Japan Stock Market in Bear Market Territory

Watching the mood swings in the Nikkei puts me in mind of someone who would be considered manic-depressive. It has gone from Euphoria to acute Depression in the matter of 4 short weeks. The index has fallen over 20% from its best level this year which puts it in the category of official bear market territory. This is coming in spite of the Bank of Japan and the Abe administration's best efforts to kick the economy out of its state of deflation and induce a 2% annual rate of inflation.

What appears to be happening is that investors are losing confidence in the ability of the Bank of Japan to cure what ails this economy. Initially, upon the election of the new government, optimism that Japan's long season of discontent was finally coming to an end. The Nikkei began a monstrous rally that coincided with the sharp drop in the value of the Yen. However, what has derailed this bull train was the Japanese government bond market. It has proved to be a rebellious, strong-willed and recalcitrant child. Why? Interest rates are going the wrong way! The yield on the all important 10 year is going up, not down! This was not supposed to happen with the BOJ mopping up such a large chunk of those bonds on a regular monthly basis.

As interest rates have risen in Japan, the Yen is now reversing course and as it moves higher, it is sending stocks lower. What then appears to be occurring is a vicious circle in which the Nikkei then drops, sending the Yen higher, which in turn drops Japanese stocks lower, which in turn sends the Yen higher, etc... I think you get the picture.

The reason for this is those pesky speculators which were effectively herded, lemming-like in doing precisely what the Bank of Japan wanted them to do, namely, buy Japanese stocks, pushing the Nikkei higher and generating a wealth effect and a spillover happy optimism among the Japanese consumer and Japanese business. So much so that all the major hedge funds and large buyers of stocks had lost sight of the very concept of RISK. Why worry about that when the mighty BOJ was there to limit any downside moves in equities. As a matter of fact, let's just leverage our bets even more and load the boat for even bigger gains has been the thinking.

When the government bond market rejected this feel-good view, as bond investors wanted no part of locking in pitifully low yields for the foreseeable future, money came OUT OF JAPANESE GOVERNMENT BONDS to be put to work chasing yield in Japanese stocks. That sent interest rates soaring higher which is not want the Bank of Japan wanted.

As a result of this, money flows are violently reversing both in the short Yen trade and in the Long Japanese stock trade. That in turn is setting global equity markets on edge, particularly with all the noise surrounding the new buzz word in the US, "TAPERING".

Since we now live in the age of the zombie and the vampire in pop culture, we can call this newest movie, "The Rise of the TAPER". Sort of scares the hell out you just thinking about this hideous beast doesn't it?

Regardless, I have created a chart of the Nikkei futures indicating some potential support levels, which if it is going to stop falling, it will do so at these levels or else.

The first level of the support is a biggie. It is the 50% Fibonacci retracement level of this year's entire rally. It currently comes in near the 12192 level. Of all the Fibonacci retracement levels, this one is regarded as the most important. Generally, if prices are going to turn around, they will do so at this level. If they do not ( watch for an ancillary shock to US markets if they do not), they the index could drop down towards the red rectangle shown. That comes in between 11600 and 11200. If the Nikkei were to drop this low, I would expect the Yen to soar even more sharply putting even further pressure on the Yen carry trade. That would have big consequences for the entire financial market system, as heavily leveraged bets would continue to suffer huge paper losses.

MY guess is that there are currently a lot of phone calls taking place between the Fed and the Bank of Japan, along with the ECB.

How all of this would impact gold is a bit unclear right now. Back in 2008 when we had the massive unwind of the Yen carry trade, gold was clocked along with everything else as you recall. That was before all this Quantitative Easing began in earnest. Only the advent of QE reversed the bleeding as it encouraged speculators to come back in and speculate again, on the long side of everything in sight!

This time around we have had all the various QE efforts which have apparently run their course. Even some of the most die hard of stock bulls are beginning to wonder if stocks had gotten way ahead of themselves. I have said from the get go that the entirety of the stock market rally is nothing but a massive Central Bank induced bubble. I stand by that view. The bond buying has allowed the economy to muddle along with some improvement but as to generating any sort of robust growth, it is and has been an abysmal failure.

If investors begin to lose faith in the Central Banks and remember this is all a confidence game, then we might see gold actually function as a safe haven this time around. instead of a large flight into government bonds, which are becoming suspect to many, gold could withstand any unwind of the carry trade this time around, unlike it did in 2008. Again, I am unsure of this but one way or the other, we are witnessing economic and monetary history.

