"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

Trader Dan's Work is NOW AVAILABLE AT WWW.TRADERDAN.NET



Friday, February 7, 2014

Weak Payrolls Number spurs Commodity Buying

Traders were holding their breath to see whether or not today's expected Payrolls number was going to confirm last month's number as a one-off or whether we would get yet another abysmal reading. We got the latter.

Immediately talk of the Fed going on hold for any further tapering emerged and with it, down went the US Dollar along with Treasury yields. The result - hot money poured into equities and strangely enough, into commodities.

Watching crude oil shoot over $100 barrel ( basis WTI) was rather entertaining to say the least given the general weakness across the global economy, not to mention that lackluster US jobs reading. Apparently that is a good reason to take the price higher for what else does a struggling economy need to mend its woes if not more expensive energy costs for all involved? Yes sir - makes perfect sense to me. Hell, they even pushed copper prices higher. Go figure!

Gasoline prices shot up over $0.07/ gallon at one point.

It seems to me, and I am at a loss to explain it to be perfectly honest, hedgies are in the process of covering shorts across a large number of commodity markets and going long. While I do not attribute all of these price rises in the sector to the Tapering issue as some of this is due to hot, dry weather in a certain area of Brazil, I do not understand the thinking behind this stampede into the sector. This looks like the usual lemming-like reaction to the idea that the Fed will be reluctant to taper thus providing more downside pressure on the US Dollar which in turn will feed through in higher prices for commodities due to currency weakness.

We have been down this road before and have seen that Fed bond buying programs have not resulted in that liquidity making its way into the broader economy but I suppose old habits die hard. For now, any talk of a cease or a halt in Fed bond buying is translating into higher commodity prices as it serves to undercut the Dollar.

Equities? they are back to loving BAD NEWS as being good news for higher stock prices. Just look at the S&P 500 which completely erased this week's early losses when emerging market concerns took front and center. Another rotten jobs number and presto! - off go stocks to the races once again. More and more we see this disconnect between Wall Street and Main Street.

Why just this week the CBO served notice that the grossly named, Affordable Care Act ( sounds like something out of Orwell's works), is going to end up costing at a bare minimum another 2.5 million American jobs. Yet somehow this is greeted with applause by stocks! One does not know whether to laugh at such madness or weep.

We are back to living in an upside down world in which the worse the news get, the better stock prices do and the higher commodity prices go. I come from a world in which the last thing needed by struggling consumers with stagnant wages is a rise in the cost of necessary items such as food and energy. And yet that is precisely what we are getting once again. At least the past year we saw gasoline prices drop lower giving some much needed relief at the pump for battered consumers. Now, thanks to hedge fund activity, gasoline prices are moving higher again as crude pushes past $100 barrel.

Hopefully some of this is tied to the spell of severely cold weather which is boosting demand for heating oil and drawing down crude stocks, but rising gasoline prices are not the least bit stimulative in nature if you are hoping to see an economic recovery occur.

From a technical analysis standpoint, the hedge fund computers are now back to buying across the sector again and those guys will buy and buy and buy until the market stops going higher. Then they will sell and sell and sell until the market stops going lower at which time they will reverse and go back to buying and buying and buying. Get the picture yet? There is no thinking - there is just computers reacting to movements in price. That is why trying to come up with explanations at times as to why prices are doing what they are doing is an enormous waste of time and mental energy. The machines are driving the market around - that is all one needs to know. Sometimes there is a underpinning fundamental reality to the movement in price caused by these distorting computers. Many times there is not.

This brings me to the US Dollar. You can see on the chart that it declined from last summer and continued into late fall when it rebounded higher and broke its downtrending pattern. It ran towards 81.40 where it was unable to move any higher and subsequently retreated lower. It did however make a higher low and thus began to undergo a gradual increase in price  which can be seen delineated by the price channel that has formed.



It is effectively unchanged since its start-of-the-year levels but has been declining for most of this month of February this month. As it has weakened, commodity prices have strengthened and so too has gold. Gold has not been able to mount a clear, sustained breach of upside resistance in the same fashion that the Dollar has not managed a clear, sustained breach of downside support.

Where this goes is anyone's guess right now but suffice it to say that many commodity markets are now entering those kind of patterns that are notorious for whipsawing traders mercilessly. Trending markets are bread and butter for traders - sideways markets can be notorious. That is what we are now getting in quite a few commodity markets. Downtrends have been halted with large bouts of short-covering but many of these markets do not possess bullish enough fundamentals to drive them into strong uptrending bull moves. The result is wild swings in price which can completely erase the previous day's move in price and then some only to reverse again on the third day.

