HUI - Lack of Buyers

Sellers continue to dominate in the gold and silver mining sector as evidenced by the inability of these shares to get any sort of updraft from the now daily repetition of new all time highs in the broader US equity markets.

As you can see on the chart below, the HUI simply cannot get anything going to the upside. There are two overhead resistance levels noted on this daily chart. One has proved so formidable that the latter one has not even been in danger of being tested.

The GAP1 region occurred back when we got what amounted to a $200 downdraft in the price of gold itself. This gap formed between 300 and 280. The HUI did manage to run up about halfway into the gap before the selling intensified knocking it right back down again for its impertinence in daring to poke its head up slightly. As long as the HUI cannot clear this first gap, the gold shares are going nowhere to the upside.

I have included a chart of silver today which is in a 4 hour format as it shows the nature of the recent price action quite well. Notice that silver was in a congestion or range trade from the second through the third week in April. Rallies were capped on approaches towards $24 while dips towards $22.50 were bought. The last week of April, silver managed to forge a bit higher of a range with the metal pushing past $24.50 before attracting selling but securing buying on approaches back towards $23.50 - $23.25.

Silver bulls would not want to see this metal breach the bottom of this new range as that would allow bears to take it back down towards the former congestion range bottom once again. On the other hand, if the bulls can take out $24.50 and keep the metal close to that level, they have a good chance of notching the range up a wee bit more with support moving up to $24. Whether that can be done remains to be seen. Much will depend on the attitude of hedge funds and index-related funds towards the "global growth" trade.

Please note that I have provided some commentary to Eric King over at King World News which will be posted later on today sharing my thoughts towards the stock market rally. Be sure to look for those when you get a chance.

Australian Dollar Drops Sharply on RBA rate cute

Big news in the Forex arena overnight was the move by the Reserve Bank of Australia to lower interest rates by 25 basis points. Chatter had been building ahead of the actual move by the RBA that they would indeed cut rates seeing that growth in China has been slowing. Chinese consumption of Australian raw material assets has been a boon to the land down under. With their biggest customer being impacted, it only made sense to expect a move by the RBA.

This is in keeping with the general trend that we are seeing of Central Banks either keeping bond buying programs going full bore or reducing interest rates as we saw the ECB just recently do.

I want to put up a chart that might be of interest and help us get a handle somewhat on how things are shaping up in general when it comes to the overall commodity sector.

It is a combined chart of both the Goldman Sachs Commodity Index or GSCI and the Australian Dollar. (Just a reminder here that they have effectively killed my old reliable friend, the Continuous Commodity Index or CCI and thus the reason for the switch to the GSCI).

Do you see how similar the chart patterns are? Here is the same chart with the graphs overlayed. Pretty remarkable is it not?

The reason I have noted this chart is because of the historic tendency of the Australian Dollar to act as a proxy for the commodity sector in general. With all the cross currents being introduced by Central Bank interventions, the connection between the two is not as reliable as it once was; nonetheless, it does still correlate fairly well. These past two weeks, we have seen the commodity sector moving up a tad while the Aussie moves lower in a bit of a divergence.

Here is my concern - with the RBA citing slowing growth (we keep hearing this same theme over and over do we not?), it might does us well to pay heed to the future plight of the Aussie. If it were to break down further, we could expect to see continued weakness in the commodity sector as a whole.

The currency is probing the lower end of a consolidation pattern that has been in place for the last few months near the 101 region. Previous visits to this zone have generated buying which has popped the currency back north but the bounces or rallies have been losing steam. There is a descending overhead trendline that has checked any upward progress.

I am watching this 101 zone to see if it holds as it has done in the past. If it does not, I believe we are going to see additional selling in the commodity sector. This does not necessarily mean fresh shorting but it could also be in the form of long liquidation as more money flees the sector to go and chase equities ever higher.

Last week's short squeeze in copper was able to temporarily halt the slide in the red metal. That movement tended to pull the commodity sector a bit higher as we saw crude oil and the precious metals track it higher also.

