S&P 500 Update - US Dollar sacrificed

The FOMC announcement this afternoon sent the equity markets into a complete turnabout from yesterday's big selloff. The catalyst? Try the fact that the Fed said that the economy is so weak that interest rates will not be raised until at least the middle of 2013 - a full two years away! That acknowledgement, namely, that growth is so sluggish, the economy so moribond and unemployment so chronically high, sent money flowing into BOTH stocks and bonds at the same time.

How's that for a neat trick by the boyz at the Fed?

Here is the deal - the FOMC is attempting to drive money out of bonds and INTO equities based on the fact that they have guaranteed practically no return as far as yields go on short term Treasuries for at least two years. Think about that. As an investor would you want to lock up money for that long for that kind of yield or would you want to buy stocks and attempt to capture a bit better return on your investment capital. After all, something beats nothing as far as returns go, especially if you think that this easy money policy is going to feed into further asset appreciation as the Dollar further succumbs to the news. Forget about the ECB's quasi QE program to buy up Italian and Spanish debt. The Euro was bought like mad while the Dollar was pounded lower as the Fed is obviously sacrificing the Dollar in an attempt to keep a low interest rate environment in which stocks are rising. That is at least, what they hope to create. I suspect that they are going after higher equity prices in an attempt to gin up confidence in the US economy by creating a rising stock market. What more can I say than YIELD. Here we go again - chase and chase yield.

On the technical chart, after plowing through the 38.2% Fibonacci retracement level last evening in Asian trading, the S&P shot right back through it to the upside, at the exact moment in time that it needed to I might add. The next target for the bulls will be to take this index back through the 1200 level. Should they be able to do that, then they have a legitimate shot at taking price back towards the former broken support level at the 1250 level.

I would watch the US Dollar very closely right now as a result of today's FOMC statement. I am coming away with the idea that they are now resorting to currency debasement but in a manner in which it is not so obvious as if they had just come out and said, "We are going to do a QE3". They have effectively told everyone that there is not going to be any growth worth speaking of for the foreseeable future in the US economy and that therefore yield on US Treasuries will be very low. They are also now counting on the market to take this idea of slow growth and bid up the back end of the yield curve without fear of the inflation monster. This is going to be an interesting exercise to observe.

Can the Fed manage to induce investors/traders to plow into stocks without having them also plow money into the commodity sector. If Bernanke and company had come right out and announced another attempt at QE3, commodity prices, particularly energy prices would have shot up immediately producing that same dampening impact on the consumer and the overall economy that it did during QE1 and QE2. By taking this line of approach, the Fed is hoping to convince market players that growth in the economy will be so slow that there will be no increasing consumer or business demand for energy and thus no reason to bid up the price of crude oil and thus gasoline. Same goes for food prices. We will simply have to wait and see how this plays out but for today at least, they managed to take equity prices up while taking commodity prices down. After the linkage we have been seeing between the two for both QE's, this is no mean feat.

Gold reaches its inflation adjusted high in Asian trading as Chinese buyers step in

The following chart is more for informative purposes than for trading but I did want to note that using the Federal Government's CPI data, (which is of course deliberately designed to underestimate the true rate of inflation), gold has effectively reached its all time high in terms of a monthly closing price in inflation adjusted terms. Whether or not this induces some profit taking among longs, particularly as global equity markets are now at this hour experiencing a rather sharp upside recovery after yesterday's pounding is as yet unclear but if we see a strong short squeeze in equities, watch for some profit taking to occur in gold. Already the metal is some $30 off its best levels of the evening.

We might also see a recovery in the gold mining shares if this rally continues into the New York trading session as those were moving higher yesterday before they succumbed to the general wave of equity selling.

S&P 500 Technical Analysis

Based on the monthly chart, the S&P has rallied to precisely the 75% Fibonacci Retracement Level and has now failed at that point. One would then expect the market to drop lower and test the next retracement level (61.8%) which it did - and promptly failed there. Following that breach of support, the next move lower should then be expected to test the more significant 50% retracement level. Note that it has currently broken below that quite significantly. Bulls now have their back firmly to the wall and will need to perform here, or else.

If the market cannot rather quickly regain this level, which comes in near the 1126 level, technical analysis tells us that it should then fall down towards the 38.2% retracement located near 1018. Interesting enough, that level corresponds very closely with horizontal support located in that same general vicinity with a swing low right at 1000.

As we move forward, IF, the market were to fall below both the 38.2% level and the 1000 level, it would portend some very serious losses in the broad equity markets and set things up for a drop towards 900 - 896.

