Saturday, November 28, 2009

Today The World Believes The Word - "Reschedule" Translates Into "Default".



Whether Dubai debt is just a catalyst and excuse for profit-taking, something more fundamental, or a set-up for to trap the majority of fund managers sitting fat and happy and waiting for the obvious trend higher, doesn’t much matter at this point -- it is what it is. The trigger for an unwind of the dollar carry/risk trade has been squeezed off. And isn’t it special that the "redistribution" of wealth trade occurred while the US was stuffing its face.
The telltale sign that not all was right with the world was the inability of our markets to capitalize on the "breakdown" in the dollar on Wednesday. Moreover, the Dubai world-standstill was in the news on Wednesday. Was The Fuse, a distant cousin of The Hand, at work? The standstill was in motion and carefully planned, not a kneejerk move. Were the last two weeks of sideways action at 1111 what Gann would have called "time on the side"?
And, what it is, is the magic axis of the 1111 square out.
It is what it is -- and what it is, is the fact that while the trading world may have felt "safe" in assuming that the markets were buoyant to up at least until the S&P had satisfied its 50% retrace of the bear at 1120, the S&P satisfied another 50% mark inasmuch as 1111 is 50% of the range from the March 2000 peak of 1553 to the March '09 low of 666. Apparently, the Dow Jones Industrial Average did a "lone walk" up to its 50% retrace. But, as shown recently, the 10,400 level, plus or minus, has been critical for a decade.
Now come the pundits with their rear-view mirrors about how the correction was overdue and how there was no way to know it was here.
But, as you know, there were signs aplenty, and when the weight of evidence stacks up and there's a confluence of time and price harmonics, sometimes stops just don’t work and the market knifes through stops with a vengeance. Like a thief in the night when you least expect it.
The market usually (not always) offers a graceful exit. The snap-back to a marginal new high in November after the break in October was, in my opinion, that graceful exit. Few likely took it. Moreover, more players probably bought into the mindset that stocks were on cruise control into year-end and were waiting for the Santa Claus rally.
However, as you know,1080 months ago in November 1919 -- a key 90 years ago -- the market traced out a blow-off into November and proceeded to sell off approximately 10% into year end. I suspect the last thing that market participants of the time were expecting at that time was a 10% decline into year end.
The most crowded trade -- the most prevalent position and mindset in the financial markets of late -- has been short of the dollar, closely followed by the notion that the markets would melt up or at least mark up into year end. I think that mindset is poised to shift significantly today, with the scramble to protect profits going into year-end coming front and center and overshadowing the buy every dip strategy.
As offered above, the market usually gives a graceful exit: The two-day sell-off from 1111 to 1086 into November 20 was the last exit from Tape Town this year in my opinion.
That decline failed to tag a 90-degree move down from high at 1080/1078. This morning’s breakaway gap to below 1080 suggests the die is cast for lower prices; 180 degrees down equates to 1046; 360 degrees down equates to 980ish and the roughly 10% break that played out 1080 months, or 90 years ago. A momentum gap below that 1 X 1 monthly "tunnel through the air" or one point per month, or 1080 S&P equates to a break of the prior high in September. September 23 and the Autumnal Equinox to be precise -- which was a Key Reversal Day.
A move below 1080 going into the end of the year here suggests the Risk Trade is in trouble as money managers rush to protect profits rather that perceive the sell-off as just another setback and a buying opportunity.
Worth considering is the swiftness at which the market turns when it tags a price harmonic. The low at 666 was a .618 retrace of the entire range from the 1982 to the 2007 peak. The 2002 low was precisely 50% of the 2000 high. Note the low in July, which approximates 50% of the range from 1576 to 666 at 840ish. The normal expectation would be for the market to pullback from the 1111 level. Now what remains to be seen is the nature of the pullback. Will it get to 980/990 or even the opening range for the year at 950ish?
The November 2 low of 1029.40 is a critical level. Trade below that level in December will turn the Monthly Swing Chart down. If the market accelerates on such a turn down should it occur it will be a bearish sign? Keep in mind that 1015ish S&P represents a .382 retrace of 666 to 1576.
We hardly know what the ramifications are and what it means if Dubai is telling the world it wants to "reschedule" debt. But today, the world believes "reschedule" translates into default, and is selling first and asking questions later.