I mentioned at the time that I believe rallies in copper should be sold (again, at what level is unclear). The reason for this is if the global economy continues to contract in spite of the unprecedented expansion of liquidity by concerted Central Bank activity, then traders are going to note this and will wait for a higher entry point into which to sell. If the Aussie breaks down, it will confirm their suspicions. If not, it will confirm that a range trade in the commodity sector in general is what we can expect instead of a bear trend. In other words, Central Bank actions are preventing a recessionary relapse and thus a bearish breakdown in the commodity sector as a whole but are insufficient to generate any serious, sustainable, robust growth which would be needed to shift the overall sector into a bullish trend. "Muddling along" would become the new norm.

Again, we do not have anything conclusive yet in the Aussie but it does merit watching in the weeks ahead.

Fed Induced Stock Market Mania

After watching the effects of the mediocre payrolls number yesterday (Friday) which culminated in a push over 1600 in the S&P 500 and a print in the Dow over 15,000, I thought it might be useful to note a few things about this most recent example of a hysteria.

I am on record here as stating that the entire stock market rally is nothing but a Federal Reserve induced bubble brought about by artificially low interest rates starving investors for yield elsewhere. The Fed, along with the Bank of Japan and the ECB I might add, are determined to corral investors and herd them, unthinking like cattle, into equities; the goal being to create an atmosphere of general euphoria towards the economy boosting consumer confidence in the hopes of inducing them to take on more debt and spend.

This is akin to building a towering skyscraper on a foundation of PLAY-DO. It may look wonderful and draw gasps of admiration but it has no stability and will not be able to withstand any external shocks.

I know what the perennial perma bulls are saying - stocks are cheap and corporate profits are good so the path of least resistance is higher. They have been right so far judging by the tape. However, to point to a jobs number that is less than 200K per month, now some FIVE YEARS after the onset of a horrible recession as if it is evidence of a recovery strikes me more as ROSE-COLORED GLASSES analysis rather than solid reasoning.

Consider some of these statistics - The number of high school graduates here in the US each year is near 3.2 million. About 2/3 - 70% of them go on to college. That leaves us about a million who will look to enter the workforce.

The number of college graduates each year here in the US is somewhere near 1.8 million (these vary from year to year and this is based on data that I have ferreted out - it is close but not an exact number).

If we assume that the lion's share of these college graduates do not go on to pursue Masters or Doctorates, (it seems the percentage of those going on to obtain advanced degrees is between 30%-40%) then we can still come up with a number of potential NEW job seekers from college near 1 million each year.

Combine them both and you end with somewhere in the vicinity of 2 million new job seekers each year. Please keep in mind that I am not attempting to be a statistician here; rather I am trying to jot down some quick thoughts on the back of a napkin for analytical purposes.

Do the math. Divide 2 million by 12 months in each year and you need about 167,000 new jobs each and every month just to keep up with the population growth.

Please note that this does not even deal with those currently unemployed and looking for work. Also, it certainly does not take into account the type or nature of the jobs being created. How many of these jobs that were created in yesterday's payrolls number were part time?

Either way, it is difficult for me to get all revved up about the recent numbers to the point of using it to drive stocks to an all time high. If you are barely adding enough new jobs to keep up with population growth, you are certainly not seeing a vibrant economy that is GROWING robustly. You are muddling along; that is what you are doing.

Now whether that justifies stocks at all time highs in the minds of investors, I will leave that to the Ra-Ra crowd but count me out. As I have said often here - this is a traders market and they should enjoy it while it lasts but reading anything other than that into it regarding the true state of the US economy is a fool's errand. It is the result of QE1, QE2, QE3, QE4 and now the Bank of Japan's version of QE along with the ECB's act in raising the spectre of fining banks for NOT LENDING by charging them interest on parked reserves instead of paying them interest.

Enough of my soap box renditions for the time being however. I want to note something on the price chart that is noteworthy.

I am using the emini S&P 500 because of its deep liquidity although I will often refer to the Russell 2000 because of its usefulness as a risk sentiment indicator.

As you can see, since the beginning of this year, the chart moves from lower left to upper right, a powerful uptrend. Note how the MOMENTUM indicator follows the price up until the middle of February of this year.

