King always does a good interview and gets the best guests. Listen here to his interview of the Swiss fund manager.
Hard to deny there’s a bearish pattern here:
The precious metals have ambivalent correlations with stocks these days, so I’m not sure what the above means in the scheme of things, other than the commodities echo bubble slowly deflating. Sometimes the metals are high beta, sometimes negative, and sometimes they seem to have no correlation at all.
Checking the 15-min bar chart, copper and oil are not looking too spirited.
And copper, same scale:
And of course platinum and palladium are looking busted. Daily charts here.
The technical damage in these metals is probably not a good sign for gold and silver either.
Silver’s daily chart leaves a thing or two to be desired:
Today I’m going to lay out what I’m watching for clues about the intermediate-term prospects. The action of the last 4 weeks has been more suggestive of a reversal than any we’ve had since the March 2009 lows. However, even if a top is in hand and we are finally at our spring 1930 moment, I’m not willing to throw caution to the wind and discount the possibility of another few weeks of rally.
Let’s start with the 5-day average equity:put call ratio, which has nailed so many intermediate-term tops, not least of which this last, which it suggested would be followed by a serious decline:
The put:call ratio could use a bit more of a reset, which could be achieved by just a few more days of calmer or rising markets. Nothing major required here, just a pause.
This break has shaken up a few traders, but judging from interviews this week, the majority remain fairly sanguine about a continued bull phase and consider this a healthy correction, much as they did the first declines off SPX 1550 in late 2007 and early 2008. Also, the past year has established a very clear pattern of modest declines followed by new highs on extreme bullishness. Traders and their machines may be programmed to buy this dip, but with the recent technical damage (we busted the last low for the first time in the whole rally and experienced a mini-crash) I’d expect any rally to be relatively shallow.
There is a pattern of reduced oomph on each subsequent rally phase, which you can see in the diminishing slopes of each rally. You can also see the weakening of the larger trend in the angles between subsequent lows. (Click to enlarge the image.)
I’ve drawn those ovals on RSI to show a technique I have for picking bottoms. It gets most intermediate term bottoms, and perhaps more importantly, it has a low false-positive rate. A rally becomes likely when you get a double bottom in RSI. This works on any scale you chose, from 1-minute to daily or higher. The likelihood of a rally increases if the second bottom on RSI is higher than the first. This is common because the middle wave of a decline is usually more intense than the final wave.
Now, this current juncture has such a double bottom signal, though the second RSI bottom is not higher than the first. It is also trickier because the first was formed by the latest black Thursday, May 6. I’m not sure how such an event should factor in, but it throws off our analysis somewhat. Perhaps the May 6 event should be discounted (it was really just 1 hour of trading that produced the reading) so that we can’t actually count this RSI bottom as a 2nd.
In terms of time, we’re just over 4 weeks into the decline, which is approaching the average for an intermediate-term decline over the last 3 years (the last one was very short at 3 weeks, and others have lasted up to 8 weeks).
Also of consideration is the extreme complacency that we are correcting. Look again at CPCE in the first chart above. From what I can tell, it set a record for complacency going back to at least the year 1999. This suggests we may have more decline ahead before an extended relief rally. Sentiment has turned negative, but not overwhealmingly so, and it has only been negative for a couple of weeks, so this is not a contraint to a further decline.
One more consideration is the 1930 parallel. Once stocks broke that April after their rally from the crash of ’29, they failed to rally hard for years. The decline was steady all the way down to the bottom in July ’32. In this analalogue, we would have another week or so of choppy and weak rally, followed by the bottom falling out, an outcome that would elegantly resolve our situation. The dip-buyers pile in, but the oomph is gone, momentum weakens and RSI turns down, then BAM, we’re back to SPX 750 this summer.
I am approaching this situation by being neutral on stocks at the moment. I am holding a core position in December 2011 and 2012 SPY puts and some calls I’m short on IYR and GDX, though I sold a portion of the puts on Tuesday morning and and the rest are hedged with a short in VIX futures (I do this because spreads on options make them costly to trade in and out of). Essentially, I’m flat on equities.
I closed a ton of shorts from last Thursday to Tuesday morning, and went long SPX, ASX and Nikkei futures (and long CHF, EUR, GBP and short JPY and VIX) early this week when I saw divergences in the VIX, currencies and commodities (ie, stock indexes made a new low that was not confirmed with new extremes elsewhere, a buy signal) as well as a glaring RSI divergence on the hourly scale. Those “long risk” positions I closed for profits on Thursday and Friday, since we’ve already corrected the extreme short-term oversold condition and are in neutral territory. Equity-wise, I ended the week where I was on Tuesday morning, since the drop in volitility hurt my puts as much as my various longs made me money. Vol is a bitch that way — sometimes you time prices right, but it’s not enough.
