PM Daily Market Commentary - 1/8/2017

davefairtex
By davefairtex on Tue, Jan 9, 2018 - 7:12am

Gold rose +0.90 [+0.07%] to 1321.20 on moderately heavy volume, while silver dropped -0.10 [-0.55%] to 17.16 on heavy volume. The buck staged a strong rally [+0.45%]; gold actually looked reasonably strong given the big move in the buck. Can gold hang on if the buck continues higher? That's the question.

Gold mostly chopped sideways today, apparently unaffected by the strongly rising dollar. The spinning top candle was a bullish continuation; the forecaster dropped -0.05 to 0.0, which is a sell signal (just barely) for gold.  Gold remains above its 9 MA, which is a positive sign.

COMEX GC open interest rose by +1,589 contracts today.

Rate rise chances (March 2018) fell to 61%.

Silver dropped steadily for much of the day, making a new low to 17.06 in the late morning in US before bouncing back into the close. Print was a bearish engulfing – which was actually just a bullish continuation. Forecaster disagreed, dropping -0.21 to -0.13, which is a sell signal for silver. Silver is definitely looking weaker than gold right now.  Still, silver is also above its 9 MA, which is good news.

COMEX SI open interest rose +316 contracts today.

The gold/silver ratio rose +0.48 to 76.97. That's bearish.

The miners sold off for the first two hours, and then mostly moved sideways for the rest of the day. GDX fell -1.06% on moderately heavy volume, while GDXJ dropped -1.54% on very heavy volume. XAU forecaster plunged -0.18 to -0.26, moving deeper into a downtrend.  XAU has dropped through its 9 MA; that's a bearish sign.  Miners usually lead, so this looks unfortunate for the near term moves in the PM group.

Today, the GDXJ:GDX ratio fell, as did the GDX:$GOLD ratio. That's bearish.

Platinum moved up +0.23%, palladium climbed +0.76%, and copper fell -0.03%. Platinum made a new high – it continues to be relatively unaffected by the selling pressure that the rest of PM is experiencing. Although copper has fallen 5 of the last 6 days, it still remains in an uptrend.

The buck rallied +0.41 [+0.45%] to 92.05. Print today was a confirmed NR7, which had a 75% chance of being a bullish reversal. Forecaster jumped +0.32 to -0.20. That's still a downtrend, but one that appears to be in the process of reversing. A stronger dollar, as always, will cause problems for PM. In looking at the news, I'm not really sure what caused the dollar rally.  Buck is back above its 9 MA; that's bullish.

Crude rose +0.31 [+0.50%] to 61.89. Mostly crude moved sideways today, moving higher in the afternoon in the US. From what I can see, crude seems relatively stable here above 60; energy equities continue to move steadily higher, with oil services doing especially well – big moves on very heavy volume. The equity market is telling us that it thinks the oil glut may be over. Certainly we've seen some bearish-looking EIA reports, but they haven't seemed to dent confidence in oil prices. Forecaster fell -0.05 to +0.14, which is still an uptrend. API release due out tomorrow after market close.

SPX rose 4.56 [+0.17%] to 2747.71, another all time high. It was a relatively quiet day. The spinning top candle had a 41% chance of marking the top (I think that's just the high RSI of 85 talking), but the forecaster rose +0.01 to +0.98, which remains a strong uptrend. Utilities led (XLU:+0.94%) while sickcare trailed (XLV:-0.36%). Might utilities have put in a low? Candle print for XLU: swing low, 71% chance of a bullish reversal. They've had a 10% drop off the highs – with the current yield of 3.33%, XLU holders will need 3 years of dividend payments to make up for their losses over the past few months.

VIX rose +0.30 to 9.52.

TLT fell -0.06%, continuing to chop sideways. TY dropped -0.01%, also going nowhere. TY is right at multi-month lows, and the technicals remain bearish: forecaster is at -0.48, and the southern doji candle print was a bearish continuation. However – the bounce in utilities might be a leading indicator for bonds.

JNK tried to rally, but the rally failed, dropping -0.11% and printing a shooting star candle which had a 32% chance of marking a top. Forecaster fell -0.14 to +0.40. That's still a relatively strong uptrend.

CRB rose +0.01%; 3 of 5 sectors rose, led by industrial metals. Momentum for commodities is starting to flag a bit.

Sell signals in gold, silver, the miners – but not platinum, palladium, or copper. The dollar may be reversing higher, and we are seeing hints of a low in utilities – those two things might be related. Euro printed a swing high today. Is this peak-Euro-for-now? Peak enthusiasm for the possible German grand coalition? Money from Europe buying the dip in yield here in the US?

Gold probably corrects from here.  How far probably depends on two things: the buck, and what happens to the rest of the commodity complex.