Let me digress a bit here to note that I am using a 28 day momentum indicator smoothed by a 5 day moving average of get rid of some of the sharp spikes and dips. I am interested in seeing the general pattern and not each spike and thus the reason for smoothing the data.

In the middle of that month, we recorded what is the first of THREE DOWNSIDE REVERSAL PATTERNS. I have those noted in the ellipses. Do you see what I am seeing here? Note from that point forward, the upward momentum in this market continues to decline even as it has gone on to make one new high after another. This has occurred even though we have recorded an additional TWO more downside reversal patterns.

Just this past week on Wednesday, the market experienced a very strong reversal pattern on extremely high volume that was totally contradicted, yet again, in the next two days' worth of trading. Of course, the Friday rally blew right through the top of the reversal pattern. Yet, momentum did not register a new high for the move.

What I am describing here are classic textbook cases of negative divergence. These are all warning signals that the uptrend is losing momentum but so far it has not mattered one bit. When you have the equivalent of $160 billion of funny money being conjured into existence each and every month by the Fed and the BOJ, downside reversal patterns, normally one of the most reliable technical signals that exist, are invalidated time after time due to the "BUY the DIP" mentality that has been created in the herd compliments of the various Central Banks.

Here is the same chart scaled down to a 12 hour time frame to show a bit closer look at the market. This time around I have noted the VOLUME. Can you see the extent of the downside volume (BARS IN RED) compared to the upside volume (BARS IN BLUE)? Downside volume has been exceeding upside volume for the most part over that same time frame that we were looking at in the above daily chart, namely since the middle of February.

I can only explain this as saying it is eerie. I get the distinct impression in looking at the internal components of this stock market rally that it is a market that really does not want to be moving higher, and yet it is. The volume, plus the waning of momentum, tells me that this market is seemingly being forced higher even though it wants to go lower. Call it a GRUDGING RALLY. If this were any other price chart for any other stock or any other commodity, I would look to sell it. Not so with this monstrosity of nature - it just keeps going higher and higher and higher casting off one technical signal after another.

No doubt a goodly number of shorts are continuously getting squeezed out and that is contributing to the upward movement but I keep coming back to the same point - who in their right mind would be chasing stocks higher and higher given the deteriorating internals of this market?

I am not sure how history is going to record this period but I suspect, after the bubble finally pops, (and who can say how high this thing will go before it does), commentators and pundits will all point to the warnings that were repeatedly ignored and will provide copious illustrations of quotations from various players of this day explaining to those of our time why stocks were a great buy, all the way up until the final moment that the bubble burst wide open.

CAVEAT EMPTOR!

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 over at the KWN Markets and Metals Wrap.

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2013/5/4_KWN_Weekly_Metals_Wrap.html

Massive Short Squeeze in Copper

Copper had its single largest daily gain in over a year and a half in today's session coming on the heels of the payrolls number. That, combined with stock drawdowns in both Shanghai and in the LME warehouses, sent shorts scrambling for cover. Once their buying tripped some key technical levels, the algorithms took over and bought everything in sight. The result - a gain of nearly 7% in a single day.

Drawdowns in copper stocks are notoriously unreliable signals however as some less-than-scrupulous players have in the past, simply bought copper, moved it out of the official warehouses and stuck it elsewhere all to give the idea that demand is robust. That allowed them to play the market from the long side claiming that supply was insufficient for current levels of demand.

Personally I think any rallies in copper should be sold but trying to find a place from which to do so will be tricky once you get a squeeze of this nature. I think it is important to note that the COT report from today showed Hedge Funds NET SHORT by a nearly 2:1 margin. In other words, there was the potential for a significant amount of buying once price tripped the computers. Apparently copper below $3.10 attracted sufficient value-based buying to prevent it from violating that key support level. A market then that refuses to go down, will go up and that is what happened.

I would want to see further economic data releases to confirm that global growth is sufficiently robust to justify an uptrend in copper prices.

Today's payrolls number was not particularly impressive to me but I think it was the upward revisions to the previous months that sparked the aggressive risk-on related buying.