Those of you who might doubt this need only look at Coffee and Natural Gas. One either needs to be particularly brave (or really stupid) to take large positions in markets behaving in such ruthless fashion. Truth be told markets moving into those sorts of patterns are graveyards for would-be professional traders. STay out of them or trade them very small in size! Forget about how much you can make - worry more about how much you are going to lose.




As far as gold and silver both go - they are being supported by this weaker Dollar/hold in Tapering stuff. Emerging market concerns are also aiding gold while serving to undercut silver strength. There was some chatter that the return of Chinese traders from the Lunar New Year celebration would bring back copper demand ( and silver ) but Chinese economic data has been relatively weak and that, so far, is muting any buying.

Silver has managed to stick its head up again above the $20 level after holding down near $19 ( once again). We'll see if can do anything next week or if it just drops lower and goes back to the bottom of the range.

Gold too remains rangebound as it nears the upper boundary of that pattern. The HUI cannot clear 225 and thus is not contributing much, if any, support to the metal.

I wonder if the famed February Break is yet to occur this year or if it came last month in January. It tends to be pretty reliable but getting the timing down can be tricky.  If it has yet to occur, we can expect to see selling pressure re-emerge across the commodity sector later this month.

40 comments:

  1. Great summary as always. The price action in coffee and Natural Gas has been wild. Made a bit on Natural Gas. Short S&P so will profit if overbought condition results in back off Mondy.

    ReplyDelete
  2. It looks to me the commodities got ahead of themselves again. It's almost as someone opens the tap just a bit and we all jump up and down, and then they maliciously close the spigot and we're left high and dry again.
    If you visit certain sites these days, it seems they are urgently passing around the punch bowl as the horrible collapse is imminent. How many times can you predict something which does not transpire and still keep some credibility and command attention? Apparently forever in this new brave world of ours.

    ReplyDelete
  3. Has Armstrong flip flopped on gold?

    http://armstrongeconomics.com/2014/02/07/the-winds-of-war-r-the-markets-responding/

    Sounds like he is saying the minimum 1150 has been reached, which is a different tone than a few months ago.

    ReplyDelete
    Replies
    1. "What is critical here is that March is showing up as a major event for the start of volatility. In gold, it is a Panic Cycle, Directional Change, and high Volatility target"

      Does this mean up or down for gold......?

      Delete
    2. Yeah I saw that too. I think he's using it as a get out clause in case the bottom is in.

      Armstrong has been quite vocal recently about Ukraine, starting that there could be a Russian invasion after the Winter Olympics. That would suggest gold will be going higher.

      Delete
    3. I'm sure Putin calls Martin to consult him every time he plans an invasion of independent countries. Armstrong doesn't know the future more than any of us.

      Delete
    4. What happens if no war or invasion? Does the war premium vanish as fast as when the Syria thing was going on and gold made a trip down to 1180 again.

      Gotta love trading the gold sector

      Delete
    5. And if gold is moving on the seriousness of the Ukraine unlike Syria, Afghanistan etc - then why did gold run to 1400 based on Syria??

      Maybe indeed no one really knows what moves gold and it's all rigged.

      Delete
    6. Hey Prophet - good questions. Can you be sure that gold moved to $1400 solely on the Syrian issue? I cant remember what the economic backdrop was at that time, but im sure that that had as much if not more to do with the rally than Syria. In fact, Armstrong answered this question a while back. In summary, capital in the war affected area will flee but that is all - the underlying trend will not change. http://armstrongeconomics.com/2013/08/26/gold-war/

      Delete
  4. Mr. Norcini, what do you think would be the after effects of a bitcoins crash if any?

    ReplyDelete
  5. Nasdaq Summation Index now the most oversold in recent history.

    Anyone who is short stocks here must be mad, as this is looking more and more like the first of many "rip your face off rallies" a term coined by Doug Noland.

    When you have so many "experts" like Richard Russell and Marc Faber bleating about crashes, panics, and "end games",

    And more than 10 "acclaimed gurus" on King World News bleating about terrifying shocks, financial armageddon, global chaos, etc. you knew we were at a major bottom and it was time to go long big on U.S. stocks.

    I'm sure gold will get dragged up in the buying melee kicking and screaming back up to $1,650 where all the "angels" are still trapped in the battered women's shelter, following the epic short squeeze in emerging market ETF's.

    Stay in the system.

    Janet has your back. She's looking out for the little guy, so I'm sure she will introduce measures soon in order to stimulate more bank lending and tell the banks they will get penalized for hoarding too much cash.

