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Chris Vermeulen
Founder of www.TheGoldAndOilGuy.com
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This week may provide some trading opportunities for us if all goes well now that most traders are investors are all giddy about stocks again. Last week we saw money move out of bonds and into stocks and the bullishness vibe in the air reminds of many market peaks just before a 5%+ correction in stocks.
Depending how the SP500 unfolds we may be going long or short equities, long precious metals, long bonds, and our VXX trade may spike in our favor.
Bonds: After last week’s strong move down in bonds as the HERD moved out of bonds and into stocks it may be providing us an opportunity to catch a dip or bounce in the price of bonds. If the stock market sees strong selling this week money will run back into bonds.
Looking at precious metals it looks as though gold, gold miners and silver may still head lower this week. The charts are still bearish and pointing to another multi percent drop in value. Gold will look bullish around $1600, Gold miners (GDX) around $48, and Silver around $30 but we need to see one more wave of strong distribution selling for that to take place.
Crude oil has recovered nicely from its 5 wave correction which shook us out of the trade for a profit. I still like the chart for higher prices but with it trading at resistance and a high possibility of sellers stepping back in at this level I am not getting involved here.
The SP500 made a new high last night but has run into sellers early this morning taking prices straight back down. The chart in pre-market looks as though we will see lower stock prices later today and with any luck the fear index (VIX) will continue to rise in our favor.
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Friday Technical Take Blog Post:
We are seeing stocks, oil and the dollar move up nicely today.
Stocks are pushing deep into a resistance level with very light volume… not a bullish sign. This is why we took profits yesterday with our SSO trade once we reached our dead cat bounce target of 2.5%. With it being Friday volume should only get lighter as the say progresses. I am starting to look at buying SDS as risk is low in my opinion but I’m going to let the morning play out first and re analyze in the afternoon.
Pre-Dead Cat Bounce Warning:
The rising market has sent the volatility index tumbling lower and this just goes to show why you must manage position and use protective stops. I know many of you were angry that I said to take partial profits and that we got stopped out yesterday on the VXX trade for a net gain of 2.9% in three days. Maybe one day emotional traders will see that you must trade with the market and adjust your trade outlook while in the trade. The market does not stop and wait for you to see the light, rather it will just steam roll you and never look back.
So with that being said I am starting to really like the VXX again for another buy signal. With any luck it could keep dropping for most of the session and we could go long this afternoon.
Crude oil is moving nicely in our favor today up another 2% on our 2x leveraged ETF’s. I am keeping my stop at breakeven for now as but that may change by the end of the day if we break the $109 level which is unlikely. Where to put your stops for any trade is always a tough call. It varies on the time frame, overall market condition and the size of your position so don’t think it’s just as simple s using the previous pivot high or low. That being said, those are good places for them if you have the timing correct or if the market co-operates with you…
*One key thing to point out today, the dollar bounced off support which is what I warned about last night and again this morning in pre-market. The strong bounce in the dollar has not caused any selling in oil or stocks this morning. I think that is based on the strong jobs report this morning. More jobs means businesses should be getting stronger and the more gas/oil will be consumed. But if the dollar keeps on moving higher and breaks above this key resistance level in the next few trading sessions then it will likely cause selling in stocks. Oil may hold up because demand will still be there.
Let’s see how the morning and lunch unfolds and regroup.
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Over the past 5 months we have seen volatility steadily decline as stocks and commodities rise in value. The 65% drop in the volatility index is now trading at a level which has triggered many selloffs in the stock market over the years as investors become more and more comfortable and greedy with rising stock prices.
Looking at the market from a HERD mentality and seeing everyone run to buy more stocks for their portfolio has me on edge. We could see a strong wave of fear/selling hit the S&P 500 Index over the next two weeks catching the masses with their hand in the cookie jar . . . again.
