"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


Thursday, October 9, 2014

Two Charts

The charts speak for themselves...

Did the Last Bull Standing Finally Give up the Ghost?

By that I am referring to the cattle markets which, as the regular readers have no doubt noticed, I have been watching carefully to see if they are going to go the way of the rest of the commodity world, namely down.

As noted in an earlier post from today, cattle are one of the very few commodity markets in which hedge funds have been overwhelmingly big longs. They have pushed and shoved, and pushed and shoved on this market for nearly two months now, even as the rest of the complex ( the GSCI) has been plummeting lower.

In my mind, it was thus just a matter of time before they gave up the ghost. While the longs have been reaping huge profits, the hapless bears have been handed their heads and then some. Margin clerks have been extremely busy phoning small specs on the short side of this market and telling them to either pony up some more cash or close out their badly losing positions.

Today, maybe, possibly, we have seen this complex top out. For me it comes back to the demand side of the equation. High priced beef in an economy that is not growing all that rapidly and in which wages are stagnant/flat will price itself out of the demand chain. While falling gasoline prices have freed up a bit more disposable income for consumers, it is hardly enough to justify the kinds of prices we have seen at the grocery counters.

I want to see how these things close out the week tomorrow but for now, it could be another commodity futures market is succumbing to the general downward price trend, albeit from extremely lofty levels.

One reason I am hesitant to get too bearish on these things is because of what they did back in early August. The beef got too expensive, it moved lower and down went the moo-moo's only to have uncovered strong demand at the wholesale level at those lower prices. That sent the cattle market right back up again, this time to make all-time record highs.

As far as a longer term top in this market, I would need to see this contract fall below the September low before being more confident that this is merely the beginning of a correction in an ongoing bull.

Incidentally, since this morning's early post, I am noting that the HUI has dropped even further as it is moving with the broader equity markets and essentially following the S&P 500. However, the latter is down 1.86% as I type these comments while the HUI is now down 4.8%.

The GDXJ is being savaged even worse as it is off nearly 6% today.

Switching briefly to the broader markets - here is the Russell 2000. Talk about something that looks potentially devastating. The close tomorrow to end the week will be extremely important from a TA standpoint. The index has fallen below the key support level noted, a level which I should add that has held the market on the downside for over a year now. Currently the index is off its peak nearly 12%. A correction is usually, for TA purposes, defined as a 10% fall off the top. Bear market territory begins, again for TA purposes, at 20% off the peak. Thus we are in the nether-realm ( Mortal Kombat fans) between the two.

King Dollar has not been Dethroned Just Yet

Trying to get a read on these markets during the times that the Fed is either announcing policy changes or releasing minutes can be incredibly difficult. The sheer ferocity of the moves in price can confound even the most astute and dedicated chart watchers.

It would appear at this point ( don't hold your breath however as who knows what will happen in the next hour much less the next day in these markets anymore) that the Dollar found eager buyers at the key breakout level near 85.00 on the USDX chart.

Note that the Dollar fell back to that former resistance level which is now serving as downside support and that support did hold. That it did so, in spite of the Fed's concerns over its strength, is rather telling. It shows that the fundamentals supporting the Dollar are just too strong right now, Fed protestations notwithstanding.

it all comes back down to interest rate differentials. Traders are of the view that economic data releases that are forthcoming are going to show continued improvement ( albeit gradual) and that compared to other major currency regions, that strength is noteworthy.

Look at the Euro for Pete's sake - it is down over 55 points as I type this with forex guys wasting no time in selling into its rally.

When it comes to gold - just like yesterday when we had to give respect to the big rally in the mining shares, so today we must give respect to the fact that the miners are sinking once more. The HUI is off over 4% with the junior-laden GDXJ getting pummeled once more as it is off more than 5.5% as I type up these comments.
Also, as one of our regular posters noted ( we are all watching that now) the big gold ETF, GLD, actually LOST gold yesterday - almost 5.5 tons to be precise. Apparently those in that vehicle used the big rally yesterday to get out. The ETF is now down 36.14 tons since the beginning of the year. For those who are bullish on gold, that is not an encouraging sign. One wants to see the reported holdings climbing on rallies, not shrinking.

