PM Daily Market Commentary - 11/9/2016

By davefairtex on Thu, Nov 10, 2016 - 3:10am

Gold rose +2.10 to 1278.00 on the biggest volume ever, while silver rose +0.11 to 18.48 on extremely heavy volume.  Trump's election first caused gold to rally all the way up to 1338.30, but the dollar rebound (and probably some help from the commercials) caused gold to retrace almost all those gains by end of day, a $50 round trip for the yellow metal.

I know I promised you a fantastic gold rally if Trump were elected, but that's not how things turned out, is it?  To be sure, we got a rally - but it didn't last very long.  The dollar turned out to be absurdly strong, and that made it very difficult for gold to move higher.

In the weeks leading up to the election, the dollar would drop and a gold would rally whenever Trump moved higher in the polls.  But when the unthinkable actually happened, when Trump won and the gun was actually placed to the trader's head, they ended up buying the buck instead of selling it.

By end of day, the USD was up a very respectable +0.68 to 98.47 after being down almost 2 full points.  The Euro ended up falling -1.05% on the day, closing at 109.17.  JPY sold off too, down -1.25%, however the pound actually rallied, up +0.27%.

Now the move in the buck could have been official intervention.  During events like these, I more or less expect governments to step in and intervene.  We will soon know if traders will use this as an opportunity to sell dollars or not.  But I ask you to think about this: what if this is about the Euro and the Yen, instead of the dollar?  Is President Trump Euro-positive?  Yen-positive?  If the US raises trade barriers and stops running such a large trade deficit, what will that do to the Japanese?  The Germans?  The Chinese?

My current guess: European and Japanese traders weren't paying too much attention to the election.   Everyone assumed Clinton would win, but once the unthinkable happened, they sold their own currencies and bought the dip in the buck.  Everyone knows Trump is for tariffs.  Buy dollars sell Yen!

The massive sell-off followed by an even more massive rally in the dollar had a direct impact on gold.  On the chart below, we see one of the biggest doji candles ever, with a $50 trading range, a 1338 top tick, and a volume stick that really is the largest volume in history for COMEX gold: 860,430 contracts, or 2676 tons of paper gold.  Were the commercials going short during this rally?  I would assume so.  But the buck's wild trading range was probably the primary driver of gold's large rally, and then subsequent fall.  In this context, this massive doji gives us no information as to where prices go next.  Gotta love dojis.

The December rate-rise projection rose to 81%.  Trump means rate-rise.  Another surprise.

Gold open interest at COMEX fell by -4,223 contracts.

Gold took silver higher, and then gold's correction dragged silver back down again.  However, silver did manage to outperform gold by end of day, and in fact the gold/silver ratio has been steadily declining over the past two weeks.  Ratio is now 69.29, down from a high of 73.  On the chart, silver seems to be riding the rising 9 EMA higher; if this continues, silver will close above the 50 MA quite soon.  Silver overall is looking more bullish than gold.

The miners rallied today, with GDX up +2.63% on heavy volume, while GDXJ climbed +2.29% on heavy volume also.  That all sounds pretty reasonable, until you look at the chart, which shows an unpleasant-looking "opening black marubozu" candle, which says that the miners opened high, and then promptly sold off for most of the day. There was a modest rally at end of day, which saved the miners from looking entirely bearish, but the retracement of gold's rally was not kind to the mining shares.  GDX remains above both its 9 EMA and its 200 MA, but the 50 continues to provide resistance.  Still, miners managed to hang onto some of their gains by end of day.  That's better than a poke in the eye.

Platinum fell -0.23%, palladium jumped +2.40%, and copper rallied once more, up +3.56%.  Each day copper's rally is larger, volume larger, and copper's RSI-7 is now at 96.54, which at this point is ridiculously overbought.  Copper has gone vertical; this appears to be a major short squeeze.  I'd be surprised if there were any shorts left in copper at this point: 13 straight days up.  Is it China?  Probably.

Crude rose +0.51 to 45.34; oil was hammered early, selling off with many other things after Trump's election became increasingly likely, but crude bottomed at midnight at 43.07 - right at support - and by the time the market opened in NY it was back in the green once again.  The petroleum status report today was mildly bearish, showing an inventory build of 2.2 million barrels; relatively soon after the status report, oil took off higher, eventually printing a large "high wave" candle on the day.  Candle code suggests that's a 26% chance of a low.  I think the odds are probably higher, especially given the back story.  I believe oil has most likely put in a low here at 43.07.