    Dow 20,000 here we come, along with one of the greatest economic booms in history.

    ReplyDelete
    Replies
    1. Why would more QE light gold on fire? It hasn't worked for the last few years.

      Delete
    2. Mark...a smart trader I follow on Twitter just sent this: @Convertbond
      S&P 500 1740 to 1790 since Wednesday's low, just about time to sell the rally.

      Personally, I'm sure Dow will hit 20k, but maybe we need a little pause first. What stocks do you hold?

      Delete
    3. Mark

      "Dow 20,000 here we come, along with one of the greatest economic booms in history"

      Yep…a real boom…as in…KA-BOOM !!!

      Delete
  6. Dan,

    Are you referring to the metals when it comes to the 'famed Feb break' or commodities in general?

    Thanks.

    ReplyDelete
  7. Most stocks I hold now are high dividend paying cyclical names which have huge leverage to the economic recovery:

    EMR, ESV, COP, NUE, DD, KLAC, MMM, INTC, etc.

    These will move up the fastest once the economic boom takes hold.

    Towards the end of the boom, I will be rotation more money into energy and steel, since those are more late cycle plays, but for now I have a balance between tech, materials, energy, industrials.

    I"m staying in the system, it has served me very well so far. Even a 20% bail in, although remote, will not dent my account very much since I'm already up huge since the time I got in at the 2010 lows at the height of all the "Greece Fears".

    ReplyDelete
  8. What does gold have to hit and for how long to consider this long down sloping trend line broken? We have been here so many times before. Is this it this time?

    ReplyDelete
  9. hey Dan,

    great posts as usual....ive stopped commenting asmuch but still read your posts daily as i have been playing SPY more than gold/GDX-HUI recently, but i was wondering, where are your weekly metal wraps with KWN?...on sundays i like to listen (rather than read) with some tea and i havent found the last 2 or 3...

    p.s. i think 2014 will be a much better year than 2013 for gold/silver,..and many even in mainstream think the bottom is in for gold

    ReplyDelete
  10. Jay Gallemore is as old as god, cool as coors, and smooth as sahara. Although he's a trader, therefore able to argue both bull and bear case for a commodity, he recently printed in red "Feb 8 - BULL" (second table from the top).

    On the weekly CRC5 chart he has entered "^ bull". These are small clues to his long-term view for the commodities which he trades.

    Jay can be rather long-winded with this weekend being no exception .. it takes him a while to get underway, but I think the last half of the 40 minute audio is well worth the listen.

    To hear the weekend audio, scroll to the bottom and click on "audio work shop".
    http://chartingyourfutures.com/dailyworksheets.htm

    ReplyDelete
  11. Number of blog articles and podcasts on KWN predicting historic catastrophe, collapse, chaos, etc. this weekend must be an all time world record.

    How many of these guys predicted one of the biggest 2-year bear market collapses in the XAU in 2011?

    None.

    Any other questions?

    ReplyDelete
    Replies
    1. Yeah - l stopped listening to KWN a long time ago as it was only telling one side of the story (I did listen to the weekly metals wrap as l could learn something from it). If you only tout the Buy side of the market you lose credibility when things (repeatedly) go against what you say. According to 99% of Eric's guest speakers, the last 2 years have been a manipulation.

      Then when the real bull market in gold arrives, no-one will believe KWN because it has been crying wolf for the last ~ years.

      Delete
  12. We now have a new leader in the 2014 Super Gold Predictor Bowl......... and it is Jim Rickards, giving us $7,000 - $9,000 an oz. in 3-5 years. You just gotta love it; sparks

    ReplyDelete
  13. Dan:

    What's Jim S. been doing lately? Is he across the pond?

    ReplyDelete
    Replies
    1. Via Le Metrepole Cafe email teaser (note I am not a subscriber--rather I receive continue to receive emails after having signed up for a free trial some years back).

      "Le Metropole Members,

      Midas du Metropole has served a a Sunday Special
      titled, "Legendary Jim Sinclair Surprises In Front Of
      Standing Room Only Crowd In Austin, Tx." (Feb. 8)

      The market has bottomed and on its way up again with
      much more volatility in store for the price action.
      $1650 is his next target. His thinking is "the
      banksters" are getting long for the next move up, like
      they did in the 70's. I asked him privately who was
      going to be short if they get long and the specs get
      long as the technicals continue to improve? He said
      there will be no offers at some points and the price
      will soar. His timetable for this was August or before.""

      Delete
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