Consider the fact that the Euro, which just yesterday was clocked as a result of the rate cut over in Euroland, moved strongly higher while the Yen sold off rather sharply and the US Dollar moved lower. Bonds were crushed simultaneously confirming that the RISK AVERSION TRADES were reversed to RISK ON trades.

Who knows what these damned schizophrenic algorithms are liable to do next week? While the payrolls number caught some off guard, it was certainly not strong enough to suggest an economy doing anything other than muddling long. The Central Bank reflationary efforts are keeping matters stabilized and preventing conditions from deteriorating excessively; however, they are most definitely not resulting in robust economic growth either.

None other than Fed Governor Lacker himself stated as much today in a speech when he commented, that the idea that monetary policy could have made growth 3% is "Preposterous"! He went on to say that Monetary Policy is "NOT CAPABLE" of offsetting limited growth.

IN other words, the reflation efforts by the Central Banks can stave off the worst of deflationary headwinds but it cannot generate solid, SELF-SUSTAINING economic growth. It is nice to know that a Fed governor is saying the same thing as I am saying.

The stock market perma bulls will have none of that however as they will buy and keep buying equities no matter what. As long as the combination of the Fed and the Bank of Japan keep printing $160 BILLION each month of funny money, hedge funds will keep borrowing it and plowing it into equities and keep coming up with reasons to justify stocks at current levels.

That brings me to this final chart for now. My beloved Continuous Commodity Index or CCI, seems to have disappeared into the cosmos. I have been unable to get the data from ICE which appears to no longer be generating the index. Thus I have switched over to the Goldman Sachs Commodity Index, which is better weighted in my opinion than the Reuters/Jeffries CRB index, which I believe is too heavily weighted in energies provide a true assessment of the commodity sector as a whole. The GSCI is more evenly weighted in much the same manner as the CCI was.

Notice on the chart that while the commodity sector is not breaking down, neither is it roaring higher either. It anything, it is forming a constricting triangle pattern. That is indicative of a market that is uncertain as to what it wants to do next. As I noted on the chart, the Central Bank's money printing schemes and easy monetary policies, have keep the sector as a whole from further imploding. However, just as Fed governor Lacker stated today, neither is it resulting in 3% growth or higher. It is enough to stave off deflationary pressures that would drive the price of most commodities lower but not enough to overcome the fundamental roadblocks to strong, sustained growth.

This condition seems to me to be what we can expect as we move through the rest of the year. Monetary authorities are hoping that if they keep money cheap enough, long enough, the problems in the economy will somehow work themselves out. Maybe they will; maybe they won't. My bet is that they will not and that efforts to throttle back on bond buying programs, especially important for the real estate markets, will see stock prices swoon. As usual, time will make things clearer for all of us.

General Public now Net Short in Gold

For the first time since the gold bull market began back in 2001, the general public, the small specs, are now NET SHORT in the gold futures market.

It would seem as if they are now intent on chasing equities higher expecting to get better returns on investment than in gold.

Here is the chart containing this week's data where I have separated out only the small specs.

 

 

I will detail the overall COT in more depth later. In addition, I covered it somewhat in the KWN Metals Wrap segment for this week so look for that when it is released Saturday AM.

By the way, the SPREADS in gold were greatly reduced this week which we anticipated would occur once gold stabilized and lost some of its excessive volatility.

China Data Fuels Talk of Global Slowdown

China released its version of the PMI (Purchasers Management Index) today and the news was not good. Analysts had expected a reading of 50.9. What they got was 50.6. In all fairness, anything over 50.0 is considered expansion but this news, coupled with the recent slowing in their GDP number, has gotten investors/traders increasingly concerned about a global economic slowdown.

While China is growing, its RATE OF INCREASE IN GROWTH is not and a trend is what traders focus on.

Certainly, the base metals (copper, tin, lead, aluminum) all reacted negatively on this news. Copper fell down towards last week's lows and looks as if it might want to violate that critical region of chart support. Hedge funds are now pressing this metal solidly from the short and if the recent trend in the Commitment of Traders holds, they are liable to now be net short in silver. Unfortunately, this Friday's data release will not catch today's action but I would bet the farm that the hedge funds are shorting across a large number of commodity markets in increasing numbers.

