PM Daily Market Commentary - 5/29/2014

By davefairtex on Thu, May 29, 2014 - 7:17pm

Gold dropped again today but traded in a relatively narrow range: it hit 1251.40 at one point and bounced back slightly to close down -3.90 to 1254.60, on moderate volume.  Silver was hammered below 19 in asia trading, but rebounded ending the day up +0.02 to 19.03 and printing a clear doji candle on moderately heavy volume.  Silver's ability to regain the 19 handle was encouraging and it may have marked a low today, while it seems that gold still has not found its low just yet.

However before we pop the silver champagne corks, we need to see a confirmation - silver needs to move and close above 19.10; ideally higher, and with some good volume, in order to send a few of the shorts scampering for cover.

The buck traded generally lower today, closing off -0.07 to 80.53.  The dollar is a bit overbought after its 3 week rise from the depths of testing 79, and it may be time for a rest.  The dollar remains above its 200 MA, and it appears to be in a short to medium term uptrend, based on its moving averages.

GDX rallied today, closing up +0.91% on moderate volume; it had moved higher intraday, but could not hold those gains into the close.  GDXJ was also up +0.91% also on very heavy volume - it was up almost 2% at one point but it too could not hold its gains and sold off into the close.  It appears that traders are not quite ready to buy with both hands at this point.  I'm going to call this "no confirmation yet."

So what conclusions do we draw?  The move in GDXJ was a bit half-hearted for my taste - most of my sour feeling came from the bad close.  I think this particular bounce looks like a high risk buy at this point.  Perhaps silver will be the "tell" - if it can build on today's doji candlestick and move above the 19.20 area, perhaps it will lead PM higher.  The gold/silver ratio is slowly improving, but its too soon to tell if the other ratios are showing enough improvement to signal a possible trend change.

SPX jumped again today, up +10 to another all time closing high of 1920 on moderate volume.  This was perhaps a surprising result after the 2nd estimate for 1Q 2014 GDP was released at 0830 EDT: according to the BEA, the US economy contracted at -1%.  The contraction was substantially more severe if you decided to use different inflation numbers; even the manipulated CPI-U showed the contraction to be more like -1.5%, and if MIT's "billion prices project" numbers were used, GDP would have contracted -3.6%.  The folks at Consumer Metrics had some pithy comments about this, wondering frankly if the staff of the BEA were engaged in deliberate propaganda, or merely incompetent.

While other people may be utterly shocked to find that the economy is in contraction, we are much more inclined outrage at the possibility that the BEA published clearly fictitious numbers last month in an effort to "ease" the readings towards the bad news that they knew (or should have known) would follow shortly :

-- If they (the BEA) did not realize last month that the US economy was in contraction during the first quarter of 2014, they are sufficiently incompetent (in practice and procedure) to merit a complete overhaul and/or gutting of the agency.

-- That said, gross incompetence is probably the lesser evil -- simply because if they knew full well last month how bad the news really had become, they simply descended into a Goebbelesque world of publishing what they wanted the world to think.

So what explains the continual rise in equity market prices?  Does that mean the market is totally manipulated?  I trust the guys at CM, so from my viewpoint, the BEA is definitely trying to manipulate the fundamental information available to the market.  So in that sense, the answer must be a resounding yes: its a manipulated market.

But from the standpoint of actual trading - does there have to be "Fed buying" to sustain this move higher?  Here are three factors supporting the move up without actual Fed buying:

1) No Selling Pressure.  One trader I trust suggests that when the market has no "overhead selling pressure" (i.e. it is forming new all time highs) and as a result it can rise on relatively small volume, since there are no trapped longs waiting to get out.   In other words, under current "all time high" circumstances, it won't take much money flow to move things higher.

2) International Capital Flows.  Armstrong thinks a contributing factor is capital flows from Europe looking to front-run the inevitable bail-ins.  He has data I don't, so its hard for me to verify this.  It makes sense though which is why I mention it.

3) Cheap-Debt-Funded Buybacks.  We have corporate buy-backs at 160 billion per quarter (funded with cheap debt, naturally), a perfect use of shareholder funds with stocks at all time highs.  Fed Z1 statement correlates increase in borrowing by corporations.

Is this a sustainable platform for continued moves higher?  Not from a fundamental economic perspective (earnings, P/E ratios, economic growth, etc).  But from a trading/money flow perspective, as long as the money keeps flowing in, we'll keep going up, because for better or worse, that's how money flow works.

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