PM End of Week Market Commentary - 6/30/2017

davefairtex
By davefairtex on Sat, Jul 1, 2017 - 9:13pm

 

On Friday gold moved down -4.20 [-0.34%] to 1241.40 on moderately heavy volume, while silver fell -0.01 to 16.62 on moderate volume.

PM was mostly bearish this week, with some elements giving back all of last week's gains. Copper was the clear winner - it has surprisingly moved into a strong uptrend, and is above all 3 moving averages.   Platinum dropped a bit but is showing signs of having put in a low. Silver dropped back below its 9, but didn't move too far, while gold appears headed lower. Miners all fell, but junior miners continue to outperform. It was a bit confusing – it was definitely not a bullish week, but it is unclear as of yet if the metals have resumed their downtrend.

Name Chart Chg (W) 52w ch EMA9 MA50 MA200 50/200 Last Crossing last
Copper $COPPER 2.75% 23.02% rising rising rising rising ema9 on 2017-06-21 2017-06-30
Platinum $PLAT -0.36% -9.74% rising falling falling falling ema9 on 2017-06-30 2017-06-30
Silver $SILVER -0.63% -11.55% falling falling falling falling ema9 on 2017-06-29 2017-06-30
Gold $GOLD -1.30% -6.29% falling falling falling falling ema9 on 2017-06-26 2017-06-30
Palladium $PALL -1.53% 39.83% falling rising rising falling ema9 on 2017-06-27 2017-06-30
Junior Miners GDXJ -2.40% -21.64% falling falling falling rising ema9 on 2017-06-29 2017-06-30
Silver Miners SIL -2.67% -21.63% falling falling falling rising ema9 on 2017-06-29 2017-06-30
Senior Miners GDX -2.90% -20.32% falling falling falling falling ema9 on 2017-06-29 2017-06-30

Gold fell -16.40 [-1.30%] on the week, spending 3 of 5 days moving south. The picture was vastly worse when viewed in Euros: gold's drop measured -38.04 Euro, or -3.38%. Rather than simply ticking lower as it did in USD, gold plunged through support, dropping 5 days out of 5. RSI-7 for gold/EUR is 12: it is very oversold. From what I could tell, most of the selling in gold happened this week during European trading hours, and that is why I'm focusing so heavily on the European charts rather than the ones in USD. If anything, traders in the US were buyers, rather than sellers. Is the selling in Euros over? Its hard to know. Maybe. Friday things looked a bit more quiet.

In USD, the price drop was much more modest; after the larger dip on Monday, gold mostly just trickled lower, ending the week just above its 200 MA. Gold forecaster dropped about 0.50 points this week, and is now in bearish territory with a rating of -0.32. Friday's modest long black candle was seen as neutral; no help there. The view from gold/USD: it looks like we probably have lower prices ahead.

The December rate-increase chances rose to 47%.

COMEX GC open interest rose +12,444 contracts.

Silver fell -0.11 [-0.63%] on the week, doing somewhat better than gold. Mostly silver appeared to just side-track this week; Thursday was its worst-performing day. Friday's doji candle was seen as neutral. Forecaster has silver at just slightly bearish with a rating of -0.03. For most of the week, silver seemed to attract buyers more readily than gold, even though both suffered downside moves of relatively similar magnitudes.

The gold/silver ratio fell -0.51 to 74.67. That's bullish.

COMEX SI open interest fell -3,186 contracts. Commercials ringing the cash register.

The miners led PM higher last week, and they dutifully led the group lower this week. Tuesday's sell-off produced an evil-looking big black candle, but the follow-through after that day was relatively modest. Friday GDX even rallied, up +0.59% on a day when both gold and silver fell. That's a positive sign, although the piercing candle print was seen as neutral rather than bullish. GDX forecaster fell to a bearish -0.48, while GDXJ dropped to a less bearish -0.28. Juniors continue to look better than the seniors.

The GDX:$GOLD ratio fell this week, which is bearish, while the GDXJ:GDX ratio ticked higher, which is slightly bullish.

