It was just a matter of time before this occurred but coming at this time,it tends to feed into the margin related selling as those specs who are still long from higher levels and have been holding out by refusing to sell while they wait for the market to bottom are now going to be under even more pressure, particularly if this market does not find a bottom very soon.
Here are the new margins, effective as of the close of trading tomorrow (Tuesday). These rates are for speculators.... bona fide hedgers have a new margin rate the same as the maintenance rate for the specs.
Gold:
Old Margin Old Maintenance New Margin New Maintenance
$5,940 $5,400 $7,040 $6,400
Silver:
$10,450 $9,500 $12,375 $11,250
Monday, April 15, 2013
China, Boston - derail equities
News of a slower than expected growth rate in China, combined with a heart-wrenching tragedy in the city of Boston, served to pull the rug out from beneath the US equity markets today.
Before moving any further, let me state my great distress at seeing the pain and grief of my fellow citizens in the city of Boston at what has been a generally festive time for that city and its inhabitants.
Once again a sad reminder that evil exists in this world. Between what is happening there, what is happening in the global financial system, and what is happening on a moral and ethical nature in this land, it seems as if the wheels are coming off of the bus of this society.
"If the foundations be destroyed, what can the righteous do?" asked the Psalmist in Psalm 11:3.
His answer?
"God is our refuge and strength, a very present help in trouble. Therefore we will not fear, though the earth should change, and though the mountains slip into the heart of the sea; though its waters roar and foam, though the mountains quake at its swelling pride.
There is a river whose streams make glad the city of God, the holy dwelling places of the Most High. God is in the midst of her, she will not be moved; God will help her when morning dawns.
The nations made an uproar, the kingdoms tottered; He raised His voice, the earth melted. The Lord of hosts is with us; the God of Jacob is our stronghold.
Come behold the works of the Lord, Who has wrought desolations in the earth. He makes wars to cease to the end of the earth; He breaks the bow and cuts the spear in two; He burns the chariots with fire.
"Cease striving and know that I am God; I will be exalted among the nations, I will be exalted in the earth.'
The Lord of hosts is with us; the God of Jacob is our stronghold." (Psalm 46: 1-11)
Moving to the actual performance of the equity markets here in the US, I want to again focus in on the Russell 2000, seeing that it is perhaps the best indicator of equity investors' willingness to assume risk. Here is the final chart for the session. Note that the close was beneath both the previous support level and the 50 day moving average.
Note also the significance of the Fibonacci retracement levels posted. The first retracement level of 25% comes in at the 906 level. The session low was 904.91 with the close being 907.18. It is coincides nicely with the horizontal support line near 910. This market will need to hold here, right now, or it is going down to 880. which would also take it below the 100 day moving average.
Honestly, this scenario that we witnessed today in both equities and in commodities, is eerily similar to what we witnessed in 2008 when the JAPANESE YEN CARRY TRADE began to be unwound. You might recall at that time, the entire world of hedge funds were short the yen by borrowing in yen terms at inordinately low interest rates, and then taking those proceeds and investing them abroad into nearly anything that was not nailed down. Not only that, but then this brainless lemmings leveraged themselves to the gills in their rapacious pursuit of even greater profits to the point that they were all on the same side of the same trade with massive positions all leaning the same direction.
When the news began to surface that Lehman and Sterns were in trouble, there was a mad rush to the exits by these funds and literally no one, and I mean NO ONE, to take the other side of the trade. We saw a virtual meltdown across the markets that collapsed not only the equity world, but the entirety of the commodity world as well.
Let me explain what I think is now happening - Gold had stabilized near $1360 even as the equities were weaker but when the Boston news hit the wires, the stock market began a sharper selloff with volume picking up. As it dropped through downside support levels, gold began to move sharply lower falling another $25 in literally minutes. It fell as low as $1335 before it bounced some.
While this was occurring, simultaneously, the Japanese yen was experiencing its version of a mini MELT UP. Fundamentally, there is absolutely no reason to buy the Yen, not when it is the express intent of the political and monetary leaders there to deliberately weaken it. Most speculators who have been around for a while in trading the currencies, know that the Bank of Japan is not to be trifled with when it comes to their dearly beloved Yen. If they begin to express displeasure about the level that their currency is trading at, specs had better be careful because they will annihilate anyone who dares to go against their intentions. Nonetheless, the Yen was up nearly 2% against the Dollar alone with a greater increase coming exactly as the stock market fell apart.
