PM Daily Market Commentary - 10/29/2018

By davefairtex on Tue, Oct 30, 2018 - 7:25am

Gold fell -4.35 [-0.35%] to 1235.93 on heavy volume, and silver dropped -0.24 [-1.67%] on heavy volume also. The buck rallied +0.21%, but the selling pressure on the metals seemed independent of the currency moves. In spite of a very volatile day in the equity market (SPX:-0.66%), with a 100 point trading range, gold seemed a bit weak and silver was actually hit fairly hard.

The interesting news item today was the results of the latest German regional election on Sunday.  Merkel's CSU suffered severe losses; they went from 38% down to 27%, as did the SPD which fell from 30.8% down to 19.8%.  Both the Greens and AfD were the beneficiaries.  In response to the results, Merkel said she was resigning, but (surprise!) not until 2021.  It reminds me of the parable about "teaching the horse to sing": a lot of things can happen in 3 years.  Still, if current trends continue, the CSU might well not exist by then.  Merkel is also resigning as the leader of the CSU in December.  I'm guessing she won't last until 2021.

Gold slowly moved lower for most of the day, making its low at 1 pm, and then rallying back into the close. The candle print (swing high/bearish engulfing) was a 56% bearish reversal. Forecaster ticked lower, down -0.04 to +0.07, which says gold is still clinging to an uptrend. Gold ended the day just above the 9 MA. Gold remains in an uptrend on the daily and weekly timeframes, and GC.EUR remains in an uptrend in all 3 timeframes.

COMEX GC open interest fell -5,405 contracts.

Rate rise chances (December 2018) remains at 70%.

Silver spiked to a new high at 8:30 am, but then reversed and sold off hard, making its low at 1 pm along with gold.  Silver moved roughly in tandem with copper and palladium.  Silver's confirmed bearish NR7 candle might be a bearish reversal (51%), and silver's forecaster plunged -0.34 to -0.53, which is a fairly strong downtrend. Silver dropped clean through both the 9 and 50 MA lines, finally coming to rest right at its uptrend line. Silver's chart is not looking great. It is in a downtrend in all 3 timeframes.

COMEX SI open interest rose +4,061 contracts.

The gold/silver ratio rose +1.09 to 85.00. That's quite bearish; the current level for the ratio suggests PM could be at or near a long term low.

Miners managed to avoid disaster today, even with the large drop in silver; GDX moved down -0.26% on moderate volume, while GDXJ dropped -1.13% also on moderate volume. XAU fell -0.72%. The long black candle has a slim chance (33%) of being a bullish reversal. Forecaster fell -0.06 to -0.65, which is still a strong downtrend. XAU remains in a downtrend in all timeframes.

The GDX:$GOLD ratio rose +0.09%, while the GDXJ:GDX ratio fell -0.87%. That's somewhat bearish.

Platinum moved down -0.07%, palladium fell -1.31%, while copper dropped -1.33%. Copper is moving slowly lower, palladium is down a bit from its all time high, while platinum seems undecided about direction.  The other metals (including silver) moved more or less in a rough group today, with silver losing the most.

The buck climbed +0.20 [+0.21%] to 96.11. The spinning top candle was unrated, while DX forecaster rose +0.05 to +0.51; the buck remains in a reasonably strong uptrend. Buck is in an uptrend in all 3 timeframes. Currency did not seem to play a large role in today's move lower in PM.

Crude fell -0.89 [-1.31%] to 66.84. The long black candle was neutral, while forecaster jumped +0.11 to +0.09, which is a buy signal for crude. Crude does appear to be trying to put in a low here, although it remains in a downtrend in both the weekly and monthly timeframes. We still don't have much of an explanation for crude's $10 drop; Nick Cunningham tried to explain it, but ultimately was a “multi-handed economist”: on the one hand, we've had a bunch of bad EIA reports, on the other, Iran sanctions are due to hit shortly and everyone appears to be cooperating with the effort, and on yet another hand Libya is targeting 1.6 mbpd production by end of year, and one last hand, the IEA is projecting a supply deficit within 2 months.

SPX fell -17.44 [-0.66%] to 2641.25. In truth SPX was all over the map today, rallying strongly, then plunging, then recovering. Ultimately, the long black candle was mildly bullish (33% reversal) but forecaster moved up just +0.01 to -0.66; that's still a strong downtrend. The monthly candle looks really horrid, and we are just about at end of month. SPX is in a downtrend in all 3 timeframes.

