"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


Wednesday, October 15, 2014

Dr. Copper Succumbing to Deflationary Pressures

Even the sharp fall in the US Dollar today has not been enough to keep copper from falling sharply. It is currently down over $.08 as I type these comments, some 2.65% on the day.

The fall in the red metal has completely erased the gains made on Monday and Tuesday of this week as well as those made late last week when it bounced away from the psychological $3.00 mark.

It is threatening to sink below that once more. The meddle of the bulls is going to be severely tested here. If copper falls below the lows made last week and CLOSES below $3.00, I think we all had better pay attention as that would be a horrendous signal that the fall in stocks could become even more serious than it already is.

Dr. Copper would be signaling a sharper contraction in the overall global economy and would bring into serious challenge the idea of "buy the dip" in stocks which has been the featured sentiment for longer than I can remember now. If the equity market sentiment shifts towards one of "sell the rally", look out!
Speaking of equities, let me post up a quick chart of the Russell 2000 index. That is about as broad a basket of stocks as you can get. Two things to note. First - the highs near 1213 are now confirmed as a Double Top on the chart. The reason? Because support zone down near 1080-1075 has failed to hold. Bulls still have a chance to end the week back above that level in the last two trading days but the current negative sentiment seems quite strong for now.
Secondly - the market has officially entered "CORRECTION" territory - which is defined as a move of 10% + off the peak high. Notice however that for the market to be declared officially a "BEAR", it would have to fall to near the 975 level and collapse through that level, preferably on strong volume.
Thus, even though the selloff is incredibly violent at the moment, the market is undergoing a correction and has not yet, from a technical analysis standpoint, entered become a Bear. In other words, the Bull is wounded but not dead yet.
Take a look at the S&P 500. It is quite different from the Russell. The index is flirting ever so dangerously with entering "CORRECTION" territory in today's session.
Note how far down below the current price level it would have to drop to turn the BULL into a Bear. Stay tuned... as usual, time will make things clear for us but for now, the Bears have the upper hand but the Market is moving to levels that might shake the bulls out of their stupor.
What is also rather interesting on a day like this is that while the Dollar has been getting shellacked, on the chart, it is still just bouncing up and down like a ping pong ball going nowhere. It is still stuck in a range between 87 on the top and 85 on the bottom. It did violate the bottom of the range early in the session but has rebounded and move back within the "box".
Cattle are all over the place today. First they sold off quite sharply across the Board. Then the two front months began to move up and turned positive. Then the sellers came back in again and back down they went. The big fund long contingent in this market is fighting for dear life NOT to be flushed. Right now it looks as if they are losing the battle but the close is about 20 minutes off so anything is possible. It is amazing watching the amount of money some players will spend in an attempt to defend a position.
Gold thus far has been able to shrug off the selling pressure coming in from those selling it to cover losses in stocks but is having some difficulty getting through the $1250 level. Silver is being drug lower by copper but getting some buying related to gold's good showing. I fear that if copper cracks $3.00 decisively, silver is going to fall.
With the current equity weakness, unless we get some dose of economic data that is surprisingly strong ( say a jobs number ) instead of the surprisingly weak data we have been getting, gold is drawing support from ideas that any notion of the Fed raising interest rates soon is effectively DOA for the time being.
What a day... I am already ready for Friday afternoon and it is only Wednesday!


  1. As usual, great piece, Dan. Today in Euro, it blew off, kind of like the Yen a couple months ago. It was a gift, imho. Tight stops are worthless, so stay out if you can not take the volatility. Unless of course you are 77, who trades them all.

  2. The PPT has it's work cut out for it...... Never mind, looks like they just jumped in with both feet. Be interesting to see today's close.

  3. Beige Book: US economic growth modest to moderate, similar to last month.

    let's see if the fed pronouncement can hit gold, it's -9 from high o day. silver below the 17.74 mentioned alot to be stopping it.
    HUI fading to low o day after a 20-dma touch for it's high o day.

    perhaps the copper longs were long something else and had to sell it all.

    one nice thing about the volatility is you can be wrong on a trade, but it cycles back to give you one chance to get out with a small loss, or to reverse and be correct!

    if SPX closes well it would change the margin call theme we've had lately. $TRIN did go up near 3.00 which has happened historically right before a swing low.

    ES traders were talking that ES hit the 10% correction number today:
    "35+ handles straight off the 10% correction level of exactly 1813.0 in ES"

    walmart warns:
    Wal-Mart sees 2015 sales growth now in 2-3% range vs 3-5% initially expected.

  4. Dan -

    Maybe you are right about equities - we have further to fall.

    However, there are some positives for equities.

    1] We have oil going from $100 to $80. What do Americans do with that money?

    2] Even if there is a minor or symbolic increase in interest rates - that helps the TBTF banks.

    3] Would a lower exchange rate - meaning a higher Euro help Europe and China who are dragging down the world economy?

    I think you still see a higher dollar which effectively helps the global economy - even if it is not that great.

    1. jmsvett;

      nice bounce in the equities right now as I answer this my friend. Bulls are hanging in there for the moment as the market is well off its lows.

      I will be the first to admit that falling energy ( and FOOD ) prices are a big plus for the US consumer but that depends on how they "feel". If people are scared once again and begin pulling in the reins on spending, that is going to further pressure economic growth which then creates that feedback loop that we are all so familiar with by now.

      The single biggest thing that the Fed has had going for them throughout this entire "recovery" from the credit crisis of 2008 has been the salutary impact of a rising stock market. That feeds consumer confidence even if many are not directly being impacted by it (those who are still not part of the investor class). If the equities plummet further and if the Ebola thing worsens, I do not think falling energy prices are going to make much difference at that point buddy.

      Let's see how the stocks close here...

    2. Call me crazy. I think this Ebola thing while very very very serious in nature, is overblown/paralyzing Americans right now. Even in the 3 primary African Nations - the incidence is not as high as most people would expect.

      I think if anyone can fight and squash this - its the American public/nurses/doctors and education.

      As for the stock market - yes, these are crazy levels of valuations. But take a look at PE ratio's. Are they really that crazy? 18.03 if you google PE ratio of S&P 500.

      Is deflation a huge problem? Yes. There are now oil fields in the US that are running losses, though.

      As usual, lets see how it plays out.

    3. I can see people getting really really mad at me about downplaying ebola.

      To head it off. This guy who died in Dallas. He was symptomatic living with three people. In and out of a hospital. The three people he lived with never got ebola symptoms. (Now has it been 21 days?). Here I can be wrong.

    4. "1] We have oil going from $100 to $80. What do Americans do with that money?"

      Something crazy like saving! Paying off debt! Preparing for a rainy day! Naw... lets just go out to eat, buy a twelve pack and try to figure out this damn new I-phone.


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