In short, the Yen carry trade is being unwound today and just like it crushed the gold price in 2008, it is what it now working against the gold price. The margin related selling then gets amplified as more of these carry trades (one shorts or borrows yen and then buys gold with those proceeds) are reversed. Gold then gets sold, along with the rest of the commodity world, and now, today, the equity world, and the yen gets bought - and this is important - REGARDLESS OF FUNDAMENTALS. Those are meaningless when there are such vast sums of money involved in these one-way highly leveraged bets.
If you want to know why I despise these Central Banks so much and why I detest what they are doing, just look at the results of their handiwork when it all comes apart. These people are the ones that created this environment in which SPECULATORS GONE WILD is the new normal. They prod, cajole, tease and practically entice them into making enormously leveraged bets, particularly on stocks, to give visually proof of the "success" of their bond buying schemes. As long as those speculators oblige, all is well and these masters of the monetary universe go around patting themselves on the back for their keen insight and ability to cure what ails the economy. Meanwhile, when something occurs that then upsets this nicely arranged apple cart, all chaos is unleashed in the markets as these complacent speculators, all belatedly wake up to the fact, they are now on the wrong side of a losing trade with no one to take the other side.
At that point, it becomes a sort of footrace to the exit to see who can dump their entire positions before the next guy can. There is no finesse, no attempt at scaling out, no attempt at subtlety - it is all overboard at once.
I am not sure when this pressure will let up but I am completely confident that if it does not let up soon, the monetary authorities are going to be forced to intervene yet again to come up with some sort of soothing words, vis-à-vis, policy action that they stand ready to enact to grease the tracks of the global economic train tracks. Certainly the Japanese monetary authorities are not going to put up with this again, as they were on the receiving end of an unwind back in 2008 and they did not like it one bit. As a matter of fact, their recent comments have made it evident that they believe as a result of this unwinding that began back then, the Yen remains overvalued in their view and needs to move lower.
Fortunately, this new yen carry trade has not been taking place for the same length of time as the former one did but nonetheless, we can still see what happens when Central Banks succeed at herding hedge funds all into the same spot at the same time.
Before moving any further, let me state my great distress at seeing the pain and grief of my fellow citizens in the city of Boston at what has been a generally festive time for that city and its inhabitants.
Once again a sad reminder that evil exists in this world. Between what is happening there, what is happening in the global financial system, and what is happening on a moral and ethical nature in this land, it seems as if the wheels are coming off of the bus of this society.
"If the foundations be destroyed, what can the righteous do?" asked the Psalmist in Psalm 11:3.
His answer?
"God is our refuge and strength, a very present help in trouble. Therefore we will not fear, though the earth should change, and though the mountains slip into the heart of the sea; though its waters roar and foam, though the mountains quake at its swelling pride.
There is a river whose streams make glad the city of God, the holy dwelling places of the Most High. God is in the midst of her, she will not be moved; God will help her when morning dawns.
The nations made an uproar, the kingdoms tottered; He raised His voice, the earth melted. The Lord of hosts is with us; the God of Jacob is our stronghold.
Come behold the works of the Lord, Who has wrought desolations in the earth. He makes wars to cease to the end of the earth; He breaks the bow and cuts the spear in two; He burns the chariots with fire.
"Cease striving and know that I am God; I will be exalted among the nations, I will be exalted in the earth.'
The Lord of hosts is with us; the God of Jacob is our stronghold." (Psalm 46: 1-11)
Moving to the actual performance of the equity markets here in the US, I want to again focus in on the Russell 2000, seeing that it is perhaps the best indicator of equity investors' willingness to assume risk. Here is the final chart for the session. Note that the close was beneath both the previous support level and the 50 day moving average.
Note also the significance of the Fibonacci retracement levels posted. The first retracement level of 25% comes in at the 906 level. The session low was 904.91 with the close being 907.18. It is coincides nicely with the horizontal support line near 910. This market will need to hold here, right now, or it is going down to 880. which would also take it below the 100 day moving average.
Honestly, this scenario that we witnessed today in both equities and in commodities, is eerily similar to what we witnessed in 2008 when the JAPANESE YEN CARRY TRADE began to be unwound. You might recall at that time, the entire world of hedge funds were short the yen by borrowing in yen terms at inordinately low interest rates, and then taking those proceeds and investing them abroad into nearly anything that was not nailed down. Not only that, but then this brainless lemmings leveraged themselves to the gills in their rapacious pursuit of even greater profits to the point that they were all on the same side of the same trade with massive positions all leaning the same direction.
