VIX Rising but still no worries (Yet)

The Volatility Index or VIX, is a useful index for measuring investor/trader sentiment in regards to the broader stock market's health. It reflects option premiums and is therefore a decent way of peering into the thinking of those who write the things and what they are expecting/fearing in the immediate future. As with any market index, it has its shortcomings but all in all, it is remains a good gauge of sentiment.

While the following chart is not scientific it is helpful in understanding the impact of the Federal Reserve's monetary strategies over the past few years.  I prefer to look at this chart as a demonstration of official monetary sector meddling into the affairs of capitalism/free markets.

In simple terms, the lower the index moves, the less fear or concern option writers and thus investors in general have towards the health of the US stock markets. When the index is rising, it reflects unease/discomfort/fear in those degrees.

Note how sharp spikes upward have been accompanied by expectations of the ending of previously announced and implemented rounds of Quantitative Easing. You can see the first of these spikes back in April 2010 when QE1 was coming to an end. It was not long after that the Fed announced the next round of QE, this one involving outright purchases of Treasury bonds. That was good for another outbreak of "DON'T WORRY- BE HAPPYitis" among the Wall Street crowd.

Of course, once that virus ran its course and QE2 expired in the summer of 2011, back came the awful realities of the gargantuan mountain of indebtedness overhanging the US economy. Even with those artificially induced lower long term interest rates, those stubborn consumers were not spending fast enough to offset the proliferation of bad debts, foreclosures and delinquencies. Throw on top of that massive problems in the Eurozone and investors actually seemed to awaken from their drunken stupor of indifference long enough to begin worrying.

"Tsk, Tsk' said the Central planners and out came the European Stability Mechanism in conjunction with the Fed's "Operation Twist" (the sale of maturing shorter dated debt in exchange for the equivalent amount of longer dated debt) and PRESTO! - ALL WORRIES GONE. "I CAN SEE CLEARLY NOW, THE RAIN IS GONE. I CAN SEE ALL OBSTACLES IN MY WAY.... IT'S GONNA BE A BRIGHT, BRIGHT, BRIGHT SUNSHINY DAY".

Down falls the fear level among investors as the injection of drugs courses through their veins. Greece however flared up again, as did Portugal, as did Spain and others in the Euro Zone and that produced a fleeting burst of anxiety/concern among investors early this year. With the ECB and the Eurozone ministers working feverishly to calm worried markets, it did not take long before all was well once again.

Now, as we have entered the final quarter of this year, the Fed has announced another round of QE (QE3), this time consisting of the purchase of $40 billion per month of Mortgage Backed Securities. It is odd, considering the reaction of the market to past pronouncements from the Fed, that the VIX actually spiked a bit higher instead of sinking even further on the news.

The index did move lower however in October when proof of the actual buys under this latest round of QE were evident. However, it should be noted that the index is beginning to rise again.

This is rather noteworthy to me as a trader/chartist. If this was a commodity, I would be looking to buy it based on the chart pattern. It has failed to make new lows and instead has a mini uptrend occurring since August of this year. Could it be that the Fed's QE's are beginning to lose their luster on the markets? Are the amounts considered to be insufficient by the broader market? Or is it perhaps the current "fiscal cliff" talks which are overwhelming trader sentiment in general? Either way, something has this market a bit nervous when compared to the recent degreeof complacency that we have witnessed in response to recent Fed announcements.

This leads me to believe, based on the analysis by Goldman last week and the comments from some current Federal Reserve governors, that another round of QE (QE4) is forthcoming. The Fed is simply not getting enough bang for their buck from QE round 3.

There are a couple of other factors at work here also. Many in the investment class are worried about tax hikes coming next year. Combine that with concerns about taxes on dividends nearly tripling and a spike in capital gains taxes and some investors are cashing out now before the Obama regime's grab of more money commences. Throw in further uncertainty about the impact of Obamacare on business and further regulatory burdens, and a growing number of investors are cashing in before 2012 ends. Clearly nervousness is rising meaning that the Fed is not only now fighting the deflationary forces arising from excessive debt levels but it is also fighting the results from the recent election.

At this point, based on the charts, it looks to me like some market participants are bracing for another fall back into recession in the US. Look at the chart of the Ten Year Treasury Note Yield. It is basically flatlining.

Gold Bulls Attempting to Hold the Line at the 100 Day Moving Average

Today's breach of both psychological as well as technical chart support centered near the $1700 level has set the bulls on their heels while raising the spirits of the gold bears.