USD

This week the buck fell -1.52 [-1.57%] to 95.42, a big move with most of the damage happening on Tuesday, when ECB Chairman Draghi hinted that he would start tapering the ECB's QE program. This was strongly Euro-positive, and pretty much everything-else negative. From what I could see, money fled US assets back to Europe, and money also fled both European assets as well as gold back into cash. My read was that the markets seemed to feel that the liquidity party may now be drawing to a close, and their reaction was: no need to wait for confirmation - run, don't walk, back into the safety of cash deposits. The ECB's attempts to walk back Draghi's trial balloon only reversed the selling for a couple of hours.

US Equities/SPX

SPX fell -14.89 [-0.61%] to 2423.41. Selling was particularly intense on Thursday, when SPX broke briefly below its 50 MA. Buyers pulled price back up towards end of day, but they were not numerous enough to pull prices back up to even. It appears that traders are using the rallies as an opportunity to sell, at least right now anyway. The 10-day forecaster is now in bearish territory for SPX, with a rating of -0.25.

The equities sector map shows a lot of variation; tech was hit hard (and has been underperforming the market overall for the past 3 weeks – a bearish sign) along with utilities. My guess: Europeans fleeing US yield and growth back to cash again. Financials did best, as a result of almost everyone passing the Fed's stress test. Passing the test allows them to all start engaging in more stock buybacks and paying larger dividends, which of course boosts bank stock prices, which in turn provides large gains for the executives at the banks, who generally have substantial stock option holdings. Its great for the short term ROI (especially for the bank executives), but it weakens the banks just as the credit impulse appears to be ending, and of course the long term shareholders get hosed, since the bank is buying back stock right at the top - Worst Timing Ever for going long.  But its shareholder money, so who cares?  Four words: Breach of Fiduciary Duty.

VIX rose +1.16 to 11.18. Puts are still cheap. The VIX bounced around like a crazy thing this week, topping out at 15.16 at one point during Thursday's big move lower. Seems like there might be some money to be made buying VIX low, and selling at the intraday volatility peaks.  And speaking of which, daily volatility (as measured by my "Martin Armstrong" volatility metric) is starting to pick up.

Name Chart Chg (W) 52w ch EMA9 MA50 MA200 50/200 Last Crossing last
Financials XLF 3.26% 32.93% rising rising rising falling ema9 on 2017-06-27 2017-06-30
Energy XLE 0.84% -4.87% rising falling falling falling ema9 on 2017-06-30 2017-06-30
Homebuilders XHB 0.71% 14.88% rising rising rising falling ema9 on 2017-06-30 2017-06-30
Industrials XLI 0.15% 21.60% rising rising rising falling ema9 on 2017-06-30 2017-06-30
Cons Discretionary XLY 0.12% 14.82% falling rising rising falling ema9 on 2017-06-29 2017-06-30
Materials XLB -0.07% 16.12% falling rising rising falling ema9 on 2017-06-29 2017-06-30
Cons Staples XLP -0.99% -0.38% falling falling rising falling ma50 on 2017-06-22 2017-06-30
REIT RWR -1.18% -6.49% falling falling falling falling ema9 on 2017-06-29 2017-06-30
Healthcare XLV -1.53% 10.51% falling rising rising rising ema9 on 2017-06-29 2017-06-30
Telecom XTL -2.24% 22.00% falling rising rising falling ema9 on 2017-06-29 2017-06-30
Utilities XLU -2.35% -0.97% falling rising rising falling ma50 on 2017-06-28 2017-06-30
Technology XLK -2.81% 26.17% falling rising rising falling ma50 on 2017-06-29 2017-06-30
Gold Miners GDX -2.90% -20.32% falling falling falling falling ema9 on 2017-06-29 2017-06-30

Gold in Other Currencies

Gold fell in every currency this week, dropping -30.25 in XDR.

Rates & Commodities

TLT plunged -2.08% this week, printing a disagreeably large swing high on Tuesday after Draghi's “I think I might just taper” speech. By Friday the selling may have stopped (the high wave candle was somewhat bullish), but its hard to know if bonds will continue moving lower. Presumably, if Draghi really does curtail QE, we get to see higher long rates across the board, as money flees bonds for cash.