Late Session Selling derails mining shares

Throughout most of the day, the mining shares were very strong moving higher in conjunction with gold bullion, and to a certain extent,  silver. AS the session moved into the afternoon hours however, the breach of 1150 in the S&P 500 was apparently too much too keep the money flows coming into the mining sector which then surrendered all of its gains and dipped slightly into negative territory.

It might be a good time to note that with crude oil moving in a totally different direction than gold, one of the major costs of mining companies, energy, is falling off while the price of their product, gold, is moving higher. That looks to me like an ingredient for even better profits moving forward.

Note the ratio chart below showing the extreme level to which the undervaluation of the mining sector is reaching.

Bond Market shrugs off S&P downgrade - Equities reel and Commodities get sold

The bond market has voted and given its assessment of the S&P downgrade of US long term debt  -  investors are not only willing to buy and hold US Treasury debt but they are willing to buy and hold that debt at even lower rates of interest than going into the downgrade. Risk is trumping all right now and investors are running out of nearly everything out there except for gold and Treasuries. Even silver has been feeling the impact of risk aversion trades as it has surrendered a large part of its gains as the collapsing copper and equity markets are pulling the grey metal from its highs while safe haven bids are bringing it support.

One normally expects to see interest rates rise after a downgrade but such is the current environment that investors are rushing into cash and into gold. It would seem that gold is finally getting the due respect it deserves after being constantly harangued as "no safe haven" by far too many talking heads who confuse liquidity driven issues with fundamentals. I marvel at the obtuseness of some who just last week were trashing the metal for being "no safe haven" on a day in which equities were getting hit hard and investors were rushing to get liquid and meet margin calls. Never mind the fact that gold had been making one record high after another across a wide variety of currencies. Never mind that as the sovereign debt crisis in Euroland escalated, more and more buying of gold was occuring. All that mattered was we had a huge selloff in stocks last Thursday so out were trotted CNBC's "experts" on the gold market who pronounced it as "no safe haven" because it was being sold to meet margin calls.

Today, those nitwits are looking very stupid indeed because now the talk is that "gold might be the last safe haven available". Gee, what a surprise - 6,000 years as a currency finally does matter. My oh my what a difference a day or two can make. Let me guess - these same "experts" will now be trotted back out to tell us why gold is such a great safe haven - and they can do this without blushing!

Gold gapped higher from the get go last evening as it opened above strong resistance at $1,680 and never looked back. Anytime you see a "gap and go" above a strong chart resistance level, you know you have something impressive occuring. That is exactly what has happened in the gold market as it has left $1680 resistance in the dust and blown right through psychologically significant resistance at $1,700. As I write this, it has set a new record high of $1,721.90 and is up over $66. If global equity markets do not soon stop the bleeding, these $60 up days could soon become $100.

Further aiding the metal's upside progress is the long awaited divorce of the mining shares from the broader US equity markets. The HUI in particular is having a strong day, up 4.6% at 551 as I write this while the XAU is up 2.82% at 201.59. The HUI must get through last week's high up near 570 to have a shot at taking on critical chart resistance at 580 once again. If we get some further short covering from the hedge fund ratio spread trade, that should occur rather easily. That trade makes increasingly less sense as gold powers on towards one record high after another, especially given the already severe undervaluation of the gold shares in comparison to the metal itself. If they insist on doing a spread trade why not buy the miners and short the broader equity markets. That was has been a winner for more than a month now. If the hedge fund managers could wrap their mind around this trade, the miners would make new all time highs in short order.

I think it is important to note the price action in the Continuous Commodity Index ( CCI ). Now that we have a few months of price action to observe we can get a sense of the shift in investor sentiment towards the overall sector. Back in March, when the earthquake and tsunami struck Japan, commodities were sold down as investors rushed out of risk. The thinking was that the blow would result in slower overall growth globally. Traders then reassessed that view and pushed prices back right up to the old high. Later in April, once the index was unable to push through the former peak in price and go on to make another high, technicians sold and fundamentalists built the case that the slowdown in global growth would lessen prospects for further gains for the sector. Since that time, price has been on a rather slow grind to the downside. Based on this chart, the case can be made from a technical standpoint that unless or until the sector pushes past 660, inflation fears are no longer foremost in traders' minds. The current thinking is that RECESSION is more likely than INFLATION. That view in commodities is being reinforced from the bond pits as well.

Gold is now in an acceleration phase as it continues moving with a new and steeper uptrending channel. Given the huge speculative flows into this market, it will remain quite volatile as traders pay increasing attention to any market moving news and react according to their interpretation of that news. What that means for those who hold the metal, is that they should expect large price swings on a day to day basis. Also look for a margin hike increase very soon coming out of the CME Group for the metal as it is precisely this sort of volatility that triggers such increases.