If you don’t know what the volatility index (VIX) is, then think of it as the fear index. It tells us how fearful/uncertain investors are or how complacent they are with rising stock prices. Additionally a rising VIX also demonstrates how certain the herd is that higher prices should continue.
The chart below shows this fear index on top with the SP500 index below and the correlation between the two underlying assets. Just remember the phrase “When the VIX is low it’s time to GO, When the VIX is high it’s time to BUY”.
Additionally the Volatility Index prices in fear for the next 30 days so do not be looking at this for big picture analysis. Fear happens very quickly and turns on a dime so it should only be used for short term trading, generally 3-15 days.
Volatility Index and SP500 Correlation & Forecast Daily Chart:
Global Issues Continue To Grow But What Will Spark Global Fear?
Everyone has to admit the stock market has been on fire since the October lows of last year with the S&P 500 Index trading up over 26%. It has been a great run, but is it about to end? Where should investors focus on putting their money? Dividend stocks, bonds, gold, or just sit in cash for the time being??
I may be able to help you figure that out.
Below is a chart of the Volatility index and the gold exchange traded fund which tracks the price of gold bullion. Notice how when fear is just starting to ramp up gold tends to be a neutral or a little weak but not long after investors start selling their shares of securities we see money flow into the shiny yellow safe haven.
Gold & Fear Go Hand-In-Hand: Daily Chart
Looking at the relationship between investor fear/uncertainty and gold you will notice scared money has a tendency to move out of stocks and into safe havens.
Trading Conclusion Looking Forward 3 months…
In short, I feel the financial markets overall (stocks, commodities, and currencies) are going to start seeing a rise in volatility meaning larger daily swings which inherently increased overall downside risk to portfolios and all open positions.
To give you a really basic example of how risk increases, look at the daily potential risk the SP500 can have during different VIX price levels:
Volatility index under 20.00 Low Risk: Expect up to 1% price gaps at 9:30am ET, and up to 5% corrections from a previous high.
Volatility index between 20 – 30 Medium Risk: Expect up to 2% price gaps at 9:30am ET, and up to 15% corrections from recent market tops or bottoms.
Volatility index over 30 High Risk: Expect 3+% price gaps at 9:30am ET, and possibly another 5-15% correction from the previous VIX reading at Medium Risk
Note on price gaps: If you don’t know what I am talking about a price gap is simply the difference between the previous day’s close at 4:00pm ET and the opening price at 9:30am ET.
To continue on my market outlook, I feel the stock market will trade sideways or possibly grind higher for the next 1-2 weeks, during this time volatility should trade flat or slightly higher because it is already trading at a historically low level. It is just a matter of time before some bad news hits the market or sellers start to apply pressure and either of these will send the fear index higher.
I hope you found this info useful and if you would like to get these reports free every week delivered to your inbox be sure to join my FREE NEWSLETTER HERE: www.GoldAndOilGuy.com
Chris Vermeulen
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This morning we are seeing the US Dollar index move higher retesting a short term breakdown resistance level. What this means is that the dollar fell below support and is not slowing drifting back up to test the breakdown level. As we all know once a support level is broken it then becomes resistance. So if that holds true with the current move in the dollar we should see stocks and commodities find a short term bottom and continue higher today or tomorrow from the looks of things.
Gold has been pulling back the past couple trading session on light volume which healthy price action. It has done the opposite of what the dollar did above. Gold broke through a key resistance level and is slowly drifting back down to test the breakout level to see if it is support. If so then gold should continue higher in the coming days.
Both silver and gold miner stocks are lagging he price of gold. They have yet to break through their key resistance levels. That being said it could happen an day now as they have both been flirting with that level for a couple trading sessions now.
Crude oil continues to hold up strong and is headed straight for its key resistance levels without any real pullback. Chasing price action like this is not something do often because risk: reward is not in your favor. I am staying on the sidelines for oil until I see a setup that has more potential and less risk.