Thursday, November 26, 2009

Fiat Paper Is Crashing Against Gold




As we near the end of the month with gold now closing in on another all-time high around $1200 in US dollars and nearing or already at new all-time highs in all the other G-7 currencies, I thought it was worth pointing out that despite gold appearing “extended” in the short run by any definition, that's what happens during a “crash.” And the ongoing “crash” of all fiat paper against gold appears to be set to potentially accelerate.
Why is the world suddenly hungry for gold and defying the numerous “top callers”? The answer is complicated as always, but when you boil it all down, it really comes down to the fact that gold is the only truly hard currency ( how many times I have to repeat myself ) that can't be actively debased in an attempt to prop up the dollar like the rest of the major fiat currencies.
In essence, the gold market appears to have finally reached a “recognition point” with respect to the global “race to debase” that continues to unfold, as the world's fiat dollar-based monetary system continues to implode right before our eyes.
That's the big picture, but it may be worth pointing out that an opportunity may be approaching even in the short-term for gold bulls to potentially take advantage of.
As you can see above, each leg up in gold and especially in the gold the stocks (GDX) since September has begun on the first or second day of the month, as the dollar index has correspondingly begun a move to new lows.
I can only assume this phenomenon may have something to with beginning of the month investment flows, and make no mistake, it's investment demand that's driving the current rally in gold.
But whatever the exact reason, the fact is that this beginning of the month phenomenon has been a trend, and while gold has obviously never corrected during mid-November as it did during mid-September and mid-October, it's a good bet that the metal and the gold stocks are creeping steadily higher in anticipation of upside acceleration early next week during the first couple days of December, when these beginning-of-the-month investment flows once again hit the market.
We may even get some extra rocket fuel at month end when the 19 million ounces of open interest in the December gold futures contract could potentially stand for delivery this month, which would be nearly three times the amount of gold available for delivery in the COMEX warehouse.
For that many contracts to stand for delivery is always a low probability event, but with the world currently hungry for gold, it certainly wouldn't be all that surprising. After all, December is by far the worst month for the dollar index from a seasonality standpoint, and it's been the second best month of the year for gold over the past nine years of its secular bull market, so to see somebody actually want to take physical delivery next month would certainly make sense.
In any event, the stars seem to be aligning for another leg higher in the gold complex to begin early next week in my view, and this time the gold miners should be the real stars because they have never really discounted the last $180 of gold's rally. We talked about this months ago and now we are here !

Saturday, November 7, 2009

Traps Are Set Before Major Moves.


We trade what we think is the truth based on the time frame under scrutiny. Time bends the truth. Are we trading "the truth" or trading to make money? Opinion tweaks truth -- often monstrously. If we don't trade "the truth" and we make money, should it be considered dirty money? By that I mean, will winning with the wrong approach or strategy come back to haunt you, causing bad habits?
Not if you use discipline. Translation: You can do anything as long as you're disciplined enough to know where you're wrong. Discipline doesn't just equal a stop; it means exiting if the reason that got you in appears to be a shadow and not substance. You don't have to wait around for a price stop to get hit; you can employ a time stop.
Every good move in the market (either up or down) seems to start with a trap or a hook -- on all time frames. Such was the case in the secular bear (US) market from 1929 to 1949. Why do I say legitimate? Because that was the low prior to the advance that led to a new record high over the 1929 high. That was soon after the US government stopped crowding out the private sector, by the way.
Major moves on whatever time frame seem to erupt from traps that catch players wrong-footed -- a breakout puts many traders in the mode of buying all pullbacks, thinking the former thrust will be revisited; a breakdown puts many market participants in the mode of selling all rallies, thinking the former weakness will be revisited.
Markets KNOW this. This is their way of accumulating and distributing and clearing the decks before the ship sails, giving it an easier berth (birth?) as it were. In my speculative skepticism as to the markets, my thinking is that these bull and bear traps don't just happen -- they aren't just coincidences. Put another way, as my dear old dad used to drum into me, “Stocks don't move, they are moved.”

It may not be so much that the Street doesn't believe the Fed last week as much as it is that they realize they're winging it. They may be on this "extended" interest-rate holiday because it was a one-way ticket, and they're trying to get enough bonus miles together for a trip back to reality, out of the cave and into the light. Or, it could be that the market is sniffing out that they are clueless as to the next song in the rain -- after all, who was in the watchtower when Risk threw a riot in the prison yard?
Last Thursday morning, the Street was rife with the sentiment that Fed days that are strong pre-FOMC end strong. I don't know the stats on that but it seems that if the above is correct, then it's fair to say "Houston, we have a problem"; it's fair to say that the notion may be true but doesn't hold up when the trend has turned. This is the second time the market has slipped doing the FOMC Cha Cha. Remember that the September 23 Key Reversal Day was a Fed Day.
The market. 985 S&P or bust?

