"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Friday, June 14, 2013

Japan Stock Market in Bear Market Territory

Watching the mood swings in the Nikkei puts me in mind of someone who would be considered manic-depressive. It has gone from Euphoria to acute Depression in the matter of 4 short weeks. The index has fallen over 20% from its best level this year which puts it in the category of official bear market territory. This is coming in spite of the Bank of Japan and the Abe administration's best efforts to kick the economy out of its state of deflation and induce a 2% annual rate of inflation.

What appears to be happening is that investors are losing confidence in the ability of the Bank of Japan to cure what ails this economy. Initially, upon the election of the new government, optimism that Japan's long season of discontent was finally coming to an end. The Nikkei began a monstrous rally that coincided with the sharp drop in the value of the Yen. However, what has derailed this bull train was the Japanese government bond market. It has proved to be a rebellious, strong-willed and recalcitrant child. Why? Interest rates are going the wrong way! The yield on the all important 10 year is going up, not down! This was not supposed to happen with the BOJ mopping up such a large chunk of those bonds on a regular monthly basis.

As interest rates have risen in Japan, the Yen is now reversing course and as it moves higher, it is sending stocks lower. What then appears to be occurring is a vicious circle in which the Nikkei then drops, sending the Yen higher, which in turn drops Japanese stocks lower, which in turn sends the Yen higher, etc... I think you get the picture.

The reason for this is those pesky speculators which were effectively herded, lemming-like in doing precisely what the Bank of Japan wanted them to do, namely, buy Japanese stocks, pushing the Nikkei higher and generating a wealth effect and a spillover happy optimism among the Japanese consumer and Japanese business. So much so that all the major hedge funds and large buyers of stocks had lost sight of the very concept of RISK. Why worry about that when the mighty BOJ was there to limit any downside moves in equities. As a matter of fact, let's just leverage our bets even more and load the boat for even bigger gains has been the thinking.

When the government bond market rejected this feel-good view, as bond investors wanted no part of locking in pitifully low yields for the foreseeable future, money came OUT OF JAPANESE GOVERNMENT BONDS to be put to work chasing yield in Japanese stocks. That sent interest rates soaring higher which is not want the Bank of Japan wanted.

As a result of this, money flows are violently reversing both in the short Yen trade and in the Long Japanese stock trade. That in turn is setting global equity markets on edge, particularly with all the noise surrounding the new buzz word in the US, "TAPERING".

Since we now live in the age of the zombie and the vampire in pop culture, we can call this newest movie, "The Rise of the TAPER". Sort of scares the hell out you just thinking about this hideous beast doesn't it?

Regardless, I have created a chart of the Nikkei futures indicating some potential support levels, which if it is going to stop falling, it will do so at these levels or else.

The first level of the support is a biggie. It is the 50% Fibonacci retracement level of this year's entire rally. It currently comes in near the 12192 level. Of all the Fibonacci retracement levels, this one is regarded as the most important. Generally, if prices are going to turn around, they will do so at this level. If they do not ( watch for an ancillary shock to US markets if they do not), they the index could drop down towards the red rectangle shown. That comes in between 11600 and 11200. If the Nikkei were to drop this low, I would expect the Yen to soar even more sharply putting even further pressure on the Yen carry trade. That would have big consequences for the entire financial market system, as heavily leveraged bets would continue to suffer huge paper losses.

MY guess is that there are currently a lot of phone calls taking place between the Fed and the Bank of Japan, along with the ECB.

How all of this would impact gold is a bit unclear right now. Back in 2008 when we had the massive unwind of the Yen carry trade, gold was clocked along with everything else as you recall. That was before all this Quantitative Easing began in earnest. Only the advent of QE reversed the bleeding as it encouraged speculators to come back in and speculate again, on the long side of everything in sight!

This time around we have had all the various QE efforts which have apparently run their course. Even some of the most die hard of stock bulls are beginning to wonder if stocks had gotten way ahead of themselves. I have said from the get go that the entirety of the stock market rally is nothing but a massive Central Bank induced bubble. I stand by that view. The bond buying has allowed the economy to muddle along with some improvement but as to generating any sort of robust growth, it is and has been an abysmal failure.