The equities market remains in a strong uptrend at this time. I do feel a 1-3 weeks pause/pullback could take place at any time but in the grand scheme of things we could be only half way through this runaway stock market rally as noted in the video.
The equities market is going to gap down this morning which is typical in a bull market. Remember. in an uptrend the stock market tends to gap lower at the open and close higher into the close. And it’s the opposite in a down trend with stocks gapping higher and sell off through the trading session.
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“No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.”
~ United States Constitution, Excerpt from Article 1, Section 10 ~
A quick glance at most of the headlines over the weekend and the primary focus seemed to be either calling a near term top in domestic equity indices or a focus on the Greek debt situation. Why is anyone even paying attention to what is going on over there? Until the ISDA declares a default where the underlying Credit Default Swaps (CDS) are triggered, it is all just noise.
The ECB has broken the rule of law by placing itself as the senior creditor ahead of private creditors, the Greek government is trying to pass retroactive legislation to trap private sector creditors holding out of the PSI, and the leader of Greece was not even elected by the people of Greece – how much more manipulation and insanity do we need to monitor?
Similar to the price action since 2008, central banks around the world control everything from financial markets to the ascent of political leaders. These same political leaders help central bankers and planners control policy and decision making at the highest government levels in Europe and around the world. It would seem that the United States should change the motto from “We the People” to “We the Bankers.”
However, there is one particular asset class that even the central bankers have a hard time controlling. While they can impact short term price action through direct currency manipulation initiatives, in the longer-term gold is likely to move in only one direction – higher.
The price action on Tuesday reminded market participants that actions such as the Greek bailout come at a cost. Quantitative easing and/or printing money (depending on what one wishes to call the practice of producing fiat currency out of thin air) has a direct impact on the price of gold.
Many financial pundits argue that gold has no utility, but what they fail to recognize is that gold is the senior currency to all other fiat currencies. Silver is also a form of currency and is senior to all other fiat currencies as well. While one can draw the utility of gold into question, the idea that gold is the senior most currency to all other fiat currencies is not new.
The Constitution of the United States of America, which is over 200 years old, refers to gold and silver as forms of payment. Looking back thousands of years the Romans used gold coins as a form of currency. The idea that gold and silver are currencies is certainly not a grandiose thought or a stretch of historical concept. Trying to depict gold as a worthless asset depends on your view and consideration of fiat currency.
There are those that would argue that the Federal Reserve of the United States is not actively manipulating economic conditions domestically or abroad. For those that view gold as a poor investment or hedge against currency devaluation need to consider the charts illustrated below. The chart below was produced by Thomas Gresham of Gresham’s Law.
Total Asset Growth of the Federal Reserve System – 1915 – 2012
It is rather obvious by looking at this chart that the Federal Reserve has actively sought to enter domestic and foreign financial markets. The surge in balance sheet assets serves to prove how far the Federal Reserve Bank is willing to go to maintain markets which seemingly are only allowed to move higher over time.
This chart is bearish for nearly any form of paper backed assets. The above referenced chart is long-term bearish for the Dollar and Treasuries and long-term bullish for physical gold and silver. As the Federal Reserve continues to debase the U.S. Dollar in concert with other central banks’ monetary easing programs, gold and silver prices over time are destined to move higher in virtually every form of fiat currency.
During the same time frame that the Federal Reserve has seen its balance sheet grow exponentially, the rapid rise of M2 money supply is staggering. The long term chart of M2 is compared to gold futures in the charts presented below.
M2 Money Stock
Gold Futures Monthly Chart
It is rather obvious what has happened to the price of gold as the M2 money supply has grown. The idea that the Federal Reserve has not already destroyed a significant amount of the purchasing power of the Dollar can easily be refuted by the two charts shown above.
In the short-term, gold and silver could suffer from a pullback, but in the intermediate to longer term it is unlikely that we have seen the highs of this bull market for either metal. As long as central banks around the world continue to print money and expand their balance sheets gold and silver will remain in a long-term bull market. The daily chart of gold futures is presented below.