I  want to stress how important this support zone is that I have noted on the chart. If copper fails here to end the week, it is going to portend a definite slowdown in the global economy and one which I am of the opinion of, that not even the stock markets are going to be able to ignore any longer.

Incidentally, Silver failed at the $24 barrier again. It has flirted with that strong resistance level but cannot keep it gains ABOVE that key mark. Hedge funds are pouncing on it whenever it rears its head up here and until it can prove the bears wrong but maintaining its footing above $24, they are going to be emboldened to sell all rallies. Support remains intact below $22.50 or so keeping silver confined in a trading range.

Not to be outdone, the US released the ISM (manufacturing purchasing managers index) today also. The number fell to 50.7 in April, down from 51.3 in March.

If this news was not bad enough, the EIA information this AM, showing crude oil stocks at a THREE DECADE HIGH (yes, I am not making this number up), effectively resulted in both crude oil and unleaded gasoline getting beaten with an ugly stick. (At least we can expect some lower prices at the pump). Astonishingly enough - crude oil inventories were at 395.3 million barrels - that is the highest level since the EIA started reporting this weekly data back in 1982.

While some of this energy data is related to the efficiency and ingenuity of the US domestic oil industry, particularly the increase in production tied to shale production, it still suggests that any "growth" in the US economy is moribund at best.

Combining this data makes me even more resolute in my view that the US equity markets are firmly in bubble territory and are an enormous accident just waiting to occur.

Anyone who would chase stocks higher in such an environment as this, one in which the only supportive factor is cheap money courtesy of the Central Banks, needs his or her head examined. The commodity world is a far more accurate signal of what is coming our way rather than the equity perma bull contingent, whom as I have already sarcastically mocked, would find a reason to buy stocks if an earthquake were to drop the entire state of California into the Pacific ocean.

Incidentally, news out of Australia this morning bears out the fact of slowing global growth and is an additional confirmation of the reason behind the selling across the commodity sector. Down under there is the AIG (Australian Industry Group) which issues a monthly report. It fell to 36.7 in April from 44.4. Reports indicate that is the 14th consecutive month the index has been below 50 (expansion)and just so happens to be the lowest reading since April 2009, a full four years ago! 

Australia's economy is very tightly tied to the health of the Chinese economy since the lion's share of their mineral production ends up being sold to China. This is why many commodities are seeing weakness. Keep in mind that the commodity boom of recent memory was completely dependent on the rapid growth rate of China. Miners gearing up production to meet that demand managed to ramp up supply just in time for the growth rate to begin slowing. That means SURPLUSES and growing stocks in warehouses and that means lower prices.

Besides this negative news, all eyes will now be focused on ENTRAIL READING 101, as analysts and pundits pour over the upcoming FOMC statement for clues to the future in their attempt to discern the will of the gods (those would be the monetary masters). AS far as I am concerned, if QE1, QE2, QE3 and QE4, were not and are not enough to create rapid growth, who the hell cares what these babblers at the Fed are going to say next. They have one weapon and one weapon only and that is the creation of unlimited amounts of funny money.

"If at first you don't succeed, try harder", should be the motto carved in stone over the offices of the Fed. The bond market is sharply higher today with the yield on the Ten Year now down to 1.63 as I write this, hardly an endorsement of "growth" or a testimony to the success of the Fed.

The HUI, mining shares, cannot clear that chart gap formed on the daily. Until they do, the mining shares are going NOWHERE. Profits are lacking in that sector and until investors see a REASON to buy them, even at these incredibly cheap prices in relation to gold itself, (the HUI to Gold ratio continues to plummet), long side sponsorship is going to be lacking.

That brings us to gold. It did fail at the resistance level noted on the charts that was formed last week near $1485. Bulls simply could not overcome the hedge fund selling that was lurking up there. I know it angers my friends in the gold camp but as a trader I have to call it as I see it. That means rallies in gold are going to be sold until the technical posture of the price chart switches from bearish to bullish.