The rate moves this week were fairly strong: US 10 Year: +16bp, Germany: +21bp, France +21bp, Italy +24bp. These moves show that money fled bonds both in Europe and in the US, especially the long end. Markets always act in anticipation of what they see coming down the road.

JNK rose +0.22% on the week, JNK managing to move back above the 50 MA. In spite of the flight from the long treasury bonds, traders still seem more than willing to buy the dip in junk. I suspect the crude rally helped.

CRB shot higher, up +4.19%. Of the groups, energy +6.51%, agriculture +5.87%, livestock +2.92%, industrial metals +2.56%. Fun was had by almost everyone, with PM the sole loser. Much of the gain was driven by currency (since commodities are priced in dollars, a falling dollar helps commodity prices to rise) – much, but not all. Perhaps currency moves ignited a short-covering rally. If so, we can expect the CRB might peter out once the shorts are all gone.

Crude did extremely well this week, up +3.16 [+7.32%] to 46.33. On Wednesday, a fairly neutral-looking petroleum status report resulted in a strong rally, and on Friday, the US rig count grew by 7 rigs, but the market rallied anyway. No doubt the falling dollar helped, as did the very large overhang of managed money short positions which appeared ripe for the plucking. Crude forecaster is up at +0.93, which is about as high as it has been in recent months. The white marubozu candle probably does not mark the top. The COT was the predictor for the move this week in crude, proving once again that it is a bad idea to be on the same side with managed money, at least once things get extended. This week's COT report still shows managed money with a large overhang of shorts; that's possibly because the coverage period did not include the two large rally days on Wednesday and Friday.

The real test for crude will come when it reaches the upper channel trendline; that's when the selling will probably start in earnest.  If we make it that far, most likely the managed money shorts will be gone.

Physical Supply Indicators

* SGE premium to COMEX rose to +10.39 over COMEX.

* The GLD ETF tonnage on hand rose +1.48, with 853 tons in inventory.

* ETF Premium/Discount to NAV; gold closing of 1257.80 and silver closing of 16.73:

 PHYS 10.13 -0.71% to NAV [down]
 PSLV 6.31 +0.20% to NAV [down]
 CEF 12.33 -6.5% to NAV [up]

* Bullion Vault gold (https://www.bullionvault.com/gold_market.do#!/orderboard) showed no premiums for gold or silver.

* Big bars premiums were: gold [1kg] 1.3% and silver [1000oz] 4.1%.

Futures Positioning/COT

COT report is through June 27th, when gold closed at 1247.50, and silver at 16.68. The report covers the strong move lower in gold that happened on Monday as a result of the 4am (8am GMT) gold smash.

This week in gold, the commercials closed -7k shorts and added 8k longs, while managed money bailed out of -20k longs. Managed money continued to flee gold this week – probably encouraged by the Monday smash. Unless we have a large downside move ahead of us, we are probably in the rough neighborhood of a low for gold – although managed money has yet to start loading up short. So far they've resisted doing that, and that may mean that gold could lag behind in any rally attempt we see.

In silver, the commercials closed -5.2k shorts and added +3.4k longs, while managed money bailed out of -4.2k longs and added +10.2k shorts. That's a big increase in shorts for managed money, and it just adds to the already-large stock of managed money shorts in silver. Based on this, unless we have a big move down ahead of us, we should be at a low for silver. The managed money short position is definitely in the range to mark a low, as is the commercial net position (net = long - short).

Gold Manipulation Report

There were no after-hours spikes to report this week. There was a spike on Monday at 4am (8am GMT) where someone pounded gold down $20 with a volume spike of 18k contracts in just one minute. This assault definitely seemed to set the trend for the week; gold never recovered from the drop. My guess: a big chunk of the 20k drop in managed money longs this week occurred during that smash on Monday.

Eurozone Status

  • German Elections; October 2017: currently the polls show Merkel/CDU with a 12 point lead. Both parties are pro-Euro.