Gold Futures Daily Chart
As can be seen above, it is not out of the question that we could see gold pullback to test one of the key moving averages in coming days/weeks. However, I expect the key support area to hold in the event of a sharp selloff. Ultimately, I expect to see a breakout over the resistance zone in the days/weeks ahead. However, I would not be surprised to see gold consolidate or work marginally lower from current prices before breaking out to the upside. Right now the primary threat in this fledgling gold rally is a short-term spike higher in the U.S. Dollar. The primary catalyst which could drive a flight to the Dollar involves the sovereign debt situation in Greece and the Eurozone as a whole.
While the short-term price action may be bearish, the intermediate to longer term time frames are quite bullish for metals as central banks will continue to race to debase their currencies. Quantitative easing in the U.S. and around the world will become pervasive and gold prices could potentially soar in value. The data from the Federal Reserve Bank itself suggests that they are indeed increasing the money supply. As time has passed, the money supply and gold have seemingly grown in lockstep with one another. Surely inquiring minds do not consider this mutual relationship between gold and the money supply to be purely coincidental.
As further evidence that the Federal Reserve continues to use quantitative easing to manipulate asset prices through direct entry into financial markets, a chart of the velocity of M2 clearly depicts that the velocity of money is declining. I am not an expert regarding macroeconomic data, but if the velocity of money is declining to 1960’s levels would it be a stretch to say that we may be going through a period of stagflation? The chart below illustrates the Velocity of M2 Money Stock courtesy of the St. Louis Federal Reserve Bank.
Velocity of M2 Money Stock
For those unfamiliar with the term velocity of money, it is simply the rate of turnover in the overall money supply. The velocity of M2 is expressed as the number of times that a Dollar is used to purchase final goods or services which are included in the total gross domestic product.
Conclusion
The short term technical picture in gold is a bit suspect due to overhead resistance and recent U.S. Dollar strength. However, the longer term macro factors that impact the value of the U.S. Dollar and precious metals are all telling us the same thing.
As time wears on and central banks do even more to prop up the broader economy and failing financial institutions, it is without question in my mind that gold and silver will both benefit handsomely from these decisions being made by central bankers from around the world.
Ultimately, I am very bullish of gold and silver in the intermediate to longer-term, but in the immediate short-term frame gold could consolidate or pullback before breaking out to the upside.
This material should not be considered investment advice. J.W. Jones is not a registered investment advisor. Under no circumstances should any content from this article or the OptionsTradingSignals.com website be used or interpreted as a recommendation to buy or sell any type of security or commodity contract. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for educational purposes only.
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For the first time since the last week of December of 2011, the S&P 500 Index closed lower on the weekly chart. Recently I have been discussing the overbought nature of stocks based on a variety of indicators. However, the real question that should be asked is whether last week was just a short term event or if we see sustained selling in coming weeks.
The issues occurring in Greece spooked the markets somewhat on Friday as Eurozone fears continue to permeate in the mindset of traders. The U.S. Dollar Index is the real driver regarding risk in the near and intermediate term future. If the Dollar is strong, market participants will likely reduce risk. However a weakening Dollar will be a risk-on type of trading event which could lead to an extended rally in equities, precious metals, and oil.
Friday marked an important day for the U.S. Dollar Index futures as for the first time in several weeks the Dollar held higher prices into a daily close. The U.S. Dollar appears to have carved out a daily swing low on the daily chart from Friday. Furthermore, the potential for a weekly swing low at the end of this week remains quite possible. The chart below illustrates how the 100 period simple moving average has offered short term support for the past few weeks.
U.S. Dollar Index Futures Daily Chart
I would also point out that the MACD is starting to converge which is a bullish signal and the full stochastics are also demonstrating a cross on the daily time frame. As long as the 100 period moving average holds price, a rally is likely in the U.S. Dollar Index in coming weeks.