If investors begin to lose faith in the Central Banks and remember this is all a confidence game, then we might see gold actually function as a safe haven this time around. instead of a large flight into government bonds, which are becoming suspect to many, gold could withstand any unwind of the carry trade this time around, unlike it did in 2008. Again, I am unsure of this but one way or the other, we are witnessing economic and monetary history.


  1. Hi Dan,

    Inflation and bond rate are linked.. Which is why I say Japan need to torrent strong yen for the time being to bring down inflation.

    I have being add pm in silver both physical and futures especially down the pm smash down.


  2. One thing interesting for gold (and silver).
    I once more refer to the red median of the daily pitchfork I posted previously.
    One point of view can be that prices are oscillating around it.
    Another can be that there was a mini krach in april, with some real panic, and that this support was therefore temporarily broken.
    But then we had an upward reaction, volatility started to decrease, and the second attempt down, though getting through the median once more, didn't break the lows, and the median called back prices once more towards it.
    By that, I mean that we don't seem to be in a trend where prices will force their way towards the mlh inf of this pitchfork.
    Instead, now the median is a support again, and might hold after all the panic selling is back.
    Can't say for sure, but as this support is only going slightly down with time, as volatility is now low, it could be time to start reinforcing a bit bull positions for the middle to long term, because a stop loss can be put not so long below current prices.
    Anyhow, if the median proves to be a support now and cannot be broken anymore on the way down, I think I will risk buying a bit of gold if prices get close to it, hoping for a bounce on the medium to long term, with only a small loss if the scenario goes wrong.

    1. Would you say that the long term depends on the retaking of 1540?

    2. Arnie, unlike Dan, I'm not a professional trader neither a Professional analyst.
      Then, your question is simple, yet I don't know how to answer it in a simple way, sorry about that.

      That being said, I hope I'll have a buying signal before we get back to 1540. Yes, there is a big resistance up there and it will sure be a good sign for the long-term trend if we can recapture the 1550 $.
      The way I trade though (which is my personal way and doesn't mean would apply to someone else) is to try to get a signal on the smaller time units (short term) and buy earlier and lower than I would if I waited for a signal on the longer time unit such as daily candles.
      Basically, I'm kind of watching 3 time units : weekly, daily, and something like 2h / 4h candles.
      When I have a buy signal on the daily candles, I'm always checking the 2/4 h candles.
      When I have a buy signal on the 2/4h candles, I'm always checking the 1h/ 30 min candles for confirmation (the trend must confirm "up" on both time units).

      Besides, what do you call "long term"?
      Is it in many years?
      If so, at the moment, imho we are still in a correction of a bull market.
      We had 12 consecutive years of growth, which is a rare configuration and usually asks for a correction. So I wouldn't be surprised if, in normal conditions, we made a pause in 2013, without reaching a new high.
      In terms of correction from the last uptrend, see the Fibonacci retracement levels. Usually, even a 62% retracement is still considered a correction in a bullish trend if the support holds. So we still have some margin down before reaching the 62% of both 750-1940 or 300-1940 retracements.
      On that point of view, long-term is still bullish and doesn't depend on retaking 1540, rather dépends on not going too much further down. I wouldn't like to see gold breaking through 1150 $ to be precise.

      More "middle term" like months, I think the market will form a base and show us where from it wants to start going up once more. No need to try to be too smart and try bottom picking all the time imho. I'll wait to see if some supports hold. The last andrew's fork on a daily time unit failed, for example. So, bulls are not really strong now, but neither are bears.
      Sorry if my answer is too complicated.

  3. I no longer need to read comments or analysis in reference to gold.
    Bottom line....it's going down, I have watched it go down for two years now. Sorry folks but I drank the gold coolaid and have regretted it ever since.
    Will the bottom hold..NO..will the HUI break 250 and continue down from there...YES.

    You all think you can fight the FED?...good luck.
    You want my gold on the cheap...buy some Monday morning..I'll be selling.