I understand all the implications of the strong offtake in the physical market. That is very real and cannot be underestimated. As I have stated however; a $200 plunge in the price of gold draining the "15" handle down to a "13" handle is exactly the recipe for generating strong physical buying. The problem is that once price rallies back up towards the region from where the plummet in price began, physical gold demand will throttle back again. With the lack of investment demand heading into the gold ETF, traders are looking at that as a bearish factor and a reason to sell on rallies. They will cover on dips lower in price whenever physical demand starts surging again meaning that the ingredients are in place for a range trade.

If gold can maintain its footing above $1440, that will set the parameters of the range at that level on the bottom and $1485 on the top. If $1440 fails, we go to $1420 and then if that fails, test $1400.

That brings me to one more thing - various readers keep sending me reports about the Commitment of Traders report - please keep in mind that those who rely exclusively on those as if they are some sort of Holy Grail of trading are completely off base. They speculate this means that, and that means this and infer one thing and then another. It is all a gigantic waste of time. That sort of foolishness has about as much use as all that talk a while ago about the basis. Remember all those who kept extolling the basis and that nonsense about gold backwardation - that was before gold imploded to the downside along with the mining shares.

The one use for the COT is as a determiner of sentiment. That is how I use them. Anything else makes good fodder for newsletter writers to separate you from your money.

Lastly, the Gold Volatility Index is rising today as can be expected with the sharp selling being witnessed in the metal. Nervousness is creeping back up as is uncertainty ahead of the FOMC statement.

Let's see what the demi-gods from the FOMC give us and how the markets react to that...

Gold Commitments of Traders Report - Update I

Yesterday (Friday) I posted some comments doing a bit of analysis on the Commitment of Traders report for Gold. In those comments I noted that it looked to me as if the General Public, the smaller speculator, usually underfunded and not well capitalized, was holding their smallest net long position going back over a decade.

I have managed to finally find a bit of time to confirm that.

Here is the data in chart format. Note, the general public is the LEAST BULLISH ON GOLD since the very beginning of the decade+ long bull move way back in 2001. You will recall that gold was coming off a twenty year bear market back then.

Even during the depths of the credit crisis in the latter part of 2008, the general public, in spite of a sharp crash in the price of  gold, still remained biased towards the bullish side, even though that sentiment took quite a hit during that downdraft.

Fast forward to this past week and you can see how rapidly sentiment towards gold, on the part of the small speculator, has been damaged. All I can say about this is if the Central Planners wanted to discredit gold as an alternative currency to the Dollar, they have certainly managed to do just that. They have gotten the entire speculative camp, hedge funds, other large reportables and the small speculators selling gold while the bullion banks and swap dealers are in the process of buying it.

Keep in mind that this is using the paper Comex markets as the benchmark against which most of the investment world leans when it wants to know what the price of gold is doing. Most people outside of the gold community do not even know what a gold coin dealer shop looks like or where even to find one. Mention the words, "spot price of gold" and you are liable to get someone asking why the metal is spotted.

Let's keep a close eye on this to see if we can spot any shift in sentiment. Markets that have suffered such brutal maulings need some time to repair the psyche of those who have been on the wrong side of a move of that nature and been devastated as a result.

This is the reason that I am not in the camp with those who believe that we are now going to see an immediate rocket shot higher in gold. I can assure you as a trader that once you are on the wrong side of a trade of this nature, and watched your trading account or investment capital been blasted into the nether regions, you are in no special hurry to plunge right back into that market. You need time to lick your wounds. There are probably people out there who are swearing out loud right now that they will never even look at another ounce of gold, much less plop down money on a gold investment, especially a mining share!

This market will thus need some sort of healing process in my view to convince the skeptics that it is for real.

Those of us who believe in honest money, need to understand that the majority do not look at these things in the same manner in which we do. Thus, the mass exodus out of the Comex gold markets and the gold ETF. If gold can continue to stabilize here and avoid any further sharp downside plunges, that will go a long way to convincing some of the new skeptics that the worst is over and give some the confidence to wade back into the water.

Traders and other investment types will be looking for another retracement lower in price to see where the support emerges. They will be especially interested in seeing where the strong physical offtake begins to fade at these higher price levels.