Tag Archives: charts

Some highly scientific projections

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S&P 500:

That’s not a projection for a final bottom, by the way… that would be lower.

Gold, from 1971 (Richard ”I am now a Keynesian in economics” Nixon):

Note: Under Bretton Woods, the dollar of course was pegged at 35 to the ounce from 1933 to 1971.

Gold has been in a parabolic move since ’04, and the degree of speculative interest got high enough to call it a mania, just like every other asset class this past decade. It is money, though, so although I expect some frightful drops, on the whole gold will preserve your capital through the mayhem. The high inflation that everyone has thought is right around the corner since 2007 could actually happen several years from now after enough debt has been wiped away to end deflation. In that case, history says the best assets could instead be real estate (leverage!) and agricultural commodities (government-induced shortages). *Professor Jastram showed that gold, as a form of money, doesn’t do as well in real terms in inflation as most people think, though it sure beats paper money during high inflation.

Remember, 1980 – 2001 was an inflationary period. So was 2001-2008, so go figure — I figure gold did well in the latter inflation because there was a commodity mania. Since 2008 you could say it has been strong for the “right reasons” – financial panic and deflation. That said, it still gets ahead of itself and does tend to fall with other commodities when the margin loan department calls.

US Dollar Index:

More deflationary panic ahead — what’s so great about all the other fiat currencies? Why is everyone so afraid of the dollar? Answers: nothing, and because it fell for 7 years.

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*Here is a free paper by Jastram I found on Scribd: The Behavior of Gold under Deflation

Distribution time

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Markets have rebounded feebly from their early November bottom, with speculative interest focused in fewer sectors than in earlier risk binges. The hot money is now concentrated in big-cap US stocks over small-caps, and in gold over silver, reflecting a shift in preference for quality over junk.

With upside momentum taking a breather, we’re in another distribution zone, where assets move from early buyers to late comers. The put:call ratio, my favorite indicator of complacency, has backed off its recent highs and could approach the extreme lows we’ve seen recently if stocks remain at these levels for a few more sessions. That would be another excellent short-entry signal.

Souce: indexindicators.com

Here’s the last month of trading in the December S&P 500 futures contract:

Source: Interactive Brokers

If precedent holds, we could chop around up here for another week or so and test the highs a couple more times before rolling over. What’s important is that we have made no net progress for three trading days, and that we have a clear stop for a short position.

The moonshot in the Dow has not been confirmed by any other indexes, though a few of them have made minor new highs. The Russell 2000 remains the laggard, remaining well under the October and September highs. The Nikkei is similarly weak, and crude oil has just been working its way down a channel:

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I also suspect that gold’s run is over or nearly so. I’ve never heard so much talk of gold on the financial news and in other contexts. 19 traders are bullish for every bear. This is about as lopsided as it gets, and we’ve had a huge parabolic rise. It is hard to nail down where these ramps will end, but like oil in 2008, when their momentum stalls, they can fall extremely fast.

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For another take on things, here’s the ratio of gold to the US dollar index:

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Clearly the above trajectory is unsustainable. This is the kind of market action that draws everyone in and forces most shorts to cover. When that process is over, an asset can fall under its own weight. Conversely, the most fear and despised currency appears due for another bull run in 2010, in large part because of all the new debt that has piled up this year in the corporate bond frenzy and renewed carry-trade (borrow dollars and buy anything).

That said, gold should continue to outperform most every other asset class for years, since as professor Roy Jastram showed, its purchasing power increases in deflation when there is a gold-standard and when there is not (it is money, after all).

Watch out for the dollar

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UUP (dollar bull ETF) and SPY:

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Bonds were also up today, of course. Given the extreme degree of consensus we saw during the latest highs in stocks and lows in the dollar, today’s rally could be nothing more than a standard correction (at 40-odd percent, that is all the retracement is so far). It was to be expected (I went long SP futures and QLD Friday to hedge dollar longs and my equity and silver options). The test is whether we break to new highs on new reflation impulses. Precious metals, copper, oil, bonds and currencies say, “don’t press your luck.”