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6 Comments

Cold Rain's picture
Cold Rain
Status: Gold Member (Offline)
Joined: Jul 26 2016
Posts: 374
VIX

Hey guys, is there any way to trade the real VIX?  I know you can buy an ETF like VXX or QVXY or play options on those.  But half the time, when the actual VIX goes up, like yesterday, VXX goes down (and vice versus) which is not reflective of the actual VIX.  Just wondering if there is something other than those products that tracks right with the actual movement of the VIX.  TIA!

davefairtex's picture
davefairtex
Status: Diamond Member (Online)
Joined: Sep 3 2008
Posts: 5526
VX futures

Yeah.  You can trade VX futures.  Or you can buy puts.  Problem is, both of those items have time decay built into them.  That's why VXX drops.  If you look at a "continuous VX futures" chart, you'll see big jumps every 30 days when the contract roll happens.

Another way to look at it: in the table below, "cash" VIX is 9.49, but if you want to buy a Sep 2018 VIX future, you'll pay $15.73.  If we assume cash price remains at 9.49 for the next 9 months, time will pass, and on expiration date in September, your futures contract will be worth $9.49.

https://www.barchart.com/futures/quotes/VI*0/all-futures

Think of it this way: you cant buy the VIX, you can only rent it for a period of time.

 

A way to take the other side of the "decay" trade is to write puts.  I do this sometimes after a big nasty decline.  Volatility is high, and so I sell it.  Of course, if the price continues to fall, I will end up owning the underlying if I let it go long enough.  Which has happened.

Put writing is an art.  If you do it well, though, you can make decent money.  It requires discipline.  Sometimes, there are no good chances to write puts, though, so you just have to watch.

Kind of like right now.

cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 5779
Don’t fight the Fed!

If you can’t beat ‘em, join ‘em?

Confirming my long-held position that the Fed has been directly monkeying with “”markets”” using its co-located trading facilities in Aurora IL, the Fed minutes recently revealed show that the Fed has had a “short volatility” position.

At least in 2012 when the minutes were taken.

But since the strategy works so well, does anybody doubt that the Fed has not only continued but expanded the practice?

Fed Chair Powell's Admission: "The Fed Has A Short Volatility Position"

[W]hen it is time for us to sell, or even to stop buying, the response could be quite strong; there is every reason to expect a strong response. So there are a couple of ways to look at it. It is about $1.2 trillion in sales; you take 60 months, you get about $20 billion a month. That is a very doable thing, it sounds like, in a market where the norm by the middle of next year is $80 billion a month. Another way to look at it, though, is that it’s not so much the sale, the duration; it’s also unloading our short volatility position.

For those not sure what that means, here’s the answer; by slamming volatility an entire ecosystem of computer trading algos will pile into buying the “”market”” thereby making it go up.  I’ve seen this happen over and over.

While there are certainly a lot of private participants playing the VIX/Cash game, we now know the Fed has been shorting volatility…or selling VIX.

Here’s how that works.

I tell ya, it's almost as if those wild theorists out there were onto something by claiming the Fed was actively "influencing" the markets behind the scenes!

;)

Cold Rain's picture
Cold Rain
Status: Gold Member (Offline)
Joined: Jul 26 2016
Posts: 374
VIX

Dave, thanks very much.  That makes sense.  And Chris, I saw that the other day and I was surprised they came out with that direct admission.

cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 5779
Powell's admission
Cold Rain wrote:

Dave, thanks very much.  That makes sense.  And Chris, I saw that the other day and I was surprised they came out with that direct admission.

I'm going to bet that the "explanation" for that is that it is not a direct short position but a structural one in the bond market.

By being long a gigantic proportion of the MBS market, for example, the Fed has pushed out a lot of the economic participants.

The effect has been to subdue activity making the Fed, by this line of reasoning, "short volatility."  With subdued activity there's less volatility and the Fed 'owns' that, making them short volatility.

If they were 'long volatility' they'd be in the business of making money on spiking yields, but they are in the exact opposite position.

However, I would bet a lot of money that the Fed is not just structurally short bond volatility but also a direct participant in selling puts on long bonds which would make them a direct seller ("shorter") of volatility in bonds.  (This works by selling other holders of long dated bonds insurance against them selling off, which subdues selling which depresses volatility).

I'd go further and suggest that after seeing how well this worked in bonds (back in 2012) that they dabbled in equities.  Heck, why not?  

 

davefairtex's picture
davefairtex
Status: Diamond Member (Online)
Joined: Sep 3 2008
Posts: 5526
market stability

By going short volatility, the PPT (and/or the Fed) can justify this by saying they are working to provide stability to the markets during a crisis.

I'd guess it was PPT shorting equity VX futures.  It seems to be more their area.

And although I don't have any low level realtime models for US equities (since the juice from that lemon has been thoroughly squeezed out over the past 15 years), I do think its entirely possible that movements of VX could well be predictive of price - and that would certainly drive my bot, had I written one.

I suspect, too, that the trade makes them money.

And the private guys follow along because - the trade makes them money too.

The coming bond market meltdown might throw a wrench into the plan, however.  Might.

I say: watch the bond market.  PPT doesn't have enough firepower to stop a meltdown if it gets bad.  That requires the Fed's balance sheet.

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