SPX rallied +23.70 [+1.11%] to 2163.26, blowing through the 50 MA and apparently heading up to re-test the previous highs.  Today I am using the chart of the e-mini futures, so you can see the massive lower shadow that represents the huge sell-off that bottomed out at midnight, followed by the even-larger rally that came after.  It was a huge (6%) trading range, and it sure surprised me; based on price action prior to the election, I expected SPX to sell off hard if Trump won.  But as we can see, that's just not what happened.  VIX fell -4.36 to 14.38.  People who bought puts lost a whole lot of money.

It sure looks like it might have been a fantastic save by the plunge protection team - and to some degree, I concur: some chunk of that long lower shadow is probably theirs.  They have a wad of cash on hand for just these occasions.  But if the rally was just about the PPT, there would be little difference between how each sector performed.  They would have all gone up identically.  But as you can see in the sector map below, there was some strong variation.  Financials had a fantastic day, while utilities were crushed.

So what does this tell us?  Rather than simply "mindlessly buying everything" traders were making specific decisions about what to buy and what to sell based on anticipation of Trump's policy changes.  Or so I claim anyways.

According to the sector map, traders today think banks, sickcare (drugs & equipment), and industrials will do especially well.  Hmm.  Trump mentioned abandoning Dodd-Frank, or at least not imposing any "new regulation" on banking.   Less regulation helps banking profits in the near term, at the risk of exacerbating a crisis at the back end.  Will a Trump administration prosecute bankers for their frauds?  Maybe not.  Are we back to "light touch" regulation from Bush II?  Also, repealing Obamacare without having some mechanism for negotiating drug prices may be telling Big Pharma that "the sky is the limit" on drug price increases.  $1200 epi-pens in our future?  MYL was +4.88% just today.

Understand, this is not what I'm saying, this is what today's price moves are suggesting - I'm just reading the tea leaves.  This is the first day too, and so traders are just guessing.  But big money may have information we don't.  If these price moves become a trend, I believe it is likely predictive of where policy will probably go.

TLT fell -4.24%, a massive move lower - the chart below shows what that means in terms of yield.  20 year treasury bonds are now yielding 2.52%, while yesterday they were at 2.30%, a 23 basis-point move.  What's up with treasury bonds?  Bonds have been sold steadily (yields have risen) ever since the low was made in July, but today's jump was another matter entirely.  This was a panic out of the long bond.  Ultimately, the reason you panic-sell bonds like this is if you lose confidence in the nation, or if something changes in your expectations of rates - either because of inflation, or because of a big increase in supply (i.e. if you expect the national debt to rise significantly).

So which is it?  The rising dollar suggests no crisis of confidence.  Instead, traders may be looking forward to Trump's borrow-and-spend policies; tax cuts, and an increase in infrastructure spending - rough estimates are an extra trillion dollars added to the national debt per year over the next 10 years.  This means more than doubling the supply of new debt per year.  More supply = lower price.  As a trader, when more supply is in the sell.

This also lines up with today's vast plunge in utility stocks.  Utilities tell us this is not just about China, its about a big concern about higher long rates in the near future.  Money moves in anticipation of events.  We've been waiting for something to herald the end of the bull market in bonds; this could well be it.  Note that all that government deficit spending will also be inflationary.

JNK dropped -0.66%, falling back into a short term downtrend.  JNK tried to rally, but the rally failed.  Probably this was because of the large move down in TLT.

CRB rose +0.24%; 4 of 5 sectors rallied, but CRB still appears weak.

So although this is just the first day after the election, we're already starting to get a sense for how big money is positioning itself for the policies of President Trump.  So far, banking and pharma seem pretty happy, while bonds and things-with-a-yield are being sold hard.

The market is telling me we have a large new deficit spending impulse ahead of us.  That should be good for companies, and probably the economy too - where "good" means a direct addition to GDP at the cost of a higher debt load and higher long rates.  "Growth...borrowed from the future."  Let's see how much the bond market likes the idea.  The losses in bonds could be quite large, depending on how much selling-in-anticipation occurs.