Early Signs of Inflation?

Two different numbers out today are indicating the very early signs of inflation. Whether this is the start of the long-awaited result of the Central Bank money printing policies is unclear, but nonetheless, it needs to be noted.

The first of these was the PPI (Producer Price Index). The other was the Reuters/U Michigan 12 month Inflation Forecast and their 5 Year Inflation forecast. Granted the latter is a forecast whereas the former is an actual measurement but the big thing to take away from all this is that the mantra: "There is no measurable inflation" has been one of the biggest problems for both gold and especially for silver.

The PPI number for the month of May was an increase of 0.5% over April. Analysts had been expecting a mild 0.1%. It was the first increase in the PPI in three months.

The U of Michigan 12 month forecast was +3.2% while their 5 Year forecast was +3.0%.

We should note that once the University of Michigan numbers came out, silver, which was already bouncing higher today on the heels of the PPI, recaptured the very important technical chart level of $22. If it can hold those gains into the close, it will have dodged a major bullet.

I want to see how crude oil closes this week as it was the component of the PPI (energy prices) which saw the big jump. Thus far crude has been unable to breach $100 having only briefly punched through that level last September before fading. If it does, and this is unclear right now, it is going to be very difficult to keep gold under pressure.

Traders are going to want additional proof that the PPI was not an aberration before they get nervous about inflation but at least their complacency over this issue might have gotten a bit of a nudge. Interestingly and noteworthy I might add, the bond market seems utterly indifferent to both sets of numbers with the long bond jumping a full bond higher in a counter intuitive move. There are still a lot of cross currents with all the liquidity flows occurring right now that are clouding the looking glass making it difficult to get a really good read as to what exactly is the current thinking in the marketplace.

I have been consulting my magic 8 ball and asking it questions but the answer it is giving to all my queries is the same - "DUGH?"

Stay tuned.

Japanese Yen Carry Trade continues to Create Havoc

If you have the least bit of confusion as to what is going on across the financial markets this morning, just take one look at the chart of the Japanese Yen. It is experiencing a MELT UP! This is what happens when the entire world of hedge funds are all on one side of a trade gone very, very bad, very, very quickly!

To define this term, "carry trade", for those who are a bit newer to the markets ~ it consists of borrowing large amounts of Yen for extremely low costs due to the miniscule short term interest rate in that nation, and taking those proceeds, exchanging it into different currencies and then using that money to make investments elsewhere where higher yields may be obtained. If that is not risky enough, most of these hedge funds then leverage their speculative bets in the hopes of compounding their gains. It works until it doesn't and then disaster comes.

What always causes an implosion in this sort of trade is movement in the underlying financing currency, in this case, the Yen. Carry trades bank on a continuation of a trend (down) in that currency and low volatility. As long as it is present, no worries. Once something happens to interrupt that pattern, the mayhem begins in earnest.

One would think that some in this crowd would have learned something about the power of leverage to destroy their capital back in the summer of 2008 when we saw the same sort of violent reversal in the same carry trade when the entire world was short the Japanese Yen and long everything else. Apparently not. My guess is that this crowd figured that the Central Banks had removed all risk from their trade and that meant throw caution to the wind in order to obtain the biggest bragging rights to the largest gains. The problem is that no one rings a bell to warn of an impending reversal. With all of them completely dependent on their computers to do their thinking for them, there is literally no one to take the opposite side of the trade as the mad rush to the exits commences in earnest.

I have mentioned many times that old pros and experienced traders who are still trading are there for a reason - they have learned  the hard way to RESPECT the power of leverage, especially its power to destroy. Many of these hedge fund managers seem impervious to this axiom. What gets me is that there still seems to be a near endless supply of new victims for them to milk even after many of them manage to lose most of their client's money through their insatiable greed and stupidity.

Gold continues to be caught up this mess as it is torn between its role as a safe haven and the need for hedge funds to raise cash to meet ever increasing margin calls.

Again, forget all the claptrap analysis about Commitment of Traders report, hedge fund short positions, big banks long positions in gold, etc. NOTHING MATTERS right now except liquidity. If the Yen finally stops moving higher, you will see a calming effect in the markets but as long as this volatility in the currency markets continues, either scale back your trading positions or get to the sidelines and let others chew and spit each other out. Why be a casualty if you do not need to be one? The markets are not going anywhere - they will be there tomorrow, next week, next month, etc. You can always come back and put your foot into the water when you are ready to wade in. Do not try to be a hero or a bottom picker or a top picker. Leave that to the fools and narcissists who are legends in their own minds.

