Watching for Evidence of a Shift in Sentiment

For some time now the general sentiment in the broader markets has been that economic growth is slowing, in spite of Central Bank efforts to stimulate it. We have seen that in data coming especially out of the Eurozone. We have also seen it in Japan, whose Central Bank just recently evidenced how stubborn the deflationary pressures have been in their economy.

Here in the US, last Friday's payroll numbers, which was mildly disappointing, the market reacted by selling the US Dollar with the thinking that the Fed would go slower on any potential rate hike.

In the commodity markets, we have seen in sinking commodity indices in responses to sharp moves lower in crude oil, natural gas, unleaded gasoline, grains, sugar, etc. across the board.

Thus far the sentiment has been in which there is no inflation with the general threat being regarded by Central Bankers as one of deflation , or in their terms, disinflation.

It is this sentiment which has resulted in money flows out of commodities in general and into equities.

In attempting to discern when/if this sentiment might be changing, I have been closely monitoring both copper and crude oil prices. Just yesterday I mentioned that the close of copper below the $3.00 level was something that concerned me, especially with crude oil prices going into a downside freefall.

Something else I watch is the action in the Australian Dollar. I view this currency as a sort of "quasi growth currency". The reason is because so much of Australia's economy is dependent on the export of the huge amount of raw materials it produces. Basically, if world economic growth is moving higher, especially growth in its neighbor China, the Aussie tends to benefit. The converse is true if growth is slowing.

With that in mind, take a look at this intermediate term chart of the currency. Notice the sharp rise beginning in early 2009 which was when the Fed launched its first QE program. Optimism was high that it would be successful in liquefying the financial system and growth would ensue.

Somewhere along the line however, it dawned on markets that Central Bank efforts, including those of the ECB and BOJ, as well as stimulus efforts by China, were not having the intended effect. The currency then began a slow, grinding move lower.

As of this week, it has surrendered exactly one half of its gains from the beginning of QE1, back in early 2009.

So where from here? Good question.

Today, there were two pieces of news that hit the market which came as bullish surprises for the economy. The first of these was Eurozone GDP numbers which, while still pitifully weak, were better than anticipated. The second was US retail sales, which surprised to the upside as well coming in at +0.3% for October compared to an expected +0.2% rise.

Together, both pieces of data had the effect of pushing the Euro higher at the expense of the Dollar but it was especially was seen in the Nasdaq. That market has been lagging the S&P 500 and the DOW, which as the reader knows, have both made new lifetime highs this year. The Nasdaq has not. Today however it pushed up towards levels last seen in March 2000.

I am watching very closely to see if there is any sort of hint, that sentiment might therefore be shifting away from the "slowing growth" scenario to one of "the global economy is over the deflation scare and now will work towards one of growth". Please note that I am NOT saying such a sentiment is here; I am merely stating that to be successful at this business, one has to constantly gauge sentiment which influence money flows and money flows influence price.

It is that simple, especially when it comes to silver, but even gold as well.

Next week we are going to get some more pieces of economic data as well as the minutes from the Fed's October FOMC meeting. This will give us some fresh data to work with to see what kind of response the market has.

My thinking is that if there is indeed any shift that has actually taking place, something of more significance than the price action of a single week, it will begin to show itself in the Australian Dollar chart and in copper and in crude oil.

I noticed that crude oil cut yesterday's horrendous losses by half in today's session and that the XLE was up more than 1%. It is interesting to note that the XLE has performed much better overall than the price of crude itself. Today looked a lot like some big players were taking the opportunity to renew their exposure to the energy sector.

Remember, silver needs a "solid growth environment", one in which inflation dominates, rather than disinflation or deflation, if it is to thrive. In my view, silver is NOT a safe haven. If the sentiment begins to shifts towards one of slow but steady global growth, silver will probably bottom down here. If the sentiment is a short term phenomenon and we start getting more evidence of economic stalling, it is going back down again.

Time will of course make things clear, but I would strongly caution would be silver bulls who are constantly warning us about how crappy the US economy really is and how the stock market is really just a huge bubble, to be careful what they wish for in terms of stocks. they really seem to believe that if stock prices implode silver will soar and therefore are always rooting for equities to tumble as they constantly nitpick and criticize anything positive about the US economy that might actually happen to be reported.

Let me just say this -  If equities were to fall out of bed because markets begin fearing overpriced stock valuation in a slow growth environment, guess which way silver is going? Hint - it ain't higher!