I am noticing that silver is having trouble holding its gains above the key chart resistance level near $17.50. It managed to push past that level earlier in the session ( failing to make it as far as more formidable overhead resistance near $18.00) but has since fallen back. Copper is continuing to hold above $3.00 which is helping silver but with the Goldman Sachs Commodity Index continuing to swoon, one has to be skeptical about the extent of any upward moves in these metals continuing much further.

The bulls will have to prove their mettle ( a little play on words here).

Here is the most recent GSCI.

The index is one point above a 27 month low. If it drops more than a point, it will be at levels last seen FOUR YEARS ago!

Crude oil and the products continue to weaken - I noted that yesterday this sector failed to respond to the big sell off in the Dollar - that was a sign that the fundamentals are just too poor which makes me even more concerned about deflationary pressures. Crude has dropped $22.50 / barrel in 3 1/2 months time. That is why I keep telling those who are stuck on inflation that they need to check their ideology at the door and look at the chart. It is going down, not up.

Personally, as a consumer, I LOVE it.

Depending on the outcome of the USDA report tomorrow, we might just get a break of that 27 month low level. Heck, if crude keeps falling today it might do that today! (NOTE - Before I could finish typing this post the GSCI just fell BELOW that 27 month low - it hit a FRESH FOUR YEAR LOW TODAY).

Again, at the risk of beating a dead horse, this is the reason that I remain skeptical about any SUSTAINED moves higher in both gold and silver. What we witnessed on Monday of this week and yesterday were what happens when the Dollar weakens. My viewpoint is that the Dollar has been and will remain the key for many of our commodity markets.

The sheer magnitude of these leveraged carry trades overwhelms anything fundamentally driven for a time but if the general trend is one of lower commodity prices due to slowing global growth, it is hard to see how a few words from the Fed can significantly alter that trend WITHOUT some sort of action. Remember - Central Bankers are very good at moving their currencies by talking them down or talking them up, but IF the movement is AGAINST the primary trend, which is driven by fundamentals, the countertrend move will not have any staying power. It takes a shift in the fundamentals and that means a shift in policies.

I keep watching the cattle market in awe wondering at what point the fun and games for the bulls are going to come to an end. Funds have been big longs in this market and it is one of the very few that have been bucking the trend in the commodity sector in general so they are pushing it for all their worth. Funds LOVE DRIVING BULL MARKETS HIGHER. They always overdo things however. The trick for a trader is trying to read the market to figure out when they have done just that. As of now there is still no sign of a top in these markets ( both fats and feeders).

My own view is that cattle are living on borrowed time but I am not dumb enough to get in front of a fund-driven freight train at the moment.

Corn could be setting itself up for a big fall ahead of tomorrow's USDA report. Some players have been trying to squeeze out the shorts based on harvest delays but from what I can tell, private forecasting firms are all upping their yield estimates. It will take a rather bullish report from USDA tomorrow to keep prices at these elevated levels. If the USDA increases the number of unplanted acres but kicks up the yields, traders who have bid prices up ahead of the report might well be left high and dry. Many in the industry continue to marvel at the yields from some areas that have been harvested.

There has been some chatter that more acres will go to beans down in S. America in lieu of the very high bean prices in relation to corn and that is the reason being given for buying in the corn pit but that seems to be quite a bit of a stretch at this point given the massive crop that is coming our way. That will probably be the case, as well as here in the US for the next planting season - but we are talking about a huge carryover for this year.

Yes, harvest is being delayed in some areas due to the rains but one thing that many traders continue to underestimate is the speed at which US farmers can both run those planters and harvest their crops when they do get an open window. The days of 4-6 row tractors are over for the average farmer.

I love witnessing the wheat harvest up here my way as I am just awestruck by the size of those combines. They are IMMENSE and can really chew their way through a field quite rapidly.

Harvest delays are just that - "Delays" - that is one thing. Crop quality deterioration is altogether another thing. So far there are no reports that I am seeing of quality issues in regards to the rains and the crop.

Remember that big recent rally in wheat that some in the trade were attributing to wheat having fallen far enough in price to bring some increase in export buying. Today's export numbers sure as heck obliterated that argument. Down went wheat as apparently wheat above $5.00 is not conducive to exports so pushing it up even more doesn't make a helluva lot of sense if you are trying to garner some business. Looks like it is going to have to retreat once more to see if it really can move low enough to get competitive with the rest of the global supplies out there.