We have several levels of downside support should we get any sort of pullback or retracement in price. The first is $1,680, followed by $1,650 - $1,644 and then by $1,620.

Silver needs to get above $40 and stay there. It just cannot hold that level as it is unable to shrug off its industrial metal hat to the point where safe haven or monetary related flows can keep it elevated. Downside support in silver is last week's low near $37.50 and then $36.

Trader Dan on King World News Weekly Metals Wrap

Please click on the following link to listen in to my regular weekly radio interview with Eric King on the King World News Weekly Metals Wrap.

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Riding in the Kangaroo Pouch

Trying to write a set of comments to describe what is going on in this market today, I tried to come up with what I feel might be the a good comparison to provide the perspective. The best I could come up with is how a baby kangaroo must feel after going for a cross outback ride in its mother's pouch. Bounce - Hit; Bounce - Hit; Bounce - Hit. UP-DOWN; UP-DOWN; UP-DOWN.

If this is an example of the "liquidity" that the High Frequency Trading crowd is supposed to be supplying to the market, a point which I might add we are constantly lectured upon by those parasites as well as the various exchanges which ADORE the volume that their churning provides to their bottom line, then we are in a heap more trouble than many suspect. There is no liquidity because this entire HFT crowd is all on the same side of the trade at the same moment in time attempting to front run each other and everyone else for that matter. This is why we are witnessing such enormous swings in price, going either direction, with those occuring with increasing frequency.Only a few brave and nimble floor traders can take the other side of those trades.

The catalyst for the volatility was the payrolls number, which exceeded the low expectations that had been factored into the markets earlier in the week (Wait until next month where they will probably come back and revise it downward), further fears of a meltdown in Euro land, news from the ECB about a potential bond buying program and then a press conference from Italian Prime Minister Berlesconi.

The equity markets first greeted the jobs number with euphoria rallying nicely off their lows as shorts covered. That rally then completely ran out of steam as new shorts sold the rally with stale longs using it to get out. The thinking was that the real epicenter of the current global economic woes is in Europe - "Who cares about a jobs number in the US" was the thought. That then took the markets, especially the tech-heavy Nasdaq, down over 2% for the day. It was then about halfway through the session, after the European markets were closed for the week, that news broke from Reuters that the ECB would buy both Italian and Spanish Bonds provided that their respective political leaders could institute necessary structural reforms. That seemed to be a game changer for the day. Out came all the fresh short seller; in came a bunch of bottom picking longs and away went all the losses for the stock market.

The bond markets here in the US then sold off sharply on the news with interest rates jumping after the yield on the Ten Year had fallen as low as 2.43%.

However, after Berlesconi gave his speech and began promising the same load of BS that we were just recently treated to here in the US during the debt ceiling charade, the equity markets began having some doubts about the ECB bond buying program and off came the markets from their gains. As I write this the equities are now higher once again however as shorts are getting very nervous heading into the weekend that they might actually come up with Europe's version of QE1. Make no mistake about it - this is exactly what Europe is planning - their own version of Quantitative Easing.To illustrate the madness, as the markets entered the last hour of trade, once again the sellers showed up and down went the stock markets again. Where are they going to end today? Who knows at this point?

Oddly enough, (although one can see the "logic" of the Euro trade), the Euro rose sharply on the news with the short Euro trade reversing sharply as risk trades were piled back on as risk aversion trades were taken off. If one looks at what happened to the Dollar during QE1 and QE2 it is obvious that this foray into monetary madness cut the floor out from beneath the Dollar as the supply of greenbacks was increased exponentially. If the ECB does go ahead with its QE, then the supply of Euros is going to soar and the trade will be to short the Euro. The problem is that this conflicts with the hedge fund risk trade which is to sell the Dollar and run back into the Euro and the commodity currencies. Get ready for more insane instability with the HFT crowd in there just screwing things up even more with their churning. I cannot say with certainty, but I am convinced that we had more than a few hedge funds disappear completely this week. The price swings were wiping out both longs and shorts. Sometimes the smartest place to be is to be on the sidelines watching and waiting while the other guys chew each other to shreds.

That brings us to gold which was all over the place today. It moved back and forth as the news changed,  torn between the need to raise cash to meet margin calls, the desire to have a safe haven, the unwillingness of traders to hold "commodities" during a risk off trade, and severe doubt and skepticism towards both monetary authorities and political leaders not only in Europe but over here in the US.

