Fund Money Flows Continue Wreaking Havoc

In yesterday's post I mentioned to not put too much into a single day's price action as hedge funds are allocating money into various markets and yanking it out of others to start off the New Year.

The result so far has seen gold giving back all of its gains from yesterday, plus some, with silver surrendering nearly all of its gains as I write this. Silver looked shaky to me yesterday given the fact that the other base metals were so strong. In that environment, it should not have faded 50 cents off its best level of the session.

Even copper is surrendering some of its sharp increase from yesterday along with palladium, which is getting smacked. Platinum however is going the other way and that is up.

Don't forget that we are now in an age in which the word "SUBTLE" is unknown amongst the giant hedge funds.

They come crashing into and flying out of markets in the blink of an eye (check that - faster than that thanks to their algos) with very little regard if any to the disturbances that their buying and selling create in the markets in which they decide to play. This positioning is going to continue into tomorrow but maybe by the time the dust settles on the trading floors at the close we will have a better indication as to what to expect the start of the first FULL week of trading next Sunday evening/Monday morning.

Part of the weakness in gold and silver today is coming from two fronts - the first of which is the lowering of projected gold prices for 2013 and 2014 by analysts at some of the major investment banks. The chatter on that front is that the economy is improving enough to reduce the FEAR FACTOR that has supported gold prices. With that removed, returns on stocks look promising to many hedge fund managers and that has them looking more at equities and the base metals rather than the precious metals. Apparently the minutes from the latest FOMC meeting, in which there was some debate among the various governors about the duration of the QE3 and QE4 programs has gotten some looking for a cessation of the easy money policies of the Fed sooner than the market was expecting.

I do not buy into that notion since the only thing propping up the economy has been easy money policies but as said before, everything nowadays in these markets is ultra short term thinking. I have jokingly told some friends that a LONG TERM TRADE in these new normal is 60 minutes!

The other reason is the inability of the gold shares to sustain any sort of upward momentum. Yesterday, the HUI gapped above resistance at 450- 452 but then immediately began to attract selling. Today, that selling has intensified as the index has been steadily sinking lower since the start of the session.

I am going to refrain from too much on the technical analysis front today for the above-mentioned reasons but let's just say for now that the $1700 level is now become reinforced as a formidable overhead resistance level that MUST be breached for a trend to begin in gold. Prior to that however, gold must clear and STAY ABOVE $1680 if it is going to go anywhere in US Dollar terms.

Gold in Euro terms and in Yen terms looks significantly better right now than it does in US Dollar terms.

The Dollar is experiencing a sharp rally higher today and that is bringing general selling pressure across the commodity sector but oddly enough, if this were a RISK OFF trade, the bonds would be moving sharply higher - they are not! Iinstead they just fell apart as I wrote this.

I am watching the price action in the long bond with EXTREME INTEREST right now as it is right on the verge of a major breakdown. As of now, I am not clear what message this is sending but I find it ironic that long term rates on Treasuries are moving higher today after all the backslapping and self-congratulations we witnessed among the political class yesterday after their "triumph" of avoiding the fiscal cliff, for two months. Maybe, just maybe, the larger market is getting sick and tired of the dysfunctional government in the US and their inability to GET SPENDING UNDER CONTROL in a serious, adult-like fashion. Could it be the markets are sending a message to "GET YOUR HOUSE IN ORDER OR ELSE"?

Again, I am not sure but if these bonds do break down, all bets are off as to the US economy in the months ahead. The last thing that policy makers or the economy wants to see at this juncture is higher long term interest rates.

By the way, as I am finishing this commentary up, the FOMC minutes suggesting that the bond buying program, especially QE4, might end sooner than the end of the year, just wiped out the floor of support under this market. If the FEd is not going to buy these worthless IOU's in the quantity that it first announced for that duration that it also announced, then one has to wonder who in their right mind would want to hold them given the fact that interest rates are just too damn low on them. Rates will have to rise if the Fed no longer sucks up $40 billion a month of these things.