Still rolling over?

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At the moment, everything is still up in the air, so to speak. The rollover into the sub-950 range is still on the table, since a bounce like the last 24 hours on weak internals (such as an advance:decline ratio of well under 2:1) should surprise no one. Despite the lack of oomph here, it is still possible we drift to new highs. I’m sticking with a bearish stance until we see some more strength and breadth on the upside. A sharp drop to fresh lows in late US trading today or tomorrow would not surprise me, and this chart provides a nice stop in case that does not pan out:

Interactive Brokers

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Meanwhile, the zig-zag action in the dollar since Monday looks corrective, maybe a wave 2. Sentiment remains highly bearish on the dollar in the face of a pretty sharp rally. Silver completed a brutal $1.70 drop over 5 days, but everyone still loves it. Oil is conspicuously not making new highs here with that storm out there. Nice short set-up there, since you’ve got a ready-made stop just above these levels.

Copper also seems to be losing its mojo, and is potentially on the verge of a very sharp fall after this sideways correction. Also a nice stop there. Did you read about how pig farmers and other Chinese are taking out bank loans to stockpile tons of the stuff? Now if that isn’t a productive use of credit, I don’t know what is.

Credit spreads (junk vs. quality and corporate vs. Treasury) continued to widen yesterday, further undercutting the integrity of the bounce in equities.

What should worry the bears a bit is the oversold condition in Chinese equities, down 20% from their peak a few weeks ago. But then India’s bubble is just as big and they’ve not dropped nearly as much.

Safest route here is to short with a tight stop or sit in cash. Longs are just tempting fate.

Phew, the storm has passed…

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5-year view of positive-only maximum values for the NYSE TRIN* here:

Interactive Brokers

Boy, that squall just came out of nowhere, didn’t it? Thank god it’s behind us… looks like smooth sailing from here on.

I thought it was kind of neat to see this faulty, positive-only TRIN chart, since it highlights the really bad days. Here’s the complete picture of daily TRIN readings (3 years):

Stockcharts.com

Notice the symetry that forms over time: action and reaction. This picture is looking pretty lopsided at the moment, reflecting a very highly overbought market.

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*TRIN is a measure of breadth, useful for gauging the intensity of advances and declines.

Formula: (Advancing Issues / Declining Issues) / (Advancing Volume / Declining Volume)

When lots of stocks move together and volume picks up in the direction of the movement, you get a strong TRIN reading and you know that the movement could be more than just noise. Moving averages help you to identify overbought and oversold conditions.

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TICK

TICK* is usually considered a day-trader’s tool, but its longer-term moving averages are very information rich. It is a tool that would have helped keep you on the right side of the market for the last 24 months:

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Look at how useful the MACD has been. Very nice pattern here since the start of the bear market. From an overbought condition it gives a sell signal on a downward cross of the zero line. Once that is followed by a countervailing move large enough to reset momentum, the return to the zero line gives the signal to tighten up stops and a cross with gusto gives a buy signal.

Right now we’re at the zero and pointed down.

*TICK: Downticking stocks (hitting bid) minus upticking stocks (hitting ask) on the exchange at a given moment.

Pretty Chart of the Day: Gold in Various Currencies

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Thanks to Lance Lewis at Minyanville for this image:

Mr. Lewis is an inflationist and gold bull, and his sentiments here pretty much sum up the mainstream rationale of that species: “Gold’s bull market isn’t just a weak-dollar phenomenon. It’s a function of inflation, just as oil and other commodities.”

To which I reply, gold’s bear market isn’t just a strong-dollar phenomenon. It’s a function of deflation, just as oil and other commodities. This applies in all currencies, as the credit crunch is global, just like the bear markets in stocks and real estate.