When the news began to surface that Lehman and Sterns were in trouble, there was a mad rush to the exits by these funds and literally no one, and I mean NO ONE, to take the other side of the trade. We saw a virtual meltdown across the markets that collapsed not only the equity world, but the entirety of the commodity world as well.
Let me explain what I think is now happening - Gold had stabilized near $1360 even as the equities were weaker but when the Boston news hit the wires, the stock market began a sharper selloff with volume picking up. As it dropped through downside support levels, gold began to move sharply lower falling another $25 in literally minutes. It fell as low as $1335 before it bounced some.
While this was occurring, simultaneously, the Japanese yen was experiencing its version of a mini MELT UP. Fundamentally, there is absolutely no reason to buy the Yen, not when it is the express intent of the political and monetary leaders there to deliberately weaken it. Most speculators who have been around for a while in trading the currencies, know that the Bank of Japan is not to be trifled with when it comes to their dearly beloved Yen. If they begin to express displeasure about the level that their currency is trading at, specs had better be careful because they will annihilate anyone who dares to go against their intentions. Nonetheless, the Yen was up nearly 2% against the Dollar alone with a greater increase coming exactly as the stock market fell apart.
In short, the Yen carry trade is being unwound today and just like it crushed the gold price in 2008, it is what it now working against the gold price. The margin related selling then gets amplified as more of these carry trades (one shorts or borrows yen and then buys gold with those proceeds) are reversed. Gold then gets sold, along with the rest of the commodity world, and now, today, the equity world, and the yen gets bought - and this is important - REGARDLESS OF FUNDAMENTALS. Those are meaningless when there are such vast sums of money involved in these one-way highly leveraged bets.
If you want to know why I despise these Central Banks so much and why I detest what they are doing, just look at the results of their handiwork when it all comes apart. These people are the ones that created this environment in which SPECULATORS GONE WILD is the new normal. They prod, cajole, tease and practically entice them into making enormously leveraged bets, particularly on stocks, to give visually proof of the "success" of their bond buying schemes. As long as those speculators oblige, all is well and these masters of the monetary universe go around patting themselves on the back for their keen insight and ability to cure what ails the economy. Meanwhile, when something occurs that then upsets this nicely arranged apple cart, all chaos is unleashed in the markets as these complacent speculators, all belatedly wake up to the fact, they are now on the wrong side of a losing trade with no one to take the other side.
At that point, it becomes a sort of footrace to the exit to see who can dump their entire positions before the next guy can. There is no finesse, no attempt at scaling out, no attempt at subtlety - it is all overboard at once.
I am not sure when this pressure will let up but I am completely confident that if it does not let up soon, the monetary authorities are going to be forced to intervene yet again to come up with some sort of soothing words, vis-à-vis, policy action that they stand ready to enact to grease the tracks of the global economic train tracks. Certainly the Japanese monetary authorities are not going to put up with this again, as they were on the receiving end of an unwind back in 2008 and they did not like it one bit. As a matter of fact, their recent comments have made it evident that they believe as a result of this unwinding that began back then, the Yen remains overvalued in their view and needs to move lower.
Fortunately, this new yen carry trade has not been taking place for the same length of time as the former one did but nonetheless, we can still see what happens when Central Banks succeed at herding hedge funds all into the same spot at the same time.
Watching the HUI for Signs of a Respite to the Selling
The gold shares have been remarkably prescient when it has come to predicting the slide in the price of gold. We have mentioned that the ratio of the HUI/Gold was so skewed that something had to give, either the price of gold was going to have to drop further and at a faster clip than the HUI was falling or the HUI was going to have to start to rise to bring this ratio back into balance.
Seeing that the shares have led the price of gold lower, I think it just makes sense to look for a sign of a selling exhaustion in there first before the metal itself will bottom.
In looking at the following long term chart of the HUI, the technical damage is all too painfully evident if you are a holder of the mining shares. I think it was last week that I put up a chart of this and noted that since the bottom tine of the pitchfork had been violated, that the next technical level of support would not emerge until down near the 275 level. We are there now. Notice that using two different sets of points from which to sketch out the Fibonacci retracement levels, we have a confluence near the 75% retracement level of both sets of numbers. I have circled that with an ellipse on the chart.