Should that rally play out, it will likely push risk assets lower. My primary target for the S&P 500 would be around the 1,300 – 1,310 price range if the selloff transpires. It is important to note that headlines coming out of Europe could derail this analysis in short order.
Assuming that a selloff in the S&P 500 occurs it will present a difficult trading environment for market participants. Market participants are going to be in a tough position around the 1,300 price level. A rally from 1,300 could serve to test the 2011 highs. In contrast, a confirmed breakdown of the 1,300 price level could initiate a more significant selloff towards the 1,250 area.
Should price move towards the 1,300 price level the bulls and bears will be battling it out for intermediate control of price action. This is my preferred scenario for the short-term time frame, but I would only give it about a 60% chance of success at this point in time. We simply need more time to see how price action behaves the first few session of the forthcoming week.
S&P 500 Index Bearish Scenario
The alternate scenario which has about a 40% chance of success would be a sharp rally higher which likely would be produced by news coming out of Greece and/or the Eurozone that pushes the Euro higher. Right now risk is high due to the sensitivity of price to headline risk. With that said, the bullish alternative scenario is shown below.
S&P 500 Index Bullish Scenario
At this point we just do not have enough price information to give us clarity regarding the most probable outcome. The price action in the Euro is going to drive price action for the S&P 500 and other risk assets in weeks ahead.
Anything is possible in the short-term, but I have to give a slight edge to the bears simply based on the price action Friday and the fact that almost every indicator I follow is screaming that the equities market is severely overbought. The price action this week should be telling. Headline risk is excruciatingly high, trade safely in the coming week!
This material should not be considered investment advice. J.W. Jones is not a registered investment advisor. Under no circumstances should any content from this article or the OptionsTradingSignals.com website be used or interpreted as a recommendation to buy or sell any type of security or commodity contract. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for educational purposes only.
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“You can’t feel the heat until you hold your hand over the flame.
You have to cross the line just to remember where it lays.”
~ Rise Against. “Satellite” Lyrics ~
Friday morning traders and market participants awaited the key January employment report from the U.S. Bureau of Labor Statistics. The reaction to the supposedly wonderful report was a surge in the S&P 500 E-Mini futures contracts as well as several other key equity index futures.
The overall tenor among the financial punditry was predictable as wildly bullish predictions permeated the morning session on CNBC and in the financial blogosphere. However, after the report had been out for several hours notable independent voices such as Lee Adler of the Wall Street Examiner came out with information that suggested the numbers were an apparition of manipulated statistics.
I am not going to spend a great deal of time discussing the report, but the reaction to the news was decisively bullish on Friday. The question I want to know is whether Friday was a blow off top? In the recent past the S&P 500 has seen several key inflection points and intermediate-term tops form on non-farm payroll monthly announcements.
I follow a variety of indicators to help me decipher more accurately when the market is getting overbought or oversold. For nearly two weeks the market has been extremely overbought, but now we are reaching truly astonishing levels. The following charts represent just a few signals that the market is due for a pullback and a top is likely approaching.
Percentage of NYSE Stocks Trading Above Their 50 Period Moving Average
The chart above clearly illustrates that as of Friday’s closing bell (02/03) over 89% of stocks were trading above their 50 period moving averages. Consequently that reading is one of the highest levels that we have seen in the past 3 years. In addition, over 73% of stocks that trade on the NYSE are currently priced above their longer-term 200 period moving averages. Another extremely overbought signal.
S&P 500 Bullish Percent Index Weekly Chart
The S&P 500 Bullish Percent Index is another great tool for measuring the overall position of the S&P 500. It is without question that the longer term time frame is reaching the highest level of overbought conditions in the past 3 years.