Speaking of the VIX, I think it could settle down for a few weeks, though to a higher level than in April, before the next decline pushes it up again. I think it will remain elevated (as from Oct 2007 onwards) for many more months or a couple of years:
In the commodity space I’m even more convinced that a major top is at hand, since some trendline breaks have been decisive (platinum, palladium, oil) and the declines have been so violent all around. Commodities tend not to rally as hard as stocks once the trend changes to down, so I entered shorts on oil, silver, gold, palladium and copper near their highs late in the week. The precious metals are looking particularly suspect to me here, and I still think my July 2008 double top analogue is in play.
The euro, Swiss franc and British pound are still looking very weak. Sentiment has been in the dumps for four months now, which is a set-up for a spectacular rally, but judging from their heaviness this week as stocks and commodities and CAD and AUD rallied, I think they may slide to one more low before that rally.
SPX futures are looking wobbly, and gold and silver are looking downright weak. I took profits on my equity, euro, CHF and GBP longs and JPY short and have built a modest short position in crude, copper, silver, gold, palladium and GDX (gold stock etf).
Here’s ES as of the open (1-hour scale). A set-back today may be likely, but I would still probably expect stocks to recover and inch higher a while longer. RSI is weak on a 5-min scale but still strong on the hourly.
From Yahoo! Tech Ticker last week. Lots of market talk, then Prechter makes the case for truly free banking, in which banks could decide for themselves what to use as money. He beleives that most banks and savers would chose gold, as they have for most of human history. The first segment below is mostly on the markets — the comments on the Fed are in the second:
EDIT: Sorry, I didn’t realize that there are actually two segments to this interview. The comments on the Fed are in the second half:
At the end, Prechter makes a key point about the gold standard: it is not a free-market solution, because it is a “standard” set by the government. Essentially, a gold standard is redeemable paper money, but as we saw in the early years of the Federal Reserve (and actually in older times with many other central banks), the exchange rate between paper and specie is set by the government. Paper money remains legal tender and the primary unit of account, so citizens are forced to use it and the banking cartel can still inflate.
A much better solution is no standard at all. Under such systems, the unit of account was typically a weight of gold or silver. Hence the British pound sterling, which was exactly that (sterling is 92.5% pure silver). Under these systems, there were safe banks that earned money by simply storing metal and clearing payments. Interest was low, but inflation was lower or negative, since the growth of human productivity from improved infrastructure and technology meant that goods and services became more abundant over time, while the money supply grew only as fast as new gold was mined.
This is why the price level fell steadily during the 1870s in the US while the economy grew at its fastest pace in history, and why the price of a postage stamp in England remained the same for 100 years, even as the country grew rich. There were booms and busts and banks failed, but because even big ones were allowed to fail, bubbles remained contained and the busts freed up capital for productive uses.
Such periods will come again. This is not the end of civilization, just the end of a long credit inflation.
Fleckenstein makes excellent points about the “jihad” against the bullion banks, explaining the ridiculousness of the GATA-type theories. He points out that they are often net short futures simply to hedge their long positions in physical, and that lots of people who work on those desks are PM bulls. He knows a few market makers at the big banks, and says they have been bullish all the way up.
Despite the supposed manipulation, gold is up 4-5X since these theories took hold in force. Why haven’t the supposed shorts “blown up”? As for the central banks, they thought gold was worthless and sold tons near the lows, but now they supposedly think “it’s so magical” that they have to keep the price down?
The futures manipulation theories are just a “loser’s lament,” as Jim Grant says. Get this: he says that big-time short seller Jim Chanos is on the PPT! I can’t confirm that, but would be very interesting and put to bed a lot of nonsense if true.
The discussion of manipulation starts about 3/4 of the way through (to jump to it, place the marker over the “t” in Fleckenstein).
Fleckenstein seems to be a huge silver bull, expecting physical demand to soar. He entertains the possibility of silver reaching some “silly” price level. The wealthy have not taken big physical positions in silver, but if they did, the market could go “wacko.”
Also discussed: the US health care bill, inflation, bailouts, Greece, and home foreclosures.
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.
- 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:
- 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.
Very high sentiment readings last week, up to 20:1 bulls:bears. Quite a change from a few weeks ago, when traders were bearish by 4 or 5 to 1.
If the tide is turning back to the deflation trade, expect a rout in commodities like the second half of 2008. Yes, gold rose as stocks and other commodities fell last week, but it did the same thing when it first broke $1000 in early 2008 as stocks fell into the Bear Stearns crisis. The corellation with stocks could easily switch positive again as it did in ’08.