PM Daily Market Commentary - 8/24/2015

davefairtex
By davefairtex on Mon, Aug 24, 2015 - 11:51pm

Gold fell -5.50 to 1154.40 on extremely heavy volume, while silver was crushed, dropping -0.56 to 14.76 on the highest volume in 9 months.  Gold spiked higher at the moment of the US market open in NY, but then spent the rest of the day fading slowly into the close.  Silver fared much worse, being sold for most of the day along with pretty much everything else.  The gold/silver ratio jumped +2.50 to 78.21, a value not seen since the 2008 crash.

Without the massive volume bar, you might imagine that gold was just a bystander on a day filled with massive destruction.  The volume bar tells a different story - trading was extremely heavy, especially in the half-hour prior to the NY open.  I don't like seeing huge volume bars at the peaks after a nice long rally - it smacks of a high.  Today could be a weird exception because of all the fuss, but if I just look at the chart in isolation, it is forecasting selling to come in gold.

Silver moved alongside commodities today rather than with gold, selling off hard into the NY open, rallying somewhat, and then fading into the close.  Arguably, gold performed the best today of pretty much anything; silver's performance was about average.  Above average, if you consider that it avoided making a new low.

GDX did well during the morning, but then the selling started in the afternoon, and went on, and on, and on - and finally GDX ended up closing down a massive -8.19% on extremely heavy volume.  It was the worst performing sector on the day.  Turns out, that bearish engulfing candle from Friday was an important signal after all.  Today, the miners held up initially, but then followed SPX lower once the morning bounce in SPX started to fade in earnest.  During 2008, miners were often thrown off the lifeboat during heavy days of equity market selling.  GIven gold moved very little, you can imagine what a crushing blow this was to the GDX:$GOLD ratio.  It appears that the miners will follow SPX right now.

Junior chart looks similar, with GDXJ dropping -7.62% also on heavy volume, blowing through its 9 EMA and calling its uptrend into question.

The USD was both volatile and extremely weak, dropping hard into the NY open and at one point was down more than -2.50 hitting 92.52 before rallying back to close off "only" down -1.65 to 93.36.  The hard selling of the dollar happened at the same time the e-mini futures were also being sold.  Euro went nuts, breaking through 115 resistance and eventually closing up +1.89%; the Yen too rallied sharply, up a massive +3.05%.  The incredible moves in the world's three largest currency markets suggests strongly to me that the Japanese and Europeans are engaged in a huge - and rapid - repatriation of capital out of US assets.

However, versus the emerging markets & commodity currencies, the USD fared substantially better.   USD versus Ruble, AUD, INR, CAD, and CNY - winner.  Versus the Yen, Euro, CHF, and GBP - loser.  The bifurcation is really clear, and the USD index only really looks at the nations that today happened to be in red.

Name Chart Change 52w ch EMA9 MA50 MA200 50/200 Last Crossing last
Russian Ruble USD.RUB 2.57% 96.21% rising rising rising rising ema9 on 2015-07-14 2015-08-24
Australian Dollar USD.AUD 1.45% 29.86% rising rising rising rising ema9 on 2015-08-18 2015-08-24
Indian Rupee USD.INR 1.30% 11.01% rising rising rising rising ema9 on 2015-08-10 2015-08-24
Canadian Dollar USD.CAD 0.53% 21.15% rising rising rising rising ema9 on 2015-08-21 2015-08-24
Chinese Yuan USD.CNY 0.30% 4.06% rising rising rising rising ma50 on 2015-08-11 2015-08-24
Pound Sterling USD.GBP -0.55% 4.98% falling falling falling rising ema9 on 2015-08-18 2015-08-24
Swiss Franc USD.CHF -1.56% 1.61% falling falling falling rising ma200 on 2015-08-21 2015-08-24
Euro USD.EUR -1.78% 13.83% falling falling falling falling ema9 on 2015-08-19 2015-08-24
Japanese Yen USD.JPY -2.49% 13.86% falling falling falling falling ma200 on 2015-08-24 2015-08-24

Given all the recent fuss with the capital flight from the US and the China-related problems, I think the market is projecting that "there is zero chance the Fed will raise rates in September."  Maybe that's obvious, but it also likely contributes strongly to US asset weakness.  If we concentrate momentarily, any one of us can probably write the FOMC statement explaining why, for the 84th straight month, they can't possibly raise rates above 0.25%.  As a semi-famous TV commentator used to say, "its always something; if its not one thing, it's another."