That Dollar rally is probably coming as a bit of relief to the currency with traders thinking that those same FOMC minutes are supportive to the currency, given the thinking that the Fed might not be proceeding to debauch the currency at the same rate as previously expected.

Let's see what tomorrow brings...and how long any of this lasts. It could all be forgotten by the time New York opens tomorrow morning for all that any of us know.

I am reminded of that famous scene in the Original "Planet of the Apes" in which Charlton Heston, cries out, "IT'S A MADHOUSE, A MADHOUSE". He must have been talking about today's financial markets.

Just how Bad is it?

I highly recommend the following article for those who are trying to keep up with the nation's financial condition. It is a very good summary of the enormity of the problem that is rapidly coming down the traintrack.

It’s a Spending Problem

By Yuval Levin

January 2, 2013 2:37 P.M.

http://www.nationalreview.com/corner/336777/it-s-spending-problem-yuval-levin

Sadly, because the problem of growing US indebtedness is not a flashy one, nor one that tugs at the heart's emotions, it is generally ignored by the useless mainstream media. For that part, it is also way off the radar screen of the vast majority of the American citizenry who are far more knowledgeable about what is going on in "Pawn Wars"  or "Gator Boys" than they are in the bakyard of their own nation.

I pulled the chart out of the article to highlight the extent of the catastrophe coming our way. Do yourself a favor and read the entire article and then reflect on the fact that the so-called "FIX" to the problem that our wondrous leader and the Congress came up with does absolutely NOTHING to even put a dent in it.

Do any of you remember that experiment which was conducted some time ago when chimpanzees were used to pick stocks for investments? If I recall correctly, they threw darts at a dartboard containing the names of various stocks and then those were chosen to make up a trial portfolio which was then compared to another portfolio chosen by the "experts". There was no measurable difference in the end result.

http://www.marketwatch.com/story/dart-throwing-chimpanzee-still-beating-funds

Maybe we should bring on the Chimpanzees and vote them into office to guide our nation's policy. They surely cannot do any worse than what we now have....

By the way, the chart below is drawn AFTER the FIX passed by Congress yesterday and signed, (by auto-pen from Hawaii) from the once again vacationing Golfer in Chief). Feeling better yet??

The Cesspool on the Potomac

If you ever needed any further proof (not that we do at this point) how hopelessly corrupt Washington DC has become, take a look at the following report from "The Washington Examiner".

The package of legislation to come out of that vile place screams to heaven itself how far gone this nation is and how nothing can be done to reverse the inevitable slide into decay and mediocrity.

One thing I am more and more convinced of with the passing of each week - the fact that former Senators/Congressmen are allowed to serve as lobbyists for industry once they are either defeated in an election or choose to retire is a major source of the scum that floats on the surface of the water in Washington D.C.

Get rid of that and institute term limits and maybe we can eliminate some of the ills that afflict DC.

Tim Carney: How corporate tax credits got in the 'cliff' deal

January 2, 2013 | 6:00 pm

The "fiscal cliff" legislation passed this week included $76 billion in special-interest tax credits for the likes of General Electric, Hollywood and even Captain Morgan. But these subsidies weren't the fruit of eleventh-hour lobbying conducted on the cliff's edge -- they were crafted back in August in a Senate committee, and they sat dormant until the White House reportedly insisted on them this week.

http://washingtonexaminer.com/tim-carney-how-corporate-tax-credits-got-in-the-cliff-deal/article/2517397#.UOTPwUbDVSJ

Gold up to Start the New Year

While both gold and silver had nice days today, they both made their best levels earlier in the session. The rest of the session was pretty much spent going nowhere and fading off their highs.

Try not to read too much into any of these markets, with a few exceptions, based on one day's performance. What we are witnessing is both a combination of relief buying associated with a miserable, rotten piece of legislation that will accomplish nothing except to ACTUALLY INCREASE THE DEFICIT but has temporarily served to asssuage fears overs the so-called "fiscal cliff" and the fact that hedge fund managers are committing lots of brand new money into the markets to start off the year. This positioning or allocation of hot money is going to come in regardless of the fundamentals in those markets which have been selected by the hedgies as the go-to investments for the New Year.