Treat your trading account as sacrosanct. If you preserve it, you will be able to take advantage of the good opportunities that will ultimately present themselves as a result of this mindless movement of money into and out of respective markets. If you try to be the hero and end up losing it, what are you going to do then???

Silver needs to get back above $22 in a hurry or it risks dropping back to near $20. Gold is stuck between downside support near $1365 and overhead resistance close to $1400. The Mining shares are moving lower again - what else is new there?

The US Dollar chart is turning rather ugly but with all the wild movements in the currency arena, that does not matter as much as it might if conditions that are contributing to this were otherwise.

Lack of Conviction - More Volatility Ahead

Investors/Traders are growing more confused and uncertain as to market direction and many are heading to the sidelines or scaling back the size of their positions in this very difficult trading environment. Witness the type of wild moves we are getting in the currency markets, especially the Japanese Yen, and you are seeing these CARRY TRADES involving the Yen being unwound.

When traders place these highly leveraged bets, they expect LOW VOLATILITY in the carry currency. When that does not occur, but rather the opposite takes place, it wreaks havoc on their positions and they have no choice but to liquidate or reduce market exposure at the very least. The results are unpredictable price movements across a host of markets and extremely wide trading ranges as so many of these hedge funds are all on the same side in the markets they are trading that there is hardly anyone to take the other side as they exit.

The Nikkei is now down 18% from its year-to-date high as the continued strength in the Yen is the carry trade being unwound. AS a matter of fact, the Yen had its single biggest daily gain against the US Dollar in over THREE YEARS! Tell me that the Central Banks have not fed and fostered and nourished this insanely leveraged speculative mania that we have been seeing in equities. It is ALL one massive bubble whose fortunes are tied exclusively to the continuation of enormous Central Bank bond buying policies.

The problem in Japan is that investors there are losing confidence in the ability of the Abe government and the Bank of Japan to actually accomplish what they have promised to do. In other words, the aura of invincibility of the Central Banks is beginning to wane.

Silver is getting whacked extremely hard as it has not been able to recapture most critical support at the $22 level. Failure to get back above there almost immediately is going to send it down to retest the $20 level. It was getting a bit of help from copper but now that copper is swooning after temporarily moving higher on supply disruption fears, that leg of support for the grey metal has been cut off.

Gold is flirting with support near the $1365 level with bears eyeing those stops that are building just below that level. If the physical markets blink and do not quickly step up their pace of gold buying, it too looks vulnerable to further downside. I fear that if bears are able to reach those stops and set them off, a cascade of selling will catch the lower-down stops and take this market all the way back to $1340.

I have said it many times of late and will say so again - Gold must have a catalyst of some sort to reverse the downtrend and give traders a reason to chase prices higher. They are looking to sell rallies, not buy dips. The only reason for any buying in this pit right now is due to strong physical off-take. If that fades...


The HUI continues to act as a drag on the metal. That overhead gap noted on the chart is like a THE WALL in GAME OF THRONES. It must be breached if the night walkers are going to invade the realm of men. Translation - until that gap is closed, the HUI is going nowhere. There simply is no reason for the bears to cover and thus no reason for the bulls to chase prices higher either.

A bit of parting advice for TRADERS out there... be very careful - watch your position size does not get too large for your account right now, especially if you are trading currencies, and forget all the glorious predictions and COT analysis and other claptrap. Right now, none of it means anything. All the matters is money flows and carry trades. If you happen to get caught on the wrong side of this, your career as a trader is going to be rather fleeting.

Investors with a longer time horizon obviously have a different perspective on things because we all know where this is going to go.

 

Further Signs of Internal Weakening in the US

Most of you who have read this blog for any length of time are by now familiar with my common refrain that we are witnessing an America in decline. I believe the symptoms cut across the cultural, financial, political and educational aspects of the nation.

Vice is encouraged, commended or praised by elitists as traditional standards of righteousness or morality are ridiculed or even mocked. The monetary system is hopelessly corrupted as it is addicted to cheap credit. Economic "growth" depends upon various forms of stimulus and the creation of revolving bubbles moving from one sector to the next now seems to be a permanent fixture. The public education system has produced a generation which seems to have little if any understanding of history and practically no ability to deeply think (witness the proliferation of one reality TV show after another where instead of living their own lives, the viewers live the lives of others).