In the weekly chart below, we can see that with today's price action the USD is now in a clear downtrend, having just violated its previous low, which forms a pattern of lower highs and lower lows.  That should be at least somewhat supportive for gold and commodities, but clearly it does not augur well right now for US equity assets.

SPX losses were immense today, dropping -77.68 [-3.94%].  It turns out, that's where SPX opened after selling off overnight in the futures markets; it plummeted another 70ish points lower right at the open, found a low, rose for most of the morning, only to sell off in the afternoon, closing essentially where it started by end of day.  Immediately prior to opening, trading was halted on the e-minis for perhaps 10 minutes - I haven't seen this happen before.  You know something is theoretically possible, but when it happens its always a surprise.  Intraday price movements were exaggerated, with SPX rallying 90 points in a one hour period at one point.

The VIX screamed higher, up +12.71 to 40.74.  It spiked as high as 53 at the open.

You can see in the table below that the US did poorly today - of the "core" nations, the US did the worst.  This aligns with my story that "core nation" money is fleeing the US in preference for Europe and Japan.  I believe this SPX crash story is much less about US retail or some "loss of faith" by domestic participants than it is about massive international capital flows.  The foreign money crept in bit by bit over the years pushing the market slowly higher, and now that same money is fleeing in panic over the course of one week!

Name Chart Change 52w ch EMA9 MA50 MA200 50/200 Last Crossing last
Germany EWG -1.46% -11.95% falling falling falling falling ema9 on 2015-08-11 2015-08-24
Japan EWJ -3.69% -3.45% falling falling falling falling ma200 on 2015-08-20 2015-08-24
United Kingdom EWU -3.73% -17.87% falling falling falling falling ema9 on 2015-08-11 2015-08-24
United States VTI -4.02% -3.86% falling falling falling falling ma200 on 2015-08-20 2015-08-24

When will the selling be over?  I think it depends on how much of a "Fed Rate Raise Premium" there is in the USD, and in the US markets in general, and to some extent how long the worldwide selling in equities will last.  I don't really have an answer, all I can do is watch.  We did see buying today, which is more constructive than yesterday or the day before.  Soon, I think?

On a technical note: several instruments endured mini flash-crash events.  A few examples are JPM, XLK, XHB - they all had 09:30 ticks which were way under the market, but then almost immediately moved higher.  It looks like our friendly market makers have wised up.  They are no longer putting their stink bids at 50% under market because the exchange will nullify the trade - they put them 20% under the market, and once the real bids come back, they ring the cash register making a quick 15% profit for taking the risk.  This makes me think that we may not see a flash crash after all, at least not the way it happened last time.  Looks like this particular bug may be fixed.

Bond ETF TLT was basically flat on the day, dropping -0.04.  Bonds shot higher at the open, and then were sold for the rest of the day.  On a day when the US equity market drops 77 points, do we expect long bonds to be flat?  No we do not!  To me, this is a bad sign for US long bonds.  Money is fleeing US assets, and US treasury bonds are suffering because of it.

The CRB (commodity index) collapsed today, dropping -2.68%, a huge move lower that moves commodities deeper into oversold territory.  Be glad you own gold, and not the commodity index.  Copper fell -2.29, making a new low as well.

WTIC (oil) fell also, dropping -2.23 [-5.53%], closing at 38.06, the first time oil has seen the 30s since 2008.  No good news for oil.

How to summarize today's action?  Big price changes are always about big capital flows.  To see who is doing what, you have to watch not only equity prices, but bond prices, commodity prices, and exchange rates.  It seems clear that capital is fleeing the US for Europe and Japan, while at the same time continuing to flee emerging markets and commodity producing nations.

The two things I can trace this movement back to are this: first, the CNY devaluation back on August 10th - that lit the fuse on the equity market sell-off worldwide.  Secondly, the FOMC minutes released last Wednesday, where the FOMC revealed that the situation in China was an important consideration for the rate rise decision.  That started the sell-off in the buck.  This linkage of USD to China led (I believe) directly to the sell-off in the SPX that we are seeing now and the flight of capital from the US back to Europe and Japan.

What does this mean for gold?  Gold-priced-in-Euros is suffering, but the falling dollar should put a floor under gold-priced-in-USD.  We might see selling in USD terms given gold's overbought situation, but based on today's price action overall, it doesn't appear that the selling will be too serious.  Silver will follow commodities, I wouldn't touch it right now.  Miners will probably follow SPX - don't touch them either until we see a low marked in SPX.  I can't say how long the commodity sell-off will continue, but my computer shows no reversal yet for oil, copper, for any of the equity markets, or for the USD.  All we can really do is watch as it unfolds, and then act when the market tells us the selling is over.  When commodities finally put in a low, silver will be one of my candidates to buy.

