Stock jitters, Gold and JPY still compressed

Gold and the yen each worked still lower this week on highly depressed sentiment readings. Each of these has had a negative relationship with the “risk trade” lately, falling as stocks have rebounded from their oversold and overbearish condition of mid-November. Now, stock sentiment has recovered to neutral territory, and traders are afraid of these sometime “safety trades.”

Trader opinion gold has been very low since late October, a full eight weeks ago. Every similar instance in the past several years has been followed by a substantial multi-week rally. That said, if the bull markets in precious metals and the yen are indeed over, we should expect downtrends to become more protracted, with sentiment remaining low for longer.

Here’s a 1-year daily chart of gold:

1-year daily JPYUSD:

I’m holding to a thesis that the risk trade is topping out here as the US slides into a recession that remains largely unrecognised. Tops are rarely sharp peaks, but consist of several months of choppy sideways action during which sentiment deteriorates from giddy to nervous and the VIX picks up even before prices have fallen substantially. I view the rebound since mid-November with that context, akin to the action of April-July 2011 or pretty much all of 2007.  Last nights mini flash crash in stock futures fits into that context of a increasingly jittery market.

We’re three months from the 4-year birthday of the (presumably) cyclical bull market. It is now older than most cyclical bulls within secular bears, though the last bull phase lasted from March 2003 to October 2007, 4.5 years.

Another cyclical bear and a recession and drop in corporate earnings may finally compress multiples to the investable levels required to build a solid base for another bear market. I don’t expect this to happen quickly, though, since prices have a long way to go before we see anything that can be called historically cheap. I wouldn’t be surprised to see stocks hold at or beneath current levels for the rest of this decade as inflation creeps in towards the end and boosts earnings, as happened during the latter stages of the last three secular bear markets (roughly the 1910s, ’30s, ’70s).

VIX & Put:Call starting to make puts attractive again

A fair degree of complacency has snuck back into markets over the last month.  We don’t have a strong sell signal in stocks yet, but if April marked the high in US and European markets and economic indicators are turning down again, this could be a good spot to start building short positions again:

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Here’s the equity put:call vs the 20 day moving average, back to one standard deviation under its mean. Dipping lower would require the kind of extreme complacency that we’ve only seen twice in the last decade, so I wouldn’t count on it:

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The dollar has also corrected its overbought condition (and is actually very oversold), which is key for a resumption of the deflation trade:

Do we finally have an intermediate bottom in the euro and franc?

Last night’s sell-off in risk brought new lows for the euro and Swiss franc, though no other currencies made lows vs. the USD. Now with today’s rally, EUR and CHF have spiked very hard. This jumpiness and the presence of an upslope in RSI bottoms on the hourly chart (and the fact that June would be month 5 of extreme bearishness), suggest that a relief rally could be forming. I would not be surprised by $1.28 for the euro and $.91 for the franc. As usual, I’m not counting on it (the daily chart would look better with a deeper low), but we do have the formula for a short-covering rally.

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Here’s the 4-hour chart of the franc. There is a strong buy signal here, as the new low was made with very weak selling according to RSI, which stayed in its uptrend.

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You can see on this daily chart that there is no strong RSI buy signal like there was 15 months ago:

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A sharp rally here would likely coincide with rallies in stocks and commodities, but I can see the a scenario in which gold and silver do not participate or even fall as everything else rises.

Also, I’m still long-term bearsh on Japanese yen, and this price does not seem like a bad entry for a short (I put one on at $0.01104 this AM, and also shorted Treasury notes for a short-term trade to balance the odds of a rally in stocks & commodities).

Swiss franc and euro look long-term weak, but extremely oversold.

Note the lack of divergence in RSI this time around, compared to late ’08 to early ’09 when CHF and EUR were preparing to rally (see my red arrows on the bottom of this chart).

This suggests that any rally that develops here (and I suspect that one will soon, since they are very oversold on several weeks of dismal trader sentiment) will not be as strong as what we saw in 2009, and that King Dollar is going to reign for a long time yet. Click the chart to enlarge:

TD Ameritrade

Swiss franc oversold and overbearish vs. USD

The franc has taken a beating against the dollar, since it pretty much behaves like a slightly harder euro. Here is an hourly chart (click to enlarge):

TD Ameritrade

Sentiment readings have been super bearish here for a couple of weeks now, so we’re set for a reversal. At the least, going long the franc is not a bad way to hedge a portfolio that is long-term short risk (stocks, junk bonds, commodities).

Jim Rogers discusses his euro long and stock shorts

I happen to have similar positions at the moment, though unlike Rogers, I’m a bear on commodities and China, which he seems to be perpetually long.  Here’s today’s Bloomberg interview.

Take-aways:

- Long euro as a contrary position. Too many shorts out there.

- All these countries (Spain, Portugal, UK, US) are spending money they don’t have and it will continue.

- ECB buying government and private debt is wrong.

- EU is ignoring its own rules about bailouts from Maastricht Treaty.

- Governments are still trying to solve a problem of too much debt with more debt.

- Fundamentals are bad for all paper currencies. Good for gold.

- Is “contagion” limited now? Well, for those who get the money…

Here’s a longer interview from a few days ago on the same topics as well as stocks:

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- Rogers has a few stock shorts: emerging market index, NASDAQ stocks, and a large international financial institution.

- Rogers owns both silver and gold, but is not buying any more. He’s not buying anything here, “just watching.”

- Optimistic about Chinese currency. Expected it to rise more and faster, but still bullish.

- Thinking of adding shorts in next week or two if markets rally (my note: they have now).

- “Debts are so staggering, we’re all going to get hit with the problem,” no longer just our children and grandchildren.

Long Euro

I’m not a believer in manipulation, so I’m not counting on the central banks of the world to drive down the dollar. It’s as simple as 2% bulls: as of late last week there were 50 euro bulls for every bear. I always like to be the lone nut.

EUR.USD is looking very oversold at the moment by RSI, also. I’m still a long-term euro bear and would not be surprised by parity or $0.85, which actually looks all the more likely now that euroland is going to print away to relieve its banks of their bad bets on GIPSI bonds.