In the grains, a host of that new money was greeted with jubilation by bears who wasted no time in using the machine buying to sell at a much better price than they were originally hoping for.

The liquid energies went the opposite direction as crude ran nearly to $94 before it too faded and fell back off its best level. Copper had a huge up day which certainly did not hurt the cause of silver one bit. As a matter of fact, the base or industrial metals, were all soaring skyward in union at one point as the algorithms gorged themselves on that sector in today's session.

One would think by judging the performance of the S&P 500 that the US has hardly a care in the world. Like I said in a post last week or so, hedge fund buying and selling tends to be very short-sighted in its activity so those with a longer time frame of reference are often left confused by what appears to be buying or selling divorced from anything in the real world. Get used to it as the mindless machines and this industry will be with us, unfortunately, until at least we get an environment in which the average saver can obtain a decent rate of return on their savings accounts and can forego the casino world of the US stock markets.

Gold did clear that stubborn resistance level at $1680 which is promising and has helped to turn the technical posture on the charts. Silver regained the very strong resistance level of $31 so both of these metals no doubt saw some significant short covering as a result. I am a bit concerned about the depth of the fade in silver as it fell nearly 50 cents off its session high. That level near $31.55 or so coincides with the falling 20 day moving average so if the bulls can take it through this level and hold it there, we should see it make a rather quick run to $32.30.

Downside support in silver is near the $30.40 level followed by $30.

The yen continues to fall apart which is helping to keep the Dollar from further weakening to the extent that we are used to seeing when these risk trades are coming on full bore. The British Pound made a 52 week high against that same US Dollar today.

Bonds fell apart today as no one wanted anything to do with them as a safe haven. Then again, I have been feeling this way about US TReasury debt since the second round of QE began. I will be surprised if the bonds completely break down at these levels since any move higher in interest rates at this point will absolutely brutalize the US fiscal condition even worse and I doubt that the Fed is not going to notice that. They are not directly targeting the back end of the yield curve with QE4 but rest assured a spike in the Ten Year Note is not going to go unnoticed by our master planners. Every time it appears that the long bond is about to finally start a strong downtrending move, it promptly reverses and move higher. Maybe this time will be the start of an exception to that. We'll see.

Happy New Year to my Readers

May the New Year of 2013 be a Happy, Healthy, Safe and Prosperous one for you all. Thank you for your interest in the blog this past year. For those who took some time out to write words of encouragement or thanks, I appreciate you!

Only the Lord knows what will come our way in this next year but one thing promises to be certain in regards to the markets - more volatility, more uncertainty, more wild price swings and more Central Bank interference.

Comex Gold Closes UP 6.9% for the Year

Comex gold had a nice day to finish out the year as it moved sharply higher around mid morning and pushed right into strong resistance at $1680 on the price chart.

The move enabled gold to put in yet another good performance on a yearly basis as it added 6.9% in 2012.

Gold in Yen terms was the best performer among the major currencies as the Yen lost over 20% of its value against gold.

HUI Weekly Chart

The mining sector, as evidenced by the HUI has not been a happy place for bulls since late this summer. The selling has been a combination of both frustrated and disenchanted longs bailing out in addition to some opportunistic shorting.

While the broader stock market has fared well since the beginning of the year, it too began fading about the same time as did the overall mining sector. However, it still techically remains in an uptrend as long as it holds above the 1350-1340 level unlike the mining shares which have completely broken down falling through one support level after another.

The performance of the mining shares against the broader market can be seen by examining the following ratio chart comparing the HUI to the level of the S&P 500. Notice that even though the S&P was also working lower since late this past summer, it has outperformed the mining sector by a considerable amount. In hindsight, shorter-term oriented traders/investors would have been better advised to have bought into the stock rally and left their gold shares for another day. There is a reason that the motto: "You cannot fight the Fed" has some credence. Whether or not one agrees with this idiocy known as Quantitative Easing, the fact is that the market loves it, particularly the financial stocks.