A rebound in equities could come any day now - once this repatriation impulse is exhausted, the US market should bounce nicely.  How durable that rebound is, that's another matter entirely.  The uptrend for SPX is clearly over, so any impulse to "buy the dip" for any medium to long term holding period should now be resisted; you should now be thinking about "selling the rallies" in SPX.

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7 Comments

AaronMcKeon's picture
AaronMcKeon
Status: Bronze Member (Offline)
Joined: Apr 29 2014
Posts: 74
About that [SPX] Rally

you should now be thinking about "selling the rallies" in SPX

Nice - I like that mentality.  I wonder when that rally will come.  It seems like the press is making the selloff story all about Chinese spillover.  That being said, it looks like they're still selling off in the far east and I wonder if that means the selling will continue in the US for at least another day.

It seems like most commentators I'm reading, you [Dave] included, are putting a much higher likelihood on a rally than the slide turning into an full avalanche.  Dave, do you recommend any nuances to keep looking for as we move forward that would either solidify or start to change that opinion?

Personally, I'm trying to spot a bottom as best I can since I was short on US equities going into Thursday. Trying desperately to remain objective and disciplined here!

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5454
shorts looking to cover

BJ-

I'm impressed you stuck with your short position through today's rally.  You have nerves of steel my friend!  I would have blown out in the first 10-15 minutes, and (possibly) re-entered as things turned down in the afternoon but with a protective stop above today's high.

We saw buying today.  It didn't hold, but its a better sign than we've seen Thursday or Friday.  I also think once the foreigners have taken their money and gone home, selling will stop at least for a time, and that always leads to a bounce in these conditions.  Market is deeply oversold by several measures - bounces off these levels are usually strong, coming from people like you who greedily cover short!

For the US equity market low, I'd look for a slowdown in the dollar selling, and if that happens, see if that matches with an improvement in SPX and/or the e-mini futures.  They are closely correlated right now.  I'd expect a bounce once the buck stops dropping.

If the e-minis keep dropping while the buck stays flat or rises, then I'm wrong and/or the contagion has gone domestic, and we probably go lower still.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5454
rebound overnight SPX

Market looks strong in the futures markets overnight.  Dollar is rallying, so is oil, and at least copper is flat.  If this is "plunge protection team" action, they're also buying the other two correlated assets USD and oil, and they've somehow convinced the europeans to stop the repatriation.

Either that, or Occam's Razor slices away the extra, unnecessary element: the Europeans and the Japanese are just done selling, the panic from the weekend is over, the pressure is off, and its time for a bounce.

Oil could see a swing low today, it certainly would confound everyone.

We might well have seen the low yesterday morning, which was Armstrong's suggestion last night in his column.

Will the futures markets make it above yesterday's high before the open in NY tomorrow?  I wouldn't bet against it.

Repeat after me: "the market acts to hose the greatest possible number of participants."

 

KugsCheese's picture
KugsCheese
Status: Diamond Member (Offline)
Joined: Jan 2 2010
Posts: 1449
VIX vs GVZ?

I have never liked the VIX because it doesn't capture movement up/down vs bandwidth.  It biased to the up side for the cheerleading MSM.   Is Gold volatility GVZ a better measure of true market gyration?

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5454
what is VIX?

VIX is a funny beast - it (more or less) measures the demand for puts vs the willingness of put writers to take risk.  The more scared the put writers are, and the more eager the put buyers are, the higher the VIX will be.  And vice versa.

 

KugsCheese's picture
KugsCheese
Status: Diamond Member (Offline)
Joined: Jan 2 2010
Posts: 1449
davefairtex wrote:VIX is a
davefairtex wrote:

VIX is a funny beast - it (more or less) measures the demand for puts vs the willingness of put writers to take risk.  The more scared the put writers are, and the more eager the put buyers are, the higher the VIX will be.  And vice versa.

 

The futures market can get swamped by sellers like in 401K.  Futures traders are off their rocker.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5454
puts vs futures

Kugs-

The futures market can get swamped by sellers like in 401K.  Futures traders are off their rocker.

Puts are not futures, they are like an insurance policy that pays off if your stock goes down.  The premium payments get more expensive the more fear there is in the market.  The VIX is based entirely on prices of puts at the current moment.

When you think of the VIX, think about insurance.  If a fire is sweeping the city, fire insurance gets a lot more expensive.  Once the city is no longer on fire, the price of fire insurance will plummet back to normal.  Or at least, close to normal.

Futures are another beast entirely.

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