  • Chairman Draghi suggested this week that he will taper the ECB's QE program further. This led to an almost instant rally in the Euro, and a week-long flight from European sovereign debt, as well as a brisk sell-off in both European and US equities. The prospect of less liquidity resulted in a “sell everything” mood. The market has spoken. Will Draghi taper anyway? Banks in Europe definitely need a reprieve from the negative rate regime.  Savers too.

  • We saw two Italian banks taken down last weekend, total assets of 60 billion Euros. Who paid? Junior bondholders, stockholders, and the Italian taxpayer. Depositors and senior debt holders remain intact. Price tag is uncertain: as best I can tell, the government is now the proud owner of 20 billion Euros in non-performing assets, in exchange for providing 17 billion Euros in cold hard cash today to compensate the depositors. The final price tag will only be known once those bad loans have been worked through (either foreclosed upon or sold), years down the line. If the property market does spectacularly, maybe its a 60% recovery. If it does poorly, maybe 15-20%. So how can an almost-bankrupt Italian state bail out a bankrupt Italian bank? ECB QE sure helps a lot. Italian 10-year debt trades at a yield of 2.15%, less than US 10-year debt which is at 2.30%. Note: when you hear the term “bad bank”, grab your wallet, because your pocket is about to be picked. Your tax dollars are paying for the bad bank – and if history is any guide, taxpayers almost always overpay for "bad bank" assets. http://wolfstreet.com/2017/06/25/contagion-from-bank-collapses-italy/

  • Turkey & the migrants: migrant deal remains in place. Weather is good in the Eastern Med right now, and that's boosting the rate at which migrants and refugees are landing on the various Greek islands.

  • Italian Elections: no progress on a new electoral law in Italy. In national polls, M5S remains slightly below the PD; now 27.2% to 27.6%. Interestingly, the center-right FI party, led by former PM (and alleged bunga-bunga party host) Silvio Berlusconi, won a shockingly large number of municipal elections this week – some cities had been ruled by the center-left PD for the past 50 years, and now they have mayors from the FI. Major loser: the PD and former PM Renzi.  Italians clearly want change of some sort.  https://www.theguardian.com/world/2017/jun/26/italys-centre-right-wins-big-in-mayoral-elections-after-left-crumbles

Summary

Last week's PM rally was mostly unwound this week, with gold and the miners leading everyone back downhill. Silver managed to resist the downtrend best, possibly with the help of sharply-rallying copper. Silver and copper tend to be more closely correlated. Draghi's hint that he's going to start tapering caused a decent amount of mayhem, as traders fled US and Euro assets for the safety of cash.

The COT report showed an increasingly bullish positioning, especially for silver. If we don't have a big drop ahead of us, silver (at least) looks as though it should rally soon. Gold may lag behind because of a lack of managed money shorts to fuel a rally.

Gold and silver big bar shortage indicators shows a mixed picture in the West, and perhaps a hint of a premium increase with big bar silver at 4%. ETF premiums were mixed, and GLD tonnage rose slightly. In Shanghai, premiums increased. 

While the political turmoil in Europe has now ebbed, the markets got a shot across the bows courtesy of Chairman Draghi, who suggested that the liquidity party may have an near-term sell-by date.

Is this the pin that pops the bubble? Certainly, the first impulse suggests pretty clearly that expectations of ever-higher liquidity are behind the rise in asset prices – both equities and bonds. If the ECB were to simply stop QE, I expect the market would head south pretty quickly, just based on what the rumor of such a thing did this week. Bond rates would scream higher, and equities would probably sell off hard. You'd think that would give him pause, but the Germans really want Draghi to stop printing, and all the German politicians want to look good for their upcoming election. Will he end up pulling the trigger?  I think it will take some time to play out.

For PM in the near term, I think we should watch silver for clues as to where things go next. Silver should be in a position to rally, at least according to the COT, and the COT has been pretty accurate so far.  Commercials have closed a bunch of short positions and are properly set up long, while managed money is now overextended short. If silver can't rally, that's a bad sign - we may have a larger PM decline ahead of us. Junior miners continue to outperform also. With the first impulse of Draghi-inspired Euroland-selling perhaps at an end, maybe we'll get a rally out of the PM space, led by silver.

