PM Daily Market Commentary - 3/16/2015

By davefairtex on Tue, Mar 17, 2015 - 2:22am

Gold dropped -4.60 to 1153.80 on moderate heavy volume, while silver fell -0.01 to 15.63 on light volume.  Once again gold rallied in Asia and then slowly sold off for the rest of the day.

Tomorrow (Tuesday) the FOMC meeting starts, ending Wednesday with a policy announcement.  The big question: will the magic word "patient" be in there or not.  This one word (and what it implies) could really move the market, depending on what the expectations already built into prices happens to be.  And no, I don't have a sense at all what the outcome will be!

Gold looks like it is in a technical position to rally, but - simply put - no buyers have appeared to push price higher.  Possibly, nobody wants to take on risk ahead of the FOMC meeting results on Wednesday.

Miners bifurcated today, with GDX up +0.22% on light volume, while GDXJ fell -1.43% on moderately light volume.  Volume was unenthusiastic, and while senior miners did recover after an initial morning drop, they were not particularly enthusiastic about it.  When volume ebbs away on a rally, that's a danger sign.  While the miners have been a positive signal for PM recently, the declining volume is starting to call that signal into question.

The USD fell, dropping about -0.50 to close at 100.10.  Once again my data sources are giving me conflicting information: stockcharts says that the buck was up +0.63, but my trading app (and the intraday chart) clearly shows a falling dollar all day long.  Supporting my trading app's view of the world is the Euro, which rose +0.75 to 105.70.

The USD index is traded in the futures markets, and as an indicator we can look at the level of commercial short interest in the USD.  Typically, the commercials - which generally seems to act as "smart money" in most futures markets - have a high short exposure at the peaks, and they close out their shorts on the dips.  We can see in the chart below that the commercials are the most short they've ever been in the history of the timeseries.  This gives a sense as to just how extended this USD rally is.

US equities (SPX) rallied strongly today, closing up +27.79 to 2081.19.  SPX is back above its 50 MA and the 9 EMA.  Most of the gains happened in the first hour of trading, but the market had a steady bid underneath it right into the close.  VIX dropped -0.39 to 15.61.  There was no economic report or news that I could see that caused the rally.  The one important indicator released today right before market open at 0915 EDT, Industrial Production, was weaker than expected.

And that's an interesting thing in and of itself.  INDPRO is a very important timeseries; once INDPRO starts to decline, a recession is not far away.  This month, there was a big drop in the mining/drilling sector because of shale and the dropping rig counts.  Counterbalancing that was a large boost in utility production because of cold weather.  As a result, INDPRO is flat this month.  I'd expect another drop in mining next month.  And without cold weather, INDPRO will drop, more likely than not.  Here are the components of INDPRO:

Long bond ETF TLT rallied today, closing up +0.96%.  The bond market rally wasn't connected to any economic news - my guess is this is buying ahead of the FOMC meeting.  I can't think of any other reason for bonds to move up so strongly along with equities, on a day when the dollar drops.

The CRB (commodity index) fell -0.28%, first dropping and then recovering, printing a dragonfly doji which may be signaling a low in the commodity index.

WTIC fell -1.21 [-2.69%] closing at 43.79, in the process hitting a new intraday low for oil of 42.85.  Brent fell as well, but it printed a hammer candle, which if followed up by a rally tomorrow may mark the low for oil.  Brent/WTIC spread is around $10.

There are lots of moving parts in the oil markets right now: rumors of US government buying, heavy lobbying of politicians to allow oil exports, and reports that crude storage isn't running out after all.  And on one hand you have EIA saying Bakken oil production increased in January by +27k bbl/day, but on the other you have the North Dakota Department of Mineral Resources insisting production declined in that same region in January by -37k bbl/day.  That's a big difference.  In the past there have been drawdowns in production in North Dakota during the winter, but they have been driven by weather interfering with well completions.  In this case, according to the DMR Director's Cut, it isn't weather, it's oil price.  As long as price remains low, it seems that completions will not happen.

The drilling rig count dropped 21 from December to January, 27 more from January to February, and has since fallen 22 more from February to today. The number of well completions dropped from 183(final) in December to 47(preliminary) in January. Oil price is by far the biggest driver behind the slow-down, with operators reporting postponed completion work to avoid high initial oil production at very low prices and to achieve NDIC gas capture goals. There were no major precipitation events, only 5 days with wind speeds in excess of 35 mph (too high for completion work), and 8 days with temperatures below -10F.

EIA is predicting a peak in March, but DMR is showing the peak already happened in December, with a decline in January.  And if storage isn't a problem, as Robert Rapier suggests...all the talk of oil crashing into the 30s is just an attempt by the shorts to jawbone the price lower to help their book.  (Gee, imagine that).  And, just maybe, to pick up oil equities on the cheap.

User Theo would be happy.  This is turning into the PM and Energy Daily Market Commentary.  But gold, commodities, and oil often move together.  They are all connected.

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