Attempting to therefore make a projection as to where it is headed next in the SHORT TERM is an exercise in futility. All I do know is that it has been relatively solid even when the rest of the equity markets and commodity indices were getting whacked. It's safe haven status remains relatively unmarred even after being buffetted by all these money flow factors.

One of the factors that keeps some pressure on the gold market is the pitiful performance of the silver market. Right now that metal cannot get out of its own way as it is violating chart support levels with the HFT crowd going after it and driving the offers lower and lower. Both it and copper seem to be falling lower in unison. It is tricky to say right now but it might take a stabilization in copper to see silver get its footing here. It has managed to bounce off a support level near the $38.00 - $37.75 level but is acting heavy for the time being. Its 50 day moving average is just below the market near $37.35 so it if it going to prevent a further drop, it will need to remain above this level, preferably getting back over $39 once again.

The mining shares as evidenced by both the HUI and the XAU have remained joined at the hip to the broader markets and bounced when they bounced higher on the ECB news. From a technical chart perspective, they did rebound from a level that was critical for them to hold so I suppose that is a plus but the HUI is currently below its 50 WEEK moving average, which is a level that it must recapture if it is going to have a chance at staging a better rally. Ditto for the XAU which is some 12 points below its 50 WEEK moving average as I write this. It is holding above 190 however which is positive. At some point, the huge imbalance in valuation of these shares compared to gold is going to result in large acquisitions, especially by both the majors and the Chinese.

After the Dollar's huge rally yesterday, it surrendered half of those gains as longs bailed out on news of a possible ECB bond buying program. Where it goes next week completely depends on the kind of news that will greet us come Sunday evening here in the US when the markets reopen for trading in Asia. If we get some sort of confirmation that the ECB will definitely move forward with a bond buying program, look for further volatility in the currency markets as traders will be torn between selling the Dollar to put risk trades back on and buying the Dollar as they sell the Euro in anticipation of a program that will pressure the Euro lower on the crosses.

I will try to get a chart up of gold later on but I would not put too much stock in it until we see what happens over the weekend. I will say this, if the ECB does QE, it is going to be bullish gold, especially when priced in terms of the Euro. They will be debasing their currency just as the Fed attempted to debase ours and the BOJ used to practice it to debase the Yen.
The big thing I am watching right now is these interest rate markets. We might have seen a top in bond prices and a low in interest rates for the time being if the ECB QE program kicks in as all those guys who rushed into Treasuries this week will probably rush back out. Very hard to say however as too much is in flux right now.

Extreme Volatility in Gold as market digests rumors and risk aversion trades

Very early this morning, gold shot up to another all time record high above the technically significant resistance level near $1680 as sovereign debt fears coming out of the Euro Zone intensified with the worsening news. It did not take long however as trading moved further into the New York session for gold to drop sharply lower as the US equity markets began imploding. The Dollar soared over 100 points, the Euro fell out of bed and the crude oil market was shellacked as investor after investor all began heading to the sidelines and running out of nearly everything out there except for US Treasuries.

Further intensifying the fear trade was news that a large bank (Bank of New Yokr Mellon) was actually charging customers a fee for putting cash INTO their bank!  If that was not revealing, nothing was. It showed how nervous investors are becoming and how desperate they are to find a safe haven to park their wealth. THis news helped to further feed into the buying frenzy in the Treasury markets as investors basically shrugged their shoulders as if saying, "What the heck, if they are going to charge me a fee to put money in their bank, I might as well just buy Treasuries instead".

It occurs to me that the overnight intervention by the Japanese monetary authorities was extremely bullish for gold as it was further evidence of the currency debasement policy proliferation that we have been witnessing. We have seen the Swiss also playing that game along with the Brazilians  which is the reason that gold has been going on to make one record high after another across a variety of major currency terms. However, all of this was outweighed by the sheer volume of money flows out of the markets in general. Many are attempting to come up with a new strategy to deal with the rapidly changing economic paradigm and prefer to just get out of their trades while they weigh their options. Others are just selling in order to raise cash to meet a plethora of margin calls. There will be more than a few utterly exhausted margin clerks before the closing bells ring on the various markets.

The Euro in particular and the commodity currencies in general were all whalloped today as traders are now coming around to the view that the next move by the ECB in regards to interest rates will be LOWER and not higher. That has led to a general theme of Euro selling along with Dollar buying. All of this mess really started in Europe which it now appears is dealing with its own version of Lehman Brothers and the liquidity crisis that erupted when that institution failed back in the summer of 2008. Their problem is related to their big banks however in the sense of the exposure that these entities have to the sovereign bonds of some of the major countries comprising the Euro Zone. Credit lock ups are what the real fear is.