Trend-following code says:

Uptrend: crude, natgas, copper.

Downtrend: gold, silver, platinum, treasury bonds, USD.

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10 Comments

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5059
the flipper: myth confirmed

So I went off to my afternoon meeting with the HFT trading guru and - well because of too many ciders I forgot most of the questions, but the one I remembered most clearly did get answered.

I asked him, "do you think that someone could manipulate the market by figuring out what the bots were coded to trigger on, and then taking action to encourage them to do just that?"

Short answer: yes.

He told a story about a mysterious trader nicknamed named "the flipper" who was famous for wrong-footing traders in his particular marketplace - putting massive orders into the book on one side, waiting for that to have an effect, and then suddenly taking the other side of the trade.  The flipper was by all accounts extremely successful.

HFT guru explained that he actually had to change his code in order to defend his bots against the flipper's strategy.

https://seekingalpha.com/instablog/696397-traderdaily/85609-insight-from-the-flipper-catching-up-with-paul-rotter

And in this interview, the flipper himself describes the algorithms of the day (back in 2010):

TraderDaily: Back in the 1990s, so-called “SOES Bandits” were criticized for gaming Nasdaq’s Small Order Execution System. Is there an equivalent of the SOES bandit in today’s world of electronic trading — for traders with relatively small amounts of capital, that is?

Rotter: I think it will be more and more a battle between machines, where the better ones try to destroy the smaller ones by learning from their behavior and trading against them.  In the old days, there were quiet periods with no data flow but, today  one machine can create a trend and the others will follow. Today´s ”sheep’ are also machines. I am pretty sure there are all kinds of similar ”bandits” in the different electronic markets.

And then

TraderDaily: Is the overall mindset of the market and the “sheeple” trading in it different than it was five or ten years ago?

Rotter: Today the herd is the computers, and I think they are doing very well being the herd. The trends created by them are more dynamic then before.  They can reverse their mind very quickly and follow the opposite trend immediately, so I would call them the “dynamic herd”.

So we'll call this myth as "most likely confirmed."  I'm guessing this will do nothing but encourage Chris, but what are you gonna do? :)

Another story:

I asked if, on news releases, was it his team that triggered buys off headline report numbers.

No.  That was good money in 2005, but not anymore.  If you looked at the event closely, buying starts perhaps one second before the release hit the wire.

Wasn't this clear evidence of fraud?

He said, not necessarily.  Lots of places conduct their own realtime economic research, so they can have a pretty good guess of what the report will say.  For instance, there was a firm that tracked every single ship on the ocean, how heavily laden it is, where it is traveling, and the like.  Most likely, their trade data is a whole lot better than the government's data.

How come they wait until just one second to buy?  Why not the day before?

He explained: that's an extra day of market (and event) risk.  If you buy just before, you reduce your risk to just that event itself.

This answer made sense to me.  If you are running some sort of information arbitrage like this, you really want to limit your risk as much as possible.

cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
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Posts: 5568
davefairtex wrote: So we'll
davefairtex wrote:

So we'll call this myth as "most likely confirmed."  I'm guessing this will do nothing but encourage Chris, but what are you gonna do? :)

I'll take it!  ;)

"Dynamic herds"  ... sure that about fits with what I see in my head...

Think of it this way, there are thousands of independent computer bot programs exquisitely tuned to do what they do at astonishing speed.  They have rules and parameters that govern their 'behavior.'

But all of them are seeking to make money.   If you toss money into a given part of the ""market"" the dynamic herd will sniff that out in microseconds, act on that in milliseconds, and then the rest of the herd will key off of those perturbations in predictable ways.  

So if it were me trying to rig the ""market"" I'd find out where the pressure points were and apply money there.  As a starting point I might play around with the JPY/USD cross...or VIX...jam those and then watch the rest.  In some cases the predictability part is easy.  

Any of the bots running an arbitrage routine between the VIX and the index futures or even cash market will be 'forced' as it were to buy the indexes in a leveraged fashion whenever the VIX moves down and out of the minimum arb parameters.  