The thing that really troubles me however is the corruption of our political system, in particular the ever-increasing size and role of the federal government. I am watching in stunned disbelief that a government agency, the IRS, could target and harass American citizens merely because they happen to share an opposing view of government than the current administration. We watch reporters have their phones bugged and reporters doing their jobs to ferret out truth either being charged as criminals by the government or harassed in other manners. If that was not frightening enough, we now learn that phone calls and communications of our citizens are being monitored effectively destroying any privacy rights that we might have.

Additionally we have American citizens killed in Benghazi because apparently an election was upcoming and news of that nature was not conducive to the re-election efforts. We have regulatory agencies such as the EPA answering to no one who are running roughshod over the property rights of many law-abiding citizens as further evidence that the Administrative State, the 4th branch of government, no longer seems to have any constraints on its power.

I truly believe that Liberty itself is increasingly under assault in this nation and am fearful at times that it will be lost.

Take a look at the following story which gives me hope however. It comes out of northern Colorado. This is proof positive to me that liberty is alive and well in this nation, in spite of the onslaught being made against it.

Colorado counties mull forming new state, North Colorado

Read more: http://www.foxnews.com/politics/2013/06/09/colorado-county-proposes-51st-state-north-colorado/#ixzz2Vk9BQXXZ

I wish these folks well in their endeavor. Quite honestly, I expect to see this becoming a trend. I used to see the division in this nation as between red states and blue states and to a certain extent that is still very true. However, more and more I am coming to the conclusion that it is not so much the former but rather a polarization between urban dwellers and rural dwellers. If you look at a map of the US broken down by county, it is almost a given that those counties comprising the big cities are predominantly blue while those counties that encompass rural areas are predominantly red. Perhaps this is how the nation will eventually rectify the deep and unbridgeable division that besets it.

Trader Dan Interviewed at 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 at the KWN Weekly Metals Wrap.

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2013/6/8_KWN_Weekly_Metals_Wrap.html

Gold Specs Washed out and Wrung on Friday

Once again we get a Friday with a payrolls number and once again we get a wave of selling in the gold pit. It does seem as if this has been pretty much the norm for as long as I can remember.

The catalyst was the "Goldlilocks" jobs number of 175,000. I have no idea where this kind of rubbish comes from but somehow, "analysts are in agreement" that the number was not too hot and not too cold, but just perfect, at least for equities (when is anything not perfect for equities these days?).

The talk was that a stronger number would have meant the Fed was going to dial back on its bond buying program or TAPER sooner than expected. A weaker number would have ensured more QE but would have been regarded as disappoint for the overall economy. It seems to me that when it comes to equities, it is "HEADS - I win; TAILS - You lose".

Perversely enough, equity perma bulls were cheering the number as being conducive to no cutting short of the current round of QE but gold bears were crying up the number as proof positive that the economy was coming around and that the Fed was going to indeed begin tapering? Seriously, both pits looked at the same data and came up with two completely, antithetical hypotheses.

Bonds got in on the action as well as traders in that pit seized on the 175,000 number as evidence that the bond buying was going to taper off. Down they went once again and up went long term interest rates. AS a matter of fact, the yield on the Ten Year Note closed at 2.161%, fully 4% higher on the day.

The bond chart is increasingly looking like it wants to break down further as rallies cannot seem to stick. If they take out this week's and last week's low anytime soon, they could easily drop another 3 full points. Both the Fed and the Bank of Japan are now experiencing something that I am sure is not set down in their playbook, mainly how to deal with rising long term interest rates in economies that are not strong enough to handle them.

That brings me back to gold - with safe havens being jettisoned so that money can be put to work in equity markets, "gold is looking for love in all the wrong places; looking for love in too many faces," to quote an old Johnnie Lee song. Any of the readers who ever had a chance to visit legendary Gilleys down in Pasadena, Texas, before it burned down, will remember Johnnie. The metal just cannot seem to engender any sustained speculative buying. All that money is chasing equities instead of no yield gold.

While this week's COT report shows some short covering on the part of the hedge fund community, rest assured that they were selling quite vigorously today. We saw some light covering on their part with the pop through $1400 but when it stalled out, they were back to selling.

I have said it here many times recently and will say it again - specs are looking to sell rallies in gold. They will do so until it can convincingly clear $1420. Those who keep talking "Bullish" on gold while the specs are in a selling mood, simply are not experienced traders. Specs drive markets; not commercials. When the speculative selling trend reverses course and they move to buy dips, then and only then will gold make a SUSTAINED move higher. If anything, gold's poor close this week will further embolden the bears early next week. It will be up to Asian buying to save the day for the yellow metal.