The commodity currencies were crashed along with the CRB and the CCI (more on those indices later).

One of the few bright spots I can see as far as the consumer goes is that UNLEADED GASOLINE crashed through its recent low today which should eventually provide some relief at least at the gas pump for beleagured consumers. A nice $0.40 drop in the wholesale price will perhaps free up a bit of the little disposable income that consumers have left in their wallets.

There have been a large number of references back to the summer of 2008 today as the deflation trade dominated the markets at that time. This is being reflected in the mining shares once again which are absolutely horrendous today as the HUI is currently down over 5% as I write this while the XAU is down over 6%. Both have violated their 50 day moving averages and are back under their 100 day moving averages as well.  There is some support on the price chart of the HUI near the 520 level and 190 on the XAU. Whether or not those hold is unclear at the given moment especially if this fear trade were to intensify further. An awful lot of traders have already thrown in the towel today based on the massive move lower across so many markets so perhaps the bulk of the selling is over. I am simply not sure but what I find rather remarkable is how quickly the "Buy the Dip" mentality in the broader equity markets completely evaporated today. All that happened in the mining sector is that the gold shares became even more undervalued compared to gold than they were before the day started. We will keep watching to see at what level enough value based buyers emerge in the shares to outweigh the hedge fund algorithm related selling that continues in association with that ratio spread trade of theirs.

The S&P 500 has smashed through downside support moving below psychological round number support at 1200. If you look at the weekly chart, you can also see that it is negative for the year and is sitting on the 25% Fibonacci Retracement Level for the rally from the early 2009 low to its recent top.  It will need to recapture 1200 quickly to stem the bleeding somewhat or else we will see an eventual move towards the 38.2% level closer to 1107.

Back to gold however - part of the reason it was hit so hard at one point in the trading session had to do with unsubstantiated rumors that were floating around that the CME Group was going to be hiking margin requirements on their gold futures contracts. Traders hit the gold market so hard with selling on that rumor that they knocked the price of gold down nearly $40 off its best level of the session. Later on the CME felt the need to address that and denied the rumor was true. That denial led to a counter rally in the gold market which came nicely off its lows only to run into another wall of selling once the neighboring silver market puked along with the downward acceleration in the US stock markets. While the near term technical price charts look a bit toppy on gold as a result of the margin related selling, considering the carnage across so many of the commodity markets, it was down less than 1%. I want to see how it performs overnight and into early tomorrow morning when we get the payrolls number from the US pencil pushers before I get a better sense of where it might be heading next in the short term. One has to respect the technicals in today's markets as that is what the computer algorithms are all based on and right now we are looking at a short term negative technical pattern on the gold chart. If Asian comes into to buy overnight or if we see additional gold buying out of Europe when it opens tomorrow, then there is a good chance that today's action will be negated. For the time being however, one cannot ignore the chart pattern so be careful. I will feel a bit more confident for the short term prospects of gold should it be able to recapture the $1,665 level on a closing basis.

Keep in mind that I am speaking as a trader looking at a short term price chart. Longer term I believe many investors are looking for a dip in the gold price to secure more of the metal. The entire problem in the markets right now is that investors world wide, but particularly investors putting money into the Western economies, have LOST CONFIDENCE in the monetary authorities of those nations and in their political leaders. In effect, the markets have voted and that vote says, "WE DO NOT TRUST THEM TO BE ABLE TO PROPERLY DEAL WITH THE ROOT CAUSES OF THE PROBLEMS THAT ARE AFFLICTING THE NATION". Gold in that sense is the "ANTI-GOVERNMENT" vote as there is no government behind the metal. That will keep buyers interested in gold even in the midst of a money flow issue.

Silver was mauled without mercy as it met with the fate of copper. This is to be expected during times of risk aversion. For all the silver bulls out there, please understand this basic principle - Silver will not outperform gold during a period of risk aversion. Period - Comex silver stocks do not matter. All that matters is that risk trades get yanked off and silver gets hit harder than gold because even though it has an historic role as a safe haven metal, it cannot shed its industrial metal role completely during such times. The Gold/Silver ratio will therefore move in the favor of gold during periods of risk aversion when fear trades are the rule. When the risk trades go back on and traders feel very comfortable taking risk, then silver will outperform gold to the upside.

All our eyes will now turn to that payrolls number tomorrow morning to see where things go next.
In the meantime, I cannot tell you how many times I heard the talking heads using the words “OVERSOLD” today. Funny how we rarely if ever see these same financial anchors use the term, “OVERBOUGHT”. One can almost sense just how badly they want the stock market to stop going down. If we get a larger than expected payrolls number tomorrow, they will probably get their wish.