McClellan Oscillator Divergence with S&P 500 Price Action
The two charts shown above present an interesting situation regarding the divergence in the McClellan Oscillator and the price action in the S&P 500. The most recent example of this type of divergence occurred in October of 2011 and prices immediately reversed to the upside after several months of selling pressure. In fact, this correlation between reversals in the S&P 500 and divergences in the McClellan Oscillator works relatively well historically.
Clearly there are bullish voices arguing for the 2011 S&P 500 Index high of 1,370.58 to be taken out to the upside in the near future. Additionally, several market technicians in the blogospere have been pointing to the key resistance range between 1,350 and 1,370 on the S&P 500 as a likely price target. Obviously if those price levels are met strong resistance is likely to present itself. However, as a contrarian trader I have found that the more obvious price levels are the more likely it is that they either will not be tested or they will not offer significant resistance.
It is obvious that Chairman Bernanke and the Federal Reserve have embarked on a massive fiat currency printing campaign which has helped buoy risk assets to the upside. Through a combination of reducing interest rates on safety haven investments like Treasury’s and CD’s, the Federal Reserve has forced conservative investors and those living on a fixed income into riskier assets in search of yield.
This process helps elevate stock prices and creates the desired outcome for the Federal Reserve which involves the perception by average individuals that they are wealthier. The Fed calls this the “wealth effect” and they seem poised to insure that U.S. financial markets continue to ride upon a see of cheap money and liquidity.
Ultimately the Federal Reserve’s most recent announcements have served to help flatten the short end of the yield curve further while providing a launching pad for equities and precious metals. However, issues persisting in Europe could have an adverse impact on the short to intermediate term price action of the U.S. Dollar.
Right now everywhere I look I hear market prognosticators commenting on how hated the U.S. Dollar is and how Chairman Bernanke will not allow the Dollar to appreciate markedly in order to protect U.S. exports and financial markets. I think that the Dollar has the potential to rally in the short to intermediate term. Right now the U.S. Dollar Index appears to be trying to form a bottom.
U.S. Dollar Index Daily Chart
Obviously there is good reason to believe that the U.S. Dollar Index could reverse to the upside here. Whether it would have the strength to take out recent highs is unclear, but a correction to the upside not only seems unexpected by most market participants, but it seems plausible based on the weekend news coming out of Greece.
Monday morning the Greek government is set to determine if they will agree to the demands of the Troika in exchange for the next tranche of bailout funds. If the Greek government and the Troika do not come to an agreement, the Euro could sell-off violently.
Additionally there are already concerns about the next LTRO offering from the European Central Bank. The measure is to help provide European banks with additional liquidity, but there are growing concerns that the size and scope of the LTRO could have a dramatic impact on the Euro’s valuation against other currencies. Time will tell, but there are certainly catalysts which could help drive the U.S. Dollar higher.
Another potential indicator that the Dollar could see higher prices in coming days was the largely unnoticed bearish price action on Friday of precious metals. Both gold and silver have been on a tear higher over the past several weeks. Both precious metals have surged since the Federal Reserve announced that interest rates would remain near zero on the short end of the curve through 2014.
However, on Friday gold and silver were both under extreme selling pressure. The move did not get much attention by the financial media. The price action in gold and silver on Friday could be another indication that the U.S. Dollar is set to rally. The daily chart of gold is shown below.
Gold Futures Daily Chart
Obviously the reversal on Friday in gold futures was sharp. The move represented nearly a 2% decline for the session on the price of gold. However, as long term readers know I am a gold bull. I just do not see how gold and silver do not rally in the intermediate to longer term based on the insane levels of fiat currency printing going on at all of the major central banks around the world. The macro case for gold is very strong, but the short term time frame could reveal a brief pullback.
At this point, I suspect a pullback will present a good buying opportunity for those that are patient. However, I think it is critical to point out that this move in gold on Friday could be a signal that the U.S. Dollar is going to find some short to intermediate term strength. If the Dollar does start to push higher, it will likely put downward pressure on risk assets like equities and oil
While Friday’s price action may not mark a top, nearly every indicator that I follow is screaming that stocks are overbought across all time frames. Pair that with the Greece uncertainty and LTRO considerations and suddenly the Dollar starts to look a bit more attractive. Ultimately I am not going to try to pick a top, but the evidence suggests that it might not be too many days/weeks away.
