the only way to continue currency debasement (which is the heart and soul of central banking) would be to crank up the printing presses full force. At that point, 'big inflation' would be en force; gold would be situated for a moonshot increase.

It would also constitute a sort of poetic justice, since gold will have left government hands and landed in the hands of the people--where it naturally belongs.

Like Fil, I'm currently out of 'paper' gold and silver, having sold the last of my trading position in SLV last week before ensuing price weakness (better lucky than smart). I do maintain exposure via my physical metals position--a position that I do not plan to sell.

Meanwhile, I'm going to watch gold price from the sidelines for a while, and look for evidence that Fil's thesis may be playing out.

position in gold, silver, USD

CSCO Double Bottom?

After being up a percent then down more than a percent in the premarket, futes turned around and went green, thereby facilitating a gap higher at the open. The indexes pretty much never looked back and once again we saw a 5%ish range. Close: Dow +423.

I believe that makes 5 consecutive days where major indexes have ranged 5% or more.

Lots of folks suggesting that yesterday's melt constituted a successful retest of Monday's low--meaning that the worst of the selling is past.

Perhaps. My sense is that there is big leverage that wants to leave the system. As such, I want to sell rallies.

Consistent w/ yesterday's plan, I nibbled in some SPX short into today's rally. Also but a little SLV.

The big gainer today was Cisco (CSCO) that bolted about 15% higher on a better than expected earnings report.

While other stocks have been retracing some of their gains off the 2009 lows, CSCO has made a round trip. With the selling earlier this week, CSCO has basically given it all back during its recent decline.

Now, with today's big move, it appears that CSCO may have put in a classic double bottom. As always with technical analysis, it will look 'obvious' with hindsight.

position in CSCO, SPX, SLV

Just another 500 or so pt range day in the Dow today--all of it to the downside. Premarket futes starting heading south on chatter that one or more French banks were in trouble. After the opening bell, markets lost 300-400 Dow points before an afternoon rally closed the gap to about -100.

But then that rally totally fell apart, such that markets knifed thru the intraday lows on their way down in the last hour. Closing bell: Dow -519.

The market's dynamic is readily felt when assuming a trading mindset. Stocks are generally going down easier than they are going up. The temptation is to short 'em, but not only are we deeply oversold but there is also intervention risk, such as a local or worldwide ban on naked CDS sales.

Bottom fishers keep buying stocks at what seems to be 'low prices' only to get their heads handed to them when the indexes break lower in monolithic fashion.

This keeps the shorts out and the longs trapped in declining positions--a wholly bearish situation.

Also, let's keep in mind the background macro picture which portrays a massive deleveraging event underway.

As such, my inclination is to look for short side entries. The first situation I'll consider is if we happen to open green tomorrow. The risk, of course, is that we scream higher and don't look back. That's acceptable to me here given that I'm still long some stock (e.g., CSCO, MSFT).

At any rate, my general game plan as it stands is to sell rallies.

I'm also interested in adding to my SLV position. There has been a big disconnect between gold (moonshot) and silver (sold but trades relatively firm) during the past week. Clearly, market participants are wondering whether any paper currency will be worth anything--and until they do that they're piling into gold (as they have for thousands of years). My sense is that silver may play some catch-up here.

position in gold, CSCO, MSFT, SPX, SLV