And so on.  "They've" had years to play around with perfecting this.

The downside to all this is that it works until it doesn't.  Some day an event comes along that causes the machines to go away and stay away because the conditions are too far out of alignment for their routines to even consider playing.  That is the moment of a flash crash of such magnificent proportions that nobody will quite be able to wrap their heads around it.

 

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
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Posts: 5059
nanoseconds

HFT guru said that they got their transaction time down to nanoseconds.  He said "you can't do too much thinking in that amount of time - it was one or two if-then statements" coded up in an FPGA located in a switch about 5-10m from the exchange server.   He pointed across the alley.  "30 ns is about that far."

I got the distinct sense that those particular bots are not so bright at all.

We also talked about bugs in code.  There was one event where his code made $32M in about 30 seconds after market open, because a competitor got the "buy" and "sell" signals reversed.

Opposing software engineer didn't have a good automated test suite.  No excuse for that sort of thing.

I agree that the big risk is a no-bid flash crash once the bots all retreat into their shells following a big move lower.  If you have cash, you will be able to take advantage of this.  Find a company that's going to survive for sure, put a bid 40% under market, good-till-cancelled.  It might take months or years for it to play out, but eventually it will probably happen.

Too far under market = the exchange will unwind the trade on you once things settle down.

Maybe one of those oil majors.  Getting one of them at half price might be fun.  Good yield, too.  Then when oil snaps back, price will move hard in the other direction.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5059
bitcoin update

Here's another look at the bitcoin 3-day forecaster, this time using blue & red colored circles to indicate strength of trend instead of a separate line.  Note too how the MA9 seems to be a pretty reasonable indicator for bitcoin all on its own.

Bitcoin appears to be forming a descending triangle.  My guess is, it will break 2400 support and take a leg down to the next support level (either 1800, or 2000) - but that's just a guess.  It really needs a close above its downtrend line to break the pattern.

Forecaster, as of 2017-07-02: -0.21 +0.26

Cold Rain's picture
Cold Rain
Status: Gold Member (Offline)
Joined: Jul 26 2016
Posts: 321
Great Stuff

Dave,

Great info.  Thanks for all the notes you shared the last couple of days.  Really interesting stuff.

And how about those PMs today?  Great way to start H2, in the slaughterhouse.  Equities and crude and the buck all set to explode higher.  Great time to be long all assets correlated to US economic health!

vadim_75's picture
vadim_75
Status: Bronze Member (Offline)
Joined: Oct 18 2015
Posts: 48
Today's move in PM it's the

Today's move in PM it's the one which i vainly expected on Friday. Don't know why it took them so long, maybe it's the end of H1. Anyway, today everything's exactly right where it should be.)

Cold Rain's picture
Cold Rain
Status: Gold Member (Offline)
Joined: Jul 26 2016
Posts: 321
Dive Dive Dive

Wonder if we'll get below $16 in silver and $1200 in gold today?  I'm rooting for single digit silver and sub-$1000 gold.  Should be some really good deals in the mining sector if we can get there.  All of the gold experts keep saying prices shouldn't be able to drop much more than where they currently are.  But they have pretty much been either sideways or down since the peak last summer.  Not sure why they can't go substantially lower from here.

thc0655's picture
thc0655
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Posts: 1512
Waiting patiently

I'm pessimistic I'll see it, but I'm waiting patiently for silver <13.80 and gold <1,050. In the meantime, I'm buying some land.

 

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5059
a bad day

Yes it sure was a bad day for PM.  The majority of the damage happened during European trading hours. 

Perhaps the gang in Europe wanted to hammer prices without worrying about any buyers from the US appearing to buy the dip?  Or maybe people in Europe were just fleeing PM.   The waterfall move down in Europe was pretty striking - and the selling pressure (at least in silver) more or less vanished once Europe had closed.

After the COT report I really did think the commercials were set to move prices higher in silver.  Clearly not yet.  :)

 

Penny551's picture
Penny551
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Joined: Nov 8 2012
Posts: 149
(No subject)

 

 

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