About the best that can currently be said about the mining shares is that that are not further breaking down against the broader stock market. The low in the ratio seems to attract buying. Translation - at some point, perhaps we are there - in relation to the broader market, the gold shares are simply too cheap.

That being said, the problem with the mining sector, right now, is that big money is simply not interested in owning them. Value based buyers are but those are insufficient in size to drive them higher in price. Besides, value based buyers are never the ones who drive prices higher. That would be a contradiction in terms. Value based buyers PUT FLOORS UNDER MARKETS. Momentum based buyers drive them higher.

What is missing in the mining sector is the MOMENTUM BASED buyers. Right now, the momentum based buyers are busy chasing higher returns in other sectors of the market. To bring them into the miners one needs to see a TECHNICAL CHART SIGNAL and currently that is missing. For a bare minimum - the HUI needs to clear and CLOSE ABOVE 440. That will signal a very short term bottom is in. To do more than just meander sideways above support however, it will need to push past 455 which will spark some short covering and further fresh buying that will set up a TEST of 465. If and when this index clears that level, then, you will begin to see some more serious buying occur.

I am not in the business of making predictions for as a trader I do not have that luxury. I have to read what the current sentiment in the market is if I hope to profit and thereby trade accordingly. While 2013 might be a banner year for the mining sector (and I hope that it is), the current chart picture is not especially encouraging.

Remember, as a trader or even an investor, you are not going to profit UNLESS AND UNTIL many more traders/investors come around to your way of thinking. Without their money coming into a stock/commodity, it will go nowhere. Once it does, and the chart action confirms that your view/opinion of the market is becoming more widespread, then and only then can you be considered to have made a GOOD CHOICE. If you buy a stock that sits at the same level for months on end or even years on end you might eventually be proven to have made a correct choice but think about the lost opportunity cost of having tied up so much of your valuable investment capital that could otherwise be working for you elsewhere.

This is the reason that doing a regular analysis of your portfolio (WEEKLY) is so critical. If a technical chart is breaking down, get out of that stock unless you are content on sitting through corrections in price that may last for a long time. Do not forget, if you are constantly monitoring a portfolio or position on a regular basis, you can ALWAYS GET RIGHT BACK IN if the technical posture changes for the better.

I personally am not a big fan of Jesse Livermore because I believe he would have starved to death in today's markets. That the markets have changed tremendously since his day is an understatement of near cosmic proportions. Livermore, who by the way ended up taking his own life - an abject failure in my defintion of a successful man - should have learned to cut his losses instead of "sitting tight". How in the hell does anyone know in advance what sort of events can transpire that can completely wreck one's trading account? Yes, long term fundamentals will eventually win out but at what incredible cost to one's investment or trading account.

Also, Livermore never had to contend with trading against computer algorithms. Those mindless machines, which control most of the world's trading capital nowadays, could care less about the long term view. They are going to buy or sell depending on the current price signal, not on what any of us might think is going to happen 6 months out from now.

The good thing however is that the same technical price signals that trigger those nasty algorithms can be seen on the price charts and if we learn to properly interpret them, allow us to position ourselves to let the machines work in our favor.

In closing here, I want to emphasize the fact that I am talking as a trader and as someone dealing with paper markets. When it comes to PHYSICAL BUYERS OF METALS, if you do have a long term view of the consequences of nearly unlimited money printing by so many of the Western world power Central Banks, then you can also use the algorithm based selling of these paper markets to acquire the ACTUAL METAL during episodes of price weakness. Buy them when they are cheap; do not chase them when they are higher. Remember, this pertains only to the actual metal; not to positions being taken in the Comex futures market. If you choose to willy-nilly buy into the futures markets WITHOUT a technical price signal confirming that, just understand that you are an accident waiting to happen. Trade smartly and do not end up as road pizza on the floor of the pit.

Trader Dan Interviewed on King World News Markets and Metals Wrap

Please click on the following link to listen in to my regular weekly radio interview with Eric King on the KWN Markets and Metals Wrap.

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2012/12/29_KWN_Weekly_Metals_Wrap.html