As you can see, that is between 273 - 272. That is very near the low made so far in the session which is 272.60. Here is what to think of this. If this level does not hold the decline, and I think it will have held if the HUI can close today's session above 290, (The session is not over as I type these comments) then based on Fibonacci retracement theory, we are going down even further. There is another band of support down near 250 should we fail here.
I also want to make a point very clear here. Just because a market may bottom, does not mean that the bull market is now ready to resume. It is not. The chart damage and more importantly, the psychological and financial carnage inflected on gold bulls has been so severe, that it is going to take a massive sea change in sentiment towards this metal before the gold bull market will resume. In short, their confidence towards the metal has been dealt a massive injury and that is going to take time to heal.
Right now, the sentiment will be to sell rallies until the chart technical aspects improve. What will it take to do that? Answer - loss of confidence in the respective currencies of these various nations that have embarked on their large scale quantitative easing/ bond buying programs. Remember, this is still to all practical reasons, a zero interest rate environment. Yield is still the key. Since gold throws off no yield, and since investors have as of yet to lose confidence in these fiat currencies, there is not much incentive to own the metal. Something has to transpire to shake the complacency.
What will cause investors to lose confidence in their currencies, is the onset of inflationary pressures. With the entire commodity complex currently falling apart, it is difficult to see where that is going to come from in the very near future.
I would want to see wages rising, which as of yet there are no signs of, before getting to a different mind set towards inflation. Heck, the US jobs machine is broken with the number of jobs being created no where near what is necessary to spark a solid recovery. Right now, we are back in the deflationary mindset with the only thing preventing a larger share of investors to coming around to that view being the soaring stock markets around the planet. We may have finally now seen the first real chink in the equity bulls' armor however. Finally, the S&P 500 is responding in kind to the severe sell off in tangibles and to the various warning signals that have been popping up in the Russell 2000 and the Dow Transports. STill, even with all this carnage in the commodity sector, there remains an incredibly obtuse attitude towards these warning signals on the part of the "buy every dip in the stock market" crowd.
There is a real tendency among traders, (among human beings in general I might add) to not recognize a change in the dynamics of a situation. In other words, we tend to rely on what has always worked in the past and assume that will be the permanent order of things. Anything that deviates from that which we are familiar with then is looked at as if it is an aberration, something that is momentary and will pass before the familiar status quo reasserts itself. This is why inflection points in markets can be so difficult to ascertain. We ask ourselves, is this a change in the trend, or is this just another ongoing reaction in a bull market. The equity guys, for the most part, have not bothered to even ask themselves this question. They almost robotically and mindlessly I might add, continue to buy the dips in price expecting ever higher and higher prices in stocks while all that is transpiring around them should urge any of them with a bit of sense to exercise some caution and not be so damned dogmatic.
As I stated in a previous post, there is not a single human being on the planet who has ever lived through anything remotely resembling what is currently occurring in the financial realm right now. We are all sailing without a compass in that sense. How in the world can we know with any certainty where in the heck things are going to go right now? We are just making guesses, informed guesses based on experience and history, but they are guesses nonetheless.
In that regards, the behavior of the overall speculative crowd is what will help us navigate these waters. Herd instinct or herd behavior is difficult to predict but once it manifests itself, it is not too difficult to read. When the attitude of the herd towards equities changes, when they are reluctant to chase prices higher, when they begin to grow nervous over holding stocks, when the formerly confident dip buyers begin to second guess themselves, then we can note that when it occurs.
Keep in mind this one word - CONFIDENCE. When that goes, so too will everything else. That is the number one task now of these monetary elites and Central Banks - do nothing, say nothing, infer nothing that might rattle confidence.
Take a look at this chart of the Russell 2000. These small cap stocks have been a much better indicator of investor willingness to take on risk. One would have thought that with Qe3 and QE4, now combined with the near equivalent of the Bank of Japan's version of QE, that small cap stocks would be on a tear higher. They are not and that should pique the attention of investors. Here is a market that has now had THREE KNOCKS on a solid resistance level and has failed to better it. Not only that, it is back below the 50 day moving average. If the support level on this chart gives way, and I do not know if it will, then I would expect to see some more rattling of the confidence cage of these equity perma bulls.
Seeing that the shares have led the price of gold lower, I think it just makes sense to look for a sign of a selling exhaustion in there first before the metal itself will bottom.
