PM Daily Market Commentary - 8/19/2014

By davefairtex on Wed, Aug 20, 2014 - 2:09am

Gold closed down -2.20 to 1296.20 on light volume, while silver was off -0.17 to 19.41 on moderate volume.  Silver just cannot seem to catch a bid, and the distribution volume pattern continues.  Silver's relentless drop has pushed the gold/silver ratio to 66.80.

Perhaps at least some of the move was due to the USD, which broke sharply higher today, closing up +0.31 to 81.93 setting a new cycle high.  A lot of currencies are dropping against the buck - the pound seems to be doing the worst dropping 6.5 cents in almost a straight line over the past 4 weeks.  If the buck continues its breakout, that will most likely put more pressure on gold.

GDX dropped today, closing off -1.11% on light volume.  GDXJ was off a bit more, closing down -1.28% on relatively light volume as well.  The senior miner chart still looks relatively bullish, while the juniors are showing a bit more indecision.

If it weren't for the senior mining shares and their relatively good performance, my near term picture of the PM sector would be quite bearish, yet miners continue to hold up.  As dreadful as the silver chart looks, the senior miners are still finding buyers.  Line to watch: that rising 50 MA.  A drop below that could result in some selling; if it finds support there, it might be a decent entry point.

SPX continued its advance, rising +10 to 1982, only 8 points from a new all time closing high.  Two weeks ago I was definitely leaning short, but the lack of any sort of bearish price action during this recent advance has cured me of that.  None of the moving averages provided any sort of resistance, and the behavior last Friday clinched it for me.  This is why we use stops; if the story you have doesn't match what the prices are doing, bail the heck out so you don't lose money!

I think its important to maintain a long term perspective on where we imagine things should be going - I definitely have my beliefs too - but we cannot let that interfere with how we see prices behaving.

Will we see new highs?  An interesting question.  I'm on the fence.  Let's see how SPX handles the next 8 points.  The VIX remains somewhat elevated at 12.21, and the "double top" and/or "failure to make new highs" scenario is still in play.  If the market can't break out, that too would be a strong signal.

Junk bonds have retraced almost all of their losses.  They are another signal of "risk on" that we should not ignore if we want to avoid losing money.  I'm not suggesting that we should all run out and buy junk bonds, just that when an indicator gives you such a clear signal, it is probably wise not to ignore it.  It will be interesting to see how JNK performs in the coming days.  If it breaks out, that's a serious "risk on" sign.  If it fails to break out - then perhaps SPX moves lower too.

Long term treasuries (TLT) dropped -0.33%, no doubt feeding the equity move to some degree.  Still, the long bond looks strong.

Brent was mostly flat, down just -0.04 to 101.56.  Yet commodities in general continue their decline; the picture is definitely non-inflationary, which doesn't help silver at all.  Can you see "inflation" in this picture of gasoline prices over the past few months?  Gasoline futures do seem to be finding a bid in the last few days, which gives me hope that perhaps silver too will find a low.



davefairtex's picture
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dimes on black, dynamite on red

John Hussman's latest description of the current equity market's position.  I find his viewpoint compelling:

The stock market is presently a roulette wheel with dimes on black and dynamite on red. We continue to have extreme concerns about the extent of potential market losses over the completion of the present market cycle. At the same time, we have very little view with regard to short-term market action. If one reviews market action surrounding major pre-crash peaks such as 1929, 1972, 1987, 2000 and 2007, you’ll observe a sort of “resilience” in the major indices on a day-to-day and week-to-week basis even after market internals had already corroded....

Stocks remain strenuously overvalued, overbought, and overbullish, but those conditions have persisted uncorrected much longer in the present instance than they have historically. That doesn’t encourage us to abandon our concerns, but it does make us less aggressive about investment stances that rely on any immediate unwinding of what we continue to view, along with 1929 and 2000, as one of the three most reckless equity bubbles in the historical record.

Properly translated, that says: don't load up on short-dated puts and expect to make a killing on "the upcoming inevitable market crash."  Markets have this frustrating tendency to disappoint as many people as possible, even in situations like this where the outcome appears obvious.  One scenario: the market bounces around the top for another few months, repeatedly dipping down, and then rebounding to make modest new highs, thus wearing the living crap out of the bears until they all finally give up in frustration and all the talk of "a topping market" has vanished from Financial Entertainment TV.  At which point, the market will promptly tip over and sink.

That's not manipulation - its just how markets tend to work.  They seem to want as few people as possible on board for whatever ride they decide to take.

You will be much more sanguine about this topping process, and more likely to spot the real move if you are not emotionally involved in the outcome.

davefairtex's picture
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FOMC minutes release

The FOMC released the minutes of the meeting they had a few weeks back at 1400 EDT.  Upon release, the USD immediately sprinted higher, and is now up +0.33 to 82.28, a big move.  Immediate reaction of PM was to sell off - PM does not generally appreciate a rising dollar - however the miners are managing to hang on relatively well, currently remaining close to flat on the day.

Did the Fed say anything important?  Hard to say.  Fed members talked about mechanics - raising rates by raising the interest they pay on excess reserves - in other words, paying the banks more for them to store money at the Fed.  (Its nice to be a bank; I think we should all apply to be a bank so we too can get paid at least something for our savings.)

This will of course reduce the amount of money the Fed remits to the Treasury - basically its a transfer of money from the taxpayers to the banks.  At current levels of reserves, that's 6.75 billion for each 25 basis points in interest paid.

Its a way for them to suck money out of circulation without actually selling off the bonds they own.  By paying for it, of course, with our money.

When will they do this?  According to econoday (translated by me) "sooner than you might expect, but its all driven by data, which means it will only be because of great economic news if the Fed actually decides to raise rates, so .. (hint hint are you listening equities?) you don't need to run off and crash when we actually go and do it."

Econoday's blurb:

Overall, the minutes indicate that the Fed is remaining flexible but is focusing on being predictable. But the odds have risen that rate increases will be sooner than earlier believed-but still slow. But any rate increases would be associated with an improved economy-which likely should be seen as positive.

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I like that .

That analysis seems pretty good.  Some comments on your phrasing:


"they seem to want as few people as possible on board for whatever ride they decide to take."  I'd reverse the situation.  I'd say they want as few people as possible ready to profit from whatever ride they decide to take.  They usually take LOTS of people for the ride, the wrong way.

"That's not manipulation -- it's just how markets tend to work".  -- I'd tend to think about it as an energy minimization process.  Profits--that's directed energy output  Losses -- that's like enthalpic energy.  It takes a lot of controlled enthalpy to get directed energy output.  And if the system can develop a leak and avoid giving any useful output, well, you're out of luck, but that's the way the game works in hydraulics.  Might work that way in investment, too.

"You'll be more likely to spot the real move if you are not emotionally involved in the income".  Corrallary:  if you want to be not emotionally involved in the income, don't be heavily invested in the income.  But... if you're not heavily invested in the income, you don't profit heavily, and so the 2nd law of Investment Thermodynamics is maintained.





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