The market has not been able to get its feet solidly underneath it since that beating it took last Wednesday. When the overnight seller/sellers of large size managed to shove it down below the low of that last Wednesday, they found the stops that they were hoping to find and then some.

The market is now moving purely on technical momentum as there is really not a lot in the way of fundamental developments. The Dollar is actually lower today while at the same time reports indicate strong buying of gold in Asian markets. Don't forget also the surge in gold bullion coins as the public begins to finally show some signs of nervousness/unease with the general state of the US financial picture.

A large portion of this move lower is being blamed on the break down in the so-called "negotiations" over what has been dubbed the 'fiscal cliff'. I say so-called because one side shows no concern whatsoever for the enormity of the sums of indebtedness that they are heaping onto this nation's back. Be that as it may, there is about as much possibility of anything that would actually SERIOUSLY impact the long term fiscal deterioration of this country coming out of this group of politicians as there is of a snowball emerging unscathed from a journey into hell. They will continue spending us all to hell.

The fact is that the US is technically bankrupt, if one wants to use the actual definition of the word, and will be forced to borrow increasing amounts of money with which to fund its profligate manners. The Federal Reserve will buy a huge chunk of those IOU's in their mad attempt to continue pushing down longer term interest rates thereby further distorting the market signals and just compounding the damage that will be inflicted when it comes time to pay the piper.

QE4 is coming your way this month to be followed in the future by QE5, QE6 and then QE to infinity as my good friend Jim Sinclair has rightly dubbed it.

I am not sure what the trigger event will be but at some point, the VELOCITY OF MONEY, will begin to pick up. When that occurs, the Dollar will drop into the abyss and all of us will pay the price for this exercise in idiocy by the Fed as we watch our way of life descend with it. I dread the coming day when a shopper will head into the grocery store and come out with a single box of Corn Flakes costing $10.00.

Back to the Chart - Gold is trying to hold at the 100 day moving average level which is a key technical support point especially for the hedge fund computer algorithms. If this level cannot inspire an immediate bounce higher, one that takes the price back above $1720, we are going to head to $1680 to see if that will stop the bleeding. That is a big chart level of support with a significant amount of sell stops sitting below it so believe you me, some of these gold bears are salivating at the prospect of getting to those. The big question is whether or not the Asian buyers put an end to this downdraft or are willing to wait for prices to fall even further before they step in and end the bear's party.


If for some reason this market were to get to $1680 and break down, the next level of support does not surface until near $1640. One suspects that Asian Central Banks and other Central Banks around the globe are getting their order desks ready.

The "Whack-a-Mole" Gold Bandit Strikes Again

Ever since Wednesday of last week, gold bulls have been on edge. An unusually large surge of sell orders on that day broke the price of the metal sharply lower making a large number of recently purchased put options extremely profitable while simultaneously inflicting some serious chart damage to the metal.

Friday of last week saw another barrage of selling with the market attracting some bargain buying in yesterday's session (monday).

Once again it seems as if the mysterious whack-a-mole bandit has struck the metal. This time it was in the middle of the night here in the US, a few minutes before midnight in the Central time zone. Volume surged to levels not normally seen except during the busy pit session trading hours.

Take a look at the following price chart where you can clearly see the SHARP SURGE in volume in the middle of the night. Notice how that volume spike compares to the height of the volume bars during the pit session hours. That is what makes it stand out so obviously.

It is evident that selling of this nature was designed not to obtain the highest possible selling price for a rather large amount of metal to sell. That would have been done by a measured selling program of scale up selling into both short covering and some fresh buying, as that which occurred on Monday. NO, selling of this magnitude is done with one purpose and one purpose only - to take down a market.

Some of the usual skeptics will no doubt instantly dismiss such talk of manipulated price again. Attempting to convince such is a fruitless endeavor. Someone could piss down their backs and they would still believe it is raining. Truth be told it matters not whom the culprit/culprits are; their footprints are unmistakeable.

Gold will need buying on the physical markets to absorb the speculative long liquidation and fresh shorting that is now occuring as a result of this technical breakdown of the paper markets. That means Asian buying and Central Bank buying.

Monthly Gold Charts

Trader Dan interviewed on the King World News Metals Wrap

Please click on the following link to listen in to my regular weekly radio interview with Eric King on the KWN Weekly Markets and Metals Wrap. I have returned after taking a brief hiatus for Thanksgiving.