This material should not be considered investment advice. J.W. Jones is not a registered investment advisor. Under no circumstances should any content from this article or the OptionsTradingSignals.com website be used or interpreted as a recommendation to buy or sell any type of security or commodity contract. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for educational purposes only.
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“I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”
~ Thomas Jefferson ~
Well here we are, caught between resistance in the S&P 500 around the 1,330 area and support around the 1,300 price level. My last two articles have discussed why I was expecting a top in the coming days and weeks ahead, but prices just continued to work higher.
One of the things that I pride myself in as a person who trades and writes about financial markets in public is that I am always honest. If I blow a call I fess up and admit it. When I have made mistakes in the past, I always try to learn something new from them and I discuss losing trades publicly with readers and members of my service.
This time is different. I honestly do not know if I am going to be right or wrong. The price action in the S&P 500 Thursday was certainly bearish short term, but a back test of 1,300 or possibly even 1,280 could give rise to a Phoenix. Granted, the Phoenix is nothing more than Ben Bernanke’s pet, but that is a topic for a different time.
I have scanned through my list of indicators which discuss sentiment based on momentum, put/call ratio, the advance/decline line, Bullish Percent Indicators, and several ratio based indicators and they are all SCREAMING that a top is near. The interesting thing about the previous statement is that it would have been true a week ago and mostly true two weeks ago, yet prices have continued to climb.
The daily chart of the S&P 500 Index demonstrates the recent price action that has continued to climb the “Wall of Worry” for several weeks:
S&P 500 Daily Chart
The culmination of the massive run higher for the S&P 500 was the dovish comments coming from Ben Bernanke during Wednesday’s press release and press conference.
The U.S. & European Central Banks are seemingly in a perpetual race to debase their underlying fiat currencies. The race will not end well. In fact, this type of situation smells like a Ponzi scheme where Ben Bernanke and Mario Draghi (ECB President) are the wizards behind the curtains. Their loose monetary policies and forced reflation are synthetic drugs that juice risk assets higher and ultimately Mr. Market will have his vengeance in due time.
At this point, it seems like Ben Bernanke will do anything to juice equity prices higher. I think his hope is that they will be able to artificially keep the game going until the recovery is on a more sound footing. However, when the entire recovery is predicated on cheap money and liquidity and is not supported by organic economic growth it just prolongs the inevitable disaster.
As an example, the daily chart of the Dow Jones Industrial Average is shown below. I would point out that that Dow came within 35 points (0.27%) from testing the 2011 highs. Furthermore, the Thursday high for the Dow was only 1,356 points (10.55%) from reaching the all-time 2007 October high.
Dow Jones Industrial Average Daily Chart
I have argued for quite some time that the economy and the stock market are two different things. If Bernanke and his cronies succeed in reflating the financial markets and the Dow reaches its October 2007 high in the near term, more retail investors will regard equity markets as being rigged.
Who could blame them for viewing financial markets as a giant rigged casino that stands to win while they continue to lose their hard earned capital? We all recognize that the current economy is nowhere near as strong as it was in 2007. But alas, the regular retail investor does not recognize that the stock market and the economy do not portray the same meaning.
One specific underlying catalyst that has gone largely unnoticed by most of the financial media during this sharp run higher in stocks is the total lack of volume associated with the march higher. The NYSE volume over the past 2 months has been putrid when compared to historical norms.
As a trader, I am forced to take risk through a variety of trade structures. However, the idea that a crash could be coming seems hard pressed as long as Big Bad Ben is at the wheel.