The gold shares, as evidenced by the HUI, cannot find any strong sponsorship. Technically, until the HUI can close the chart gap between 285-301 or so, they are stuck going nowhere. That gap is critical to the future of the mining shares. It will either be filled and have a close ABOVE IT, or it will continue to act as an overhead barrier blocking all pops higher from becoming a sustained trend higher. I am hopeful that the bottom near 244 does not fail; if it does, the gap will have been proved to be an ISLAND GAP lower and the index could fall all the way to 200. At that point my guess is that even the long term holders of the gold shares will curse the day they ever thought of owning any of these things and will probably never return to the mining sector as traders or investors as long as they live.

The Dollar looks to have been stymied in its upward march at the 84 level on the USDX. Perhaps it is carving out a trading range; I am unclear. It will take a weekly push past 84 now to reignite the uptrend that has been in place for nearly a year now. Support lies at every round number interval on the way down; first at this week's low near 81 followed by 80 and then by very strong support near 79.

Refer to Monday's Headline Post

I thought this would make a good quip but the fact is that it is true. The Dollar is once again getting whacked, thanks mainly to ECB President's rather rose-colored glasses prognosis of the Eurozone economy. Then again, what is he supposed to say: "the unemployment rate among the youth is approaching critical mass but what the heck do we care about that? Most of us will be dead and long gone by the time it goes kaput. Hey, things could be worse so lighten up and relax a bit"?

If you want to see two charts that pretty much tell it all, take a look at the Nikkei and the Japanese Yen.

The Nikkei futures have dropped 17% in less than a month! That is mind-boggling to me.

Now look at the Yen.. it has staged a 7% rally over that same time period and is having a monster day to the upside today. It was up nearly 3% at one point during this trading session alone!

What you are seeing taking place is now a reversal of the Yen carry trade in which money was borrowed in Yen terms and leveraged into stock buys for even greater gains. The rally in the Yen has caused these highly leveraged trades to disintegrate and that is causing a ripple effect across the currency markets and the equity markets as those trades in which every mother and their dog was long the US Dollar and long global equities and are now trying to exit those trades. That is why we are seeing the Dollar being crushed and is also the reason we are seeing gold moving higher.

Remember, the big trade was to sell gold and take that money and put it into equities. When the equity markets begin breaking down, money flows out of that sector and back into gold while the Dollar breaks down.

Interest rates on the Ten Year, which, a week ago, were near 2.2%, today fell below 2% at one point. I repeat something which I have said over and over again at this site. This bond buying, QE, easy money policy being followed by the Fed has created the most insane volatility I recall ever witnessing in the totality of my entire trading career. I pity the poor risk manager at a mortgage company, an insurance firm, a pension fund, etc. trying to institute hedges to mitigate risk for his/her firm. There is not a single person on the planet who can read this madness and project where this is going more than one day in advance! Imagine trying to decide which side of the market you are supposed to get protection from in this sort of environment!

Tomorrow we get another payrolls number so this incessant, unprecedented volatility will just continue if not become even more exacerbated. Sigh....

I might make a note here to say, this is what I expect will eventually happen to gold at some point down the road when this monetary experiment in unlimited money creation has proved to be an ultimate failure. The investment world has been herded and corralled into all taking the same side of the same trade knowing that they are being backstopped by the Central Bankers. Once the realization dawns upon them that not a single structural problem has been solved and that the entire "recovery" depends on more crack cocaine being shoved into the victim to ward off the withdrawal symptoms, faith in the almighty Central Banks is going to evaporate.

Case in point is what is going on in Japan. The initial euphoria about the bold new monetary and political reform plan to boost the Japanese economy has rapidly soured. Skepticism is rising and with it, caution, and the desire to not be the one left looking for a chair in which to sit when the music finally stops playing.

Gold has been up and down like a damned yo-yo. Until it can strongly clear $1420, it looks as if the rallies continue being sold. However, the longer this market refuses to break down, the more nervous the bears are going to become and will begin to look for an exit. Keep in mind that while short covering is not enough to build a lasting rally upon, ALL REVERSALS IN DOWNTRENDS BEGIN WITH SHORT COVERING. The test then becomes whether or not NEW MONEY flows into that market. If it does, the trend reverses; if it does not, the market moves lower once the short covering evaporates and runs its course.