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2012/12/1_KWN_Weekly_Metals_Wrap.html

Federal Reserve Official Singing the Praises of Unlimited Money Creation

Late this afternoon, a story appeared on the Dow Jones newswire service relating a speech given by Federal Reserve governor Jeremy Stein. In his prepared remarks he defends QE3 and seems to be strongly arguing for an additional new round of QE4.

I must say that it certainly appears these monetary elites really do believe their own BS. If creating lasting prosperity was this easy, what in the world took mankind so longer to figure it out?

I think the most preposterous of his remarks was his claim that the ultra low interest rate environment being created by the Fed has allowed companies to refinance large portions of their current debt at "cheaper, longer-dated terms". This, he claims, helped strengthen the economy and "was a good thing from a financial stability perspective".

Yes, that is not a misquote.

Anyone who trades the markets for a living will tell you that the Fed's actions have created unprecedented volatility as its actions are intended to counteract the deflationary forces arising from the excessive levels of indebtedness that are swamping over the entirety of the global economy but particularly those economies of the fading West.

Instead of allowing the system to clear, as painful as that will be, the Fed continues to try to entice additional borrowing by forcing down long term interest rates to insanely low levels. This, they claim, is a good thing.

There is however a nice, dirty little secret that Mr. Stein, more than likely inadvertently, let out of the bag. Here is the takeaway quotation....

Research shows "Treasury buying is associated with increases in stock prices, which in turn can have wealth effects on consumption and investment".

There ya have conclusive proof that a major strategy of the Central Bank is to produce enough funny money to jam the stock market higher and by so doing, make consumers feel wealthier as they examine their 401K's and retirement portfolios as well as inducing businesses to expand based on a rising price for their stock.

To hell with the impact that this will have on the middle class and average American citizen over the long term. While they may "feel better" now that the Fed has been successful in creating paper asset inflation among stock shares, they are going to "lose that lovin' feelin" when this same deliberately designed inflation shows up in food and energy prices.

Yes indeed, America thanks you Mr. Stein, you and the rest of your shortsighted fools at the Federal Reserve.

http://news.yahoo.com/feds-stein-backs-qe3-says-policy-remains-effective-004501841--sector.html

Silver and the Risk Trade

I have posted the following composite chart without any easily discernible labels to illustrate why I analyze the silver market in the manner that I have been doing for some time now.

Both charts use last November 2011 as the starting point and carry on through the present trading session. See if you can pick out which one is the Continuous Commodity Index and which one is the Silver price.

Surprised? You should not be. As I have stated repeatedly, silver is moving in near perfect tandem with the RISK TRADE. When risk assets are in vogue, silver will move higher; when risk aversion is the play, silver will move lower along with the rest of the commodity complex.

There are occasional deviations from this pattern but as the chart clearly demonstrates, the connection between the two is undeniable.

The Fed is basically doing everything within its power to keep Wall Street happy and the hedge fund crowd pouring loads of hot money into risk assets (equities and commodities) to drive a stake through any sort of deflationary expectations. Heaven help us all if the VELOCITY OF MONEY ever begins to seriously uptick.

But what they are also attempting to do at the same time is to prevent the bond markets from signalling the least bit of inflationary pressures. So far they have been able to pull off this stunt. One wonders how long the game will continue without any measurable ramifications.

What you can definitely say that they have done however is to destroy the ability of seniors to live off their life's savings seeing that they have killed any hope of them getting a decent rate of interest for the next 3 years on savings accounts. Simultaneously, they are also setting up the commodity markets for another surge higher should the hedge fund crowd become completely convinced that the Fed has killed any deflation fears.

If we see silver break out into a strong uptrend move, watch the buying power of the middle class drop into the toilet as the cost of the essentials of life will be rising right along with it.

This article in the Wall Street Journal detailing Costco's end run around next year's tax increase on dividends is too interesting a read to ignore.

It continues to prove the disconnect between those big monied interests and the average small business owner who ends up bearing the brunt of their "go ahead and raise taxes" BS.

November 29, 2012, 7:39 p.m. ET

Costco's Dividend Tax Epiphany

Obama's fans in the 1% vote to beat Obama's tax increase

When President Obama needed a business executive to come to his campaign defense, Jim Sinegal was there. The Costco COST -0.68%co-founder, director and former CEO even made a prime-time speech at the Democratic Party convention in Charlotte. So what a surprise this week to see that Mr. Sinegal and the rest of the Costco board voted to give themselves a special dividend to avoid Mr. Obama's looming tax increase. Is this what the President means by "tax fairness"?

http://online.wsj.com/article/SB10001424127887324705104578149012514177372.html?mod=WSJ_Opinion_LEADTop