Sector map shows that energy did worst (XLE:-1.87%) along with tech (XLK:-1.69%)while REITs did best (XLRE:+1.65%) along with utilities (XLU:+1.41%).   This was a bearish sector map.

VIX rose +0.54 to 24.70.

With SPX down, one might have expected TLT to rally, but no - TLT dropped -0.23%, printing a mild swing high (43% bearish reversal). Forecaster looks ready to tip over too. TY also moved lower, down -0.10%, with TY forecaster dropping -0.41 to -0.28. TY appears to have run into resistance at the 50 MA, but it remains in an uptrend in both the daily and weekly timeframes. The 10-year yield rose +1.0 bp to 3.09%.

JNK had a wide trading range but ultimately went nowhere, unchanged on the day. There is no alarm in the junky credit market right now, which seems to suggest that – for the most part – all remains well in the economy, and this sell-off is driven by something other than bad economic news. JNK may be trying to put in a low here; forecaster jumped +0.45 to -0.49. That's still a downtrend, but a slowing one.

CRB plunged -1.07%, dropping below the 50 MA. Commodities have been moving slowly lower along with equities. Unlike JNK, this does hint at a weakening global economy. Perhaps JNK is more domestic, and CRB is international?   All 5 sectors fell, led by agriculture (-0.77%).

Silver and gold gave us some clues today intraday. Silver's strong sell-off at around 8 am didn't attract many buyers , but the much smaller drop in gold definitely did. Gold bounced back almost immediately, while silver languished down near its lows. Even with a gold/silver ratio of 85, which is historically very high, and usually signals a low for the metals, there just isn't any interest in silver.

From the viewpoint of traders in China and Europe, gold continues to look much stronger than it does in the US. To traders in China, gold has significantly outperformed the Chinese equity market; since 2015, SSEC is down -26%, while gold is up 18%. Peak-to-trough the numbers are even more startling: SSEC is down -52% since its 2015 high, while gold (in CNY) is up 31% from its 2015 low. Some of that is a currency effect – but in truth, that's how gold is supposed to act: like a foreign currency that isn't tied to any specific government. And from a Chinese trader's perspective – would you rather lose 52%, or make 31%?

In the US, we see the reverse; gold is up 18% from the 1050 lows in 2015, but SPX is up 42% from the lows in 2016, even after our “massive” recent 9% correction. That's why in the US, nobody cares about gold.

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Eannao's picture
Status: Silver Member (Offline)
Joined: Feb 28 2015
Posts: 188
Teaching a horse to sing


I hadn't heard that parable before, but it's a good one!

I wonder though, will Merkel's move actually have the effect of weakening her position, as opponents may view her as a lame-duck leader who has one foot out the door already?

I also appreciated the insight of stepping into the shoes of traders in Europe and China... a useful exercise.

Thanks, E.

cmartenson's picture
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 6166
How Does JNK Compare to "High Yield To Worst"?

JNK had a wide trading range but ultimately went nowhere, unchanged on the day. There is no alarm in the junky credit market right now, which seems to suggest that – for the most part – all remains well in the economy, and this sell-off is driven by something other than bad economic news. JNK may be trying to put in a low here; forecaster jumped +0.45 to -0.49. That's still a downtrend, but a slowing one.

Dave, I am utterly stumped by JNK.  It just won't move.  It's like it's stuck at 35.  

But that's an ETF and I confess to not knowing what it is composed of in terms of actual exposures and holdings.  Maybe it's better junk?  I don't know.

But looking at this very broad aggregate of CCC rated bonds we see this, below, which is giving me a different perspective - one that whispers "sneaking out the back door"

Yields are up over 100 bps YTD which translates into an ~30% greater roll-over funding cost for the average junk borrower.

That's gotta be leaving a mark.  Why is JNK not responding?  No default risk?  Any ideas.  As I said, I am stumped.

davefairtex's picture
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5940

JNK doesn't really have enough history to be too satisfying.  Here's a chart of BAA-AAA differential over the last 20 years.  (The last 100 years looks fairly similar).  Anything above 1% can hint that a recession might be coming.

Of course recessions are declared after-the-fact.  Even though the 2008 recession started in January, it wasn't really popular knowledge until about Q2, so although BAA-AAA is often a coincident or lagging indicator using USREC, it can provide confirmation in real time that there is a recession in progress.  Say a breakout above 1.2% provides a 60% chance a recession is either happening, or on the way.  Above 1.5% and that's clear danger territory.

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