Where gold and silver go from here is a tough question.  Inflation will be good for silver, probably less so for gold.  Of course, this is just day one.  We'll have to see where things go over the next few months.  I suspect the big money will get the inside scoop from Trump's people fairly soon, and I believe we'll be able to figure out who the new group of winners and losers will be just by watching prices.

But as of right now, I'm definitely not a buyer of long-dated bonds.  Nor am I particularly enthusiastic about my medical insurance premiums dropping, based on the sickcare rally today.

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davefairtex's picture
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5740
Trump: banking deregulation

Here's an article that suggests Trump's election is a "grand slam home run" for the banks, because it is thought that he will scrap some of the key provisions of Dodd-Frank including the Volcker Rule (separating trading from banking) which more or less brings us back to status quo ante 2008 in banking.

For Rafferty Capital’s Bove, the real victory for the banks comes down to the The Financial CHOICE Act, a bill introduced by House Financial Services Committee Chairman Jeb Hensarling (R-TX). According to Bove, the bill is “extremely positive for the banking industry.”

Hensarling’s bill aims to repeal sections and titles of Dodd-Frank, including the Volcker Rule. The bill would basically ease regulations on banking dramatically based upon the amount of capital-to-assets. That capital-to-asset ratio would determine how strong regulators should treat a bank. The bill also gets rid of the “living will” rule and the Durbin amendment.

With Republicans maintaining control of congress, that bill is seen as more likely to pass.

What’s more is with the Republican congress, the rhetoric from Sen. Elizabeth Warren (D-Mass) and Sen. Bernie Sanders (D-VT) “goes right down to the toilet,” Bove said.

“No one is going to let anything they think pass,” he said, adding this is also “a huge success for the banks.”

So, no war with Russia, but ... we're apparently going back to the same banking regulatory regime that brought us all the fraud from 2000-2008.

I wouldn't normally worry about this in advance, except the financial company stock prices did extremely well yesterday.  This means that big money believes this will be the outcome also.

Cold Rain's picture
Cold Rain
Status: Gold Member (Offline)
Joined: Jul 26 2016
Posts: 385
Miners & More

^ Good post, Dave.  Very much enjoy logging in and reading your daily commentary.  Re: miners, that had to be the shortest "bull market" in history!  All the exuberance the first half of the year is quickly fading with each week that passes.  Prices seem to be once again telling us that the rally earlier in the year was a massive head-fake.  Charts are really starting to look bearish for this sector.

Re: bonds, do you think at long last we're seeing the unwind of the great bond bull market?

Also, re: stocks, Armstrong says something to the effect that the stocks won't crash like people keep calling for because the retail investor levels are at something like 51% (may be a little off here...going from memory), currently.  My guess is that retail investor levels are probably not ever going to approach the peaks that we've seen in the past that, according to Armstrong, have provided the fuel for declines.  Investors of the past are likely skittish, have more debt, have lower income levels/higher bills, etc., so they may not ever come back like we've seen previously.  If that is indeed the case, why would the market ever crash, if that's Armstrong's main counterpoint to a crash?  CBs buying stocks probably aren't going to sell, institutions buying their own stocks back, I would guess, are not likely to panic out of the trade.  If most of the trading is done by institutions/high frequency trading now to make millions on fractions of cents, what force pushes down the markets that would lead to everyone bailing out...i.e. a crash...particularly, if every time the market makes a big move down, it's met with a wall of liquidity from the ESF or PPT or whatever?

davefairtex's picture
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5740

Thanks CR.  I'm still trying to sort out what is happening.  Another good day for XLF and XLI, and a bad day for XLU and XLP and TLT.  Banks & Industrials win, Staples and Yield and bonds lose.

It all smacks of inflation in the offing.  A $1 trillion annual deficit is inflationary.  Krugman will finally get his "fiscal stimulus" but from Trump, rather than Clinton.

A big debt-funded can-kick, depending on where the money is spent of course.

PM supports this; gold (safe haven) fell, while silver (inflation) had a really nice day.

Yeah.  I think the top for bonds is in.  Unless the bond vigilantes snatch away the printing press from the government.

People were worried about the Fed and inflation, but government deficit spending will be the real deal.

Run, don't walk, from your long term bond fund.

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