In looking at the following long term chart of the HUI, the technical damage is all too painfully evident if you are a holder of the mining shares. I think it was last week that I put up a chart of this and noted that since the bottom tine of the pitchfork had been violated, that the next technical level of support would not emerge until down near the 275 level. We are there now. Notice that using two different sets of points from which to sketch out the Fibonacci retracement levels, we have a confluence near the 75% retracement level of both sets of numbers. I have circled that with an ellipse on the chart.
As you can see, that is between 273 - 272. That is very near the low made so far in the session which is 272.60. Here is what to think of this. If this level does not hold the decline, and I think it will have held if the HUI can close today's session above 290, (The session is not over as I type these comments) then based on Fibonacci retracement theory, we are going down even further. There is another band of support down near 250 should we fail here.
I also want to make a point very clear here. Just because a market may bottom, does not mean that the bull market is now ready to resume. It is not. The chart damage and more importantly, the psychological and financial carnage inflected on gold bulls has been so severe, that it is going to take a massive sea change in sentiment towards this metal before the gold bull market will resume. In short, their confidence towards the metal has been dealt a massive injury and that is going to take time to heal.
Right now, the sentiment will be to sell rallies until the chart technical aspects improve. What will it take to do that? Answer - loss of confidence in the respective currencies of these various nations that have embarked on their large scale quantitative easing/ bond buying programs. Remember, this is still to all practical reasons, a zero interest rate environment. Yield is still the key. Since gold throws off no yield, and since investors have as of yet to lose confidence in these fiat currencies, there is not much incentive to own the metal. Something has to transpire to shake the complacency.
What will cause investors to lose confidence in their currencies, is the onset of inflationary pressures. With the entire commodity complex currently falling apart, it is difficult to see where that is going to come from in the very near future.
I would want to see wages rising, which as of yet there are no signs of, before getting to a different mind set towards inflation. Heck, the US jobs machine is broken with the number of jobs being created no where near what is necessary to spark a solid recovery. Right now, we are back in the deflationary mindset with the only thing preventing a larger share of investors to coming around to that view being the soaring stock markets around the planet. We may have finally now seen the first real chink in the equity bulls' armor however. Finally, the S&P 500 is responding in kind to the severe sell off in tangibles and to the various warning signals that have been popping up in the Russell 2000 and the Dow Transports. STill, even with all this carnage in the commodity sector, there remains an incredibly obtuse attitude towards these warning signals on the part of the "buy every dip in the stock market" crowd.
There is a real tendency among traders, (among human beings in general I might add) to not recognize a change in the dynamics of a situation. In other words, we tend to rely on what has always worked in the past and assume that will be the permanent order of things. Anything that deviates from that which we are familiar with then is looked at as if it is an aberration, something that is momentary and will pass before the familiar status quo reasserts itself. This is why inflection points in markets can be so difficult to ascertain. We ask ourselves, is this a change in the trend, or is this just another ongoing reaction in a bull market. The equity guys, for the most part, have not bothered to even ask themselves this question. They almost robotically and mindlessly I might add, continue to buy the dips in price expecting ever higher and higher prices in stocks while all that is transpiring around them should urge any of them with a bit of sense to exercise some caution and not be so damned dogmatic.
As I stated in a previous post, there is not a single human being on the planet who has ever lived through anything remotely resembling what is currently occurring in the financial realm right now. We are all sailing without a compass in that sense. How in the world can we know with any certainty where in the heck things are going to go right now? We are just making guesses, informed guesses based on experience and history, but they are guesses nonetheless.
In that regards, the behavior of the overall speculative crowd is what will help us navigate these waters. Herd instinct or herd behavior is difficult to predict but once it manifests itself, it is not too difficult to read. When the attitude of the herd towards equities changes, when they are reluctant to chase prices higher, when they begin to grow nervous over holding stocks, when the formerly confident dip buyers begin to second guess themselves, then we can note that when it occurs.
Keep in mind this one word - CONFIDENCE. When that goes, so too will everything else. That is the number one task now of these monetary elites and Central Banks - do nothing, say nothing, infer nothing that might rattle confidence.
Take a look at this chart of the Russell 2000. These small cap stocks have been a much better indicator of investor willingness to take on risk. One would have thought that with Qe3 and QE4, now combined with the near equivalent of the Bank of Japan's version of QE, that small cap stocks would be on a tear higher. They are not and that should pique the attention of investors. Here is a market that has now had THREE KNOCKS on a solid resistance level and has failed to better it. Not only that, it is back below the 50 day moving average. If the support level on this chart gives way, and I do not know if it will, then I would expect to see some more rattling of the confidence cage of these equity perma bulls.
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