If the Russell 2000 drops 10%, I am convinced that Ben will be out making announcements that the Fed stands ready to intervene with all of the supposed tools they have at their disposal. Let’s be honest here, they really have one tool comprised of 3 separate functions which are all a mechanism to increase liquidity in the overall system. To express this liquidity, the following chart from the Federal Reserve shows the M2 money supply levels:
Current M2 Money Supply
The 3 functions are the printing of currency, the monetization of U.S. Treasury debt (QE, QE2, QE2.5, Operation Twist), and exceptionally low interest rates (ZIRP) near 0 for an “extended period of time (2014).” Since monetary easing is all that the Federal Reserve has done since the financial crisis began, it begs to reason that the Federal Reserve has no other solutions or tools available. If they did, they seemingly would have used them by now.
The first bubble they created due to loose monetary policy was the massive bubble in oil in 2008. Fast forward to the present, and they are currently supporting another bubble in U.S. Treasury obligations. The bubble that they will create in the future when the game finally ends will be in precious metals. The precious metals bubble will be building while the Federal Reserve and the U.S. Treasury attempt to keep the Treasury Bond bubble from bursting.
At this point in time, if we continue down this path stocks will not protect investors adequately from inflation should the Treasury bubble burst. I would argue that the central planning and monetary policy we have seen the past few years continues in the United States and Europe that gold, silver, and other precious metals are likely to begin their own bubble of potentially epic proportions.
As the weekly chart of gold futures illustrates below, gold has recently pulled back sharply and has broken out. I will likely be looking for any pullbacks in gold as buying opportunities as long as support holds.
Gold Weekly Chart
In closing, for longer term investors the stock market might have some serious short term juice as cheap money and artificially low interest rates should juice returns. However, eventually equities will start to underperform. At that point, gold will be in the final stages of its bubble and the term parabolic could likely be applied.
If central banks around the world continue to print money there are only a few places to hide. Precious metals and other commodities like oil will vastly outperform stocks in the long run if the Dollar continues to slide. The real question we should be asking is who will win the race to debase, Draghi or Bernanke?
http://www.thegoldandoilguy.com/wp-content/uploads/2014/11/tgaoglogo.png00adminhttp://www.thegoldandoilguy.com/wp-content/uploads/2014/11/tgaoglogo.pngadmin2012-01-30 12:24:132014-03-06 12:26:42Why Gold Is Shining Bright & What the Fed is Doing
The stock markets had a very solid session. Most charts shot higher after Apple beat estimates Tuesday night surging over 10%. This set the tone for stocks Wednesday. Also the FOMC said they would keep interest rates low until mid 2014 and projected a 2% inflation rate which took the market by surprise. Looking at the 10 minute intraday charts of gold, silver, oil, and the SP500 you would think it was the 4rth of July with everything shooting higher.
My gut feeling before the FOMC meeting was that there would be no QE3 announced. This I figured would trigger the dollar to rise which in turn would put pressure on stocks and commodities. But the low interest rates until mid 2014 was the wild card trumping that scenario.
Trading around FOMC meetings always brings a heightened level of uncertainty to traders and investors. The news is unpredictable making that much more of beast to try and out smart. I personally do not trade on any news because of the added risk involved.
Let’s take a quick look at gold and silver…
The Weekly Gold Chart:
Gold has started to break out of its down trend and if it can hold up into Friday’s close then it will be a very positive sign for the shiny metal. It is still mid week and a lot can happen, so let’s see how it holds up and go from there.
The Weekly Silver Chart:
Silver has some work to do before it’s back in an uptrend on the weekly chart. I would not be surprised to see it catch up with gold and run toward the $35 resistance level in the next couple days.
Mid-Week Trend Conclusion:
In short, gold is on the move and in the next few weeks I figure we will be getting involved. Silver I think will unfold a little different from a chart pattern point of view, but I do feel there will be a buying opportunity soon also.
Looking more broad based we are seeing the stock market continue to make new highs with solid volume behind it while Crude oil continues to tread water.