    1. But Dean,
      It's part of human psychology to think that a trend will extend forever, up or down.
      Is it because you saw it go down for 2 years that you don't want to consider the possibility of it bottoming someday? And why not someday soon?
      You say we can't fight the Fed. You are sure right about that one, but does the Fed want to push gold prices much lower now than it already has? What for? If the point was to show that gold was not a quiet safe haven without volatility, they already made it. If it was to show that gold could underperform the dollar or the SP500, they also made the point. Why would they absolutely want to pummel gold prices much lower now, especially with the strong physical demand from Asia? I'm not sure it's their intention.

      I'm not saying it will go up or down. Only, why make up your mind before you know what it will do?
      - 2 years history of going down is not an argument, as trends bottom and reverse.
      - Fed is imho no argument because I'm not sure what they'll want to do within the next few months. Besides you have other players such as BoChina or Borussia, which are not exactly "small" players, and seem to be bullish on gold at some occasions.

      Besides even central banks don't always control the trend and manipulate as they want, and that's the point of Dan's last post. Look at the Nikkei last 3 weeks with some intraday moves of -5% and tell me they were planning that.

      As Dan mentioned, even Comex stocks are not necessarily a signal.
      So I just try to focus on following prices, divergences, etc...because after all, in the end, only prices matter.

      Have a nice weekend,

  4. yeah i agree with Hubert...and thats coming from someone bought 2 years ago just as gold started its massive dip..i doubt anyone can surpass my levels of demoralisation, i was in gold shares, but ive just switched from trader to investor,...in fact, ive found a particular shatre (NUGT) which is 3 x the GDX/HUI and its been butchered compleeeetely, and if you were to put your money in that and hold for a while, and im talking 1 to 5 years (if deficits, money-printing, geopolitical unrest and all those other fundamentally bullish gold aspects continue)..then you could end up making some serious guap...although please believe i completely get you with gold going down so heavy, but really...you think gold will go to 800 ...? adn then what? 400? i mean, you gotta zoom out and think long term, look at the gold chart zoomed out...that picture of 10 thousand chinese peeps buying on zerohedge the other day, the syrian conflict thats obviously escelating since bilderbderg..the ruskis and chinese bank buying...the ECB going to have to print and do eurobonds or face violent rebellions...i think we can discuss whether the Yen will go up cos of its CB failure, and thus dollar down gold up? maybe as dan said gold will become an actual safe haven this time facing the deflation unlike 2008..but yeah, maybe it has one final dip i think that would match 2008 well, but then, contrarians and fundamentals will overtake the poor technical picture..and dont forget the multiple bubbles and black swans...basically, keep the faith bruv. xx

    1. be careful with those "ultra" ETF's. You do know that they have a decay component associated with them, right? The decay on the 2x was brutal when I was in these casino games. The decay on 3x must be phenominal. They are not for investors, but for traders.

      Every now and then, they have to do a reverse split - on both sides of the underlying asset's ETF. It's a lose/lose game.

    2. appreciate the heads up willydog...to be honest, ive heard others say its for traders and not investors too...i also read about it enduring a reverse split recently on the way down...i had to read up on what that meant but i didnt know that could happen on the way up....so you stil lose if it reverse splits on the way up? i know its silly, but for the amount i lost in the shares on the way down i just want to make it up on the way up, and im willing to leave my money in certain stocks for a while a la investor...but there are few ETFs/shares that can provide the boost to make the money back....desperation can end in disasters, tis true...but i am convinced in gold long term and willing to leave it all for a few months/years....ill read up more on the reverse splits potential on the way up though, and ill treat it more as a trade than an investment...the other gold shares i like = PVG and MUX..but thanks for the advice..!

  5. my posts do not always get posted and I wonder why? is it because $330 silver call is total horseshit?

  6. be careful with those "ultra" ETF's. You do know that they have a decay component associated with them, right? The decay on the 2x was brutal when I was in these casino games. The decay on 3x must be phenominal. They are not for investors, but for traders. ....how to invest in the stock market


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