From the 1101 swing high to the recent low of 1029 is a range of 72 points (72 x 5 points/waves = 360-degree circle cycle). Yesterday's rally high came in pretty much as expected, as shown by the hourly S&P chart in yesterday morning's report, shown here again. And, as you know, 1060 is 50% of the range for the month of October's Doji month. A measured move of 72 points down from 1060/1061 projects to 989. At the same time, 50% of the July/October range is 985.
Connecting the dots from the daily dollar to the weekly shows that while the Street is crowded with dollar bears and chatter of a crashing greenback, when you hold a candle to the cave wall of the weeklies, in reality, the dollar is above a nice base from last year. Is the dollar carving out the mother of all backtests? When you step to the next drawing on the cave wall to peer at the VIX, it looks like a decisive breakout with a backtest over the last few days, which suggests a possible acceleration higher (chart above).

Thursday, November 5, 2009

Gold Could Still Triple From Here.




Gold broke out to a new high yesterday of $1084, and the yellow metal is glittering again today.

More impressively, strategists note, gold prices moved higher on Tuesday even as the S&P 500 ticked up two points and the DXY index modestly rose to 76.3.

What has triggered this headline-making move in the gold price?

For one, the International Monetary Fund reported that it had sold to India 200 of the 403 tonnes it wants to sell this year. All that remains, market pros note, is the prospect for the other 203 tonnes to be sold, with speculation upon China as the eventual buyer.

But strategists point to another, perhaps equally important reason for gold’s surge: fiscal policy in the USA.

Specifically, Peter Orszag, the Administration's Director of the Office of Management and Budget (OMB), delivered a speech yesterday morning at New York University, in which he said that the federal deficit during the current fiscal year will match last year's record high of $1.4 trillion.

But he continues to predict the administration will cut that in half by the end of President Barack Obama's first term.

Is there a relationship between the price of gold and the US federal deficit and the amount of US public debt outstanding?

Apparently there is, says Ed Yardeni of Yardeni Research.

In a client note this morning, he notes that the price of gold has tended to lead the US federal deficit since the 1990s. The 12-month deficit peaked during the previous decade at $332.1 billion during April 1992. It then turned into a surplus of $277.8 billion during April 2001, on a 12-month basis.

During the previous decade, the price of gold peaked at $414.80 on February 5, 1996, Yardeni points out. It fell to $255.95 on April 2, 2001.

"It then took off without much downside volatility to yesterday's record high," Yardeni emphasizes. "As gold soared, the federal surplus evaporated and turned into a structural deficit that Orszag's OMB projects at $9 trillion over the next 10 years."

The investment strategist concludes: "So why did gold rally so much yesterday despite Mr. Orszag's assurance that the federal budget deficit will be cut in half? Apparently, the gold bugs don't believe him."

The American Enterprise Institute for Public Policy Research (AEI) published a paper indicating that "by all relevant debt indicators, the US fiscal scenario will soon approximate the economic scenario for countries on the verge of a sovereign debt default."

Steven Hess, Moody's lead analyst for the US, put it this way on Reuters TV: "The Aaa rating of the US is not guaranteed. So if they don't get the deficit down in the next three to four years to a sustainable level, then the rating will be in jeopardy."

David Einhorn of Greenlight Capital, recently speaking of why he's become a fan of gold, had this to say:


I have seen many people debate whether gold is a bet on inflation or deflation. As I see it, it is neither. Gold does well when monetary and fiscal policies are poor and does poorly when they appear sensible. Gold did very well during the Great Depression when FDR debased the currency. It did well again in the money printing 1970s, but collapsed in response to Paul Volcker's austerity. It ultimately made a bottom around 2001 when the excitement about our future budget surpluses peaked.


Einhorn added, "Prospectively, gold should do fine unless our leaders implement much greater fiscal and monetary restraint than appears likely. Of course, gold should do very well if there is a sovereign debt default or currency crisis."

David Rosenberg, chief economist and strategist at Gluskin Sheff, also continues to favor gold. The fact that the yellow metal continues to surge higher -- even with ongoing deflationary developments -- suggests that other factors are driving bullion to new bullish heights, he says.

"It's called scarcity of supply relative to fiat currency, "Rosenberg argues.

The strategist wrote today in a research note that he thinks gold can at least double if not triple from here.

"The cup is still half full -- and still can be filled with gold eagle coins," he said.

For investment advice about how to play gold, checked with Curt Hesler, the longtime editor of the Professional Timing Service newsletter.

Hesler says there's no doubt that long-term gold will reach at least $1600. However, he thinks the near term is still a bit "dicey." The veteran says